June 9, 2016; Des Moines Register

As NPQ recently reported, the IRS has decided to revoke the tax exemption granted in 1989 to Prairie Meadows Racetrack and Casino near Des Moines, Iowa. The casino plans to appeal the decision, a process that could take years. The casino, with $2 billion in annual revenues, is a 501(c)(4) social welfare organization designed to benefit local governments and nonprofit service providers.

The Des Moines Register was recently granted access to audio recordings of closed Prairie Meadows board meetings held in March and April to discuss the possible effects of the casino’s $30 million in annual profits being taxed. As they discussed next steps, board members identified three points that might be of interest to local citizens. First, they would continue with business as usual while the case progresses, as they believe they have a strong case for continued tax exemption. Second, loss of tax exemption will affect negotiations over the casino’s contribution to support local governments and services. Third, according to the article, Tom Hockensmith, the chairman of the Polk County Board of Supervisors, said, “I don’t think we’d be in any danger of the taxpayer being harmed. I truly believe who would be harmed the most are the charities and nonprofits.”

Why would charities and their beneficiaries be neglected in a renegotiated deal based on tax exemption being lost? The casino’s history and governance includes strong local government participation. In fact, in 1997, the casino had to negotiate a settlement with Iowa state regulators who were concerned that Polk County, Iowa, officials were, in effect, running the casino. The primary beneficiaries of the casino’s payments are local governments, especially Polk County, which uses its $14 million to pay debt service incurred to finance its events center. Polk County recently extended those debts by two years to fund incentives for a hotel complex on the events center site. So, in summary, the nonprofit casino is heavily influenced by the county government, which has its own interests and uses for any casino profits.

Notwithstanding the casino’s guarded confidence that it will prevail against the IRS, it’s time for Des Moines area charities to do what Prairie Meadows’ board and county government have already done: begin the painful conversation about what happens should one of the area’s largest benefactors suffer a financial reverse.—Michael Wyland