IRS wants $1.6 billion in taxes, penalties from bankrupt NYRA

NEW YORK -- The Internal Revenue Service is seeking $1.6 billion in taxes and penalties from the bankrupt New
York Racing Association, a major hurdle for the group's bid to exit
Chapter 11.

But in a filing Tuesday with the U.S. Bankruptcy Court in
Manhattan, NYRA, which owns and operates the three biggest race
tracks in New York state, said it owes the IRS no more than $5

"The claim ... far exceeds any amount NYRA could potentially
satisfy," the association said in a court filing. "Because of its
magnitude, [the claim] presents a significant impediment to NYRA's
ability to accurately analyze any proposed creditor distribution
scheme that would be part of a plan of reorganization."

NYRA wants the bankruptcy court overseeing its Chapter 11 case
to intervene in the dispute and estimate the amount it owes the
government. The agency, which has run thoroughbred horse racing in
New York since 1955, oversees operations at Aqueduct, Belmont Park
and Saratoga.

Under bankruptcy law, a company operating in Chapter 11 can ask
a bankruptcy judge to estimate a disputed creditor claim blocking
its exit from Chapter 11.

The IRS claim dwarfs NYRA's total assets, which according to its November 2006 bankruptcy filing, were $153.3 million.

A hearing on NYRA's bid for bankruptcy Judge James Peck to estimate the claim is scheduled for Nov. 28.

As part of its three-year audit of the association, the IRS requested 16 adjustments to the group's tax returns filed before the NYRA went into bankruptcy, for the years 2000 through 2005. The IRS said the adjustments would result in an increase of the NYRA's taxable income by more than $1.3 billion.

Among other things, the IRS said the NYRA should have reported the "handle," or all the money bet at race tracks and offsite betting locations as income on its tax return. The NYRA only reported a portion of those proceeds, its "takeout," as income on its returns.

According to court documents, the IRS believes NYRA understated its taxable income by some $761 million during the five-year period. The IRS also said NYRA improperly deducted about $443 million on its income tax returns.

NYRA said the IRS does not fully understand its business.

Last month, NYRA filed a Chapter 11 reorganization plan under which the association agreed to surrender its claim of ownership over the three racetracks in exchange for the right to run the
state's racing franchise for 30 years.

NYRA's franchise to operate racing at Aqueduct, Belmont and Saratoga expires in two months. New York Gov. Eliot Spitzer has
said he prefers a 30-year extension for NYRA over other bidders for the franchise, but a final deal hasn't been struck with New York
state lawmakers.

A key bankruptcy court hearing on NYRA's outline of its reorganization plan is scheduled for Nov. 20 in Manhattan.