Hittin' the Trifecta and SALT

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Tax Policy

The first Saturday in May. The 143rd running of the Kentucky Derby. Will you be there? Will you bet - the trifecta? In this article, Frost Brown Todd LLC's Mark Sommer's discusses the odds of hitting the Kentucky Derby Trifecta, and how it relates to SALT practice.

Mark F. Sommer

By Mark F. Sommer

Mark F. Sommer, Esq., is a Partner of the Firm and tax attorney resident in the Louisville office of the law firm of Frost Brown Todd LLC, where he leads the Firm's Tax Teams. Now in his 29th year of private practice, Mark's comprehensive practice focuses on controversy, litigation and planning relating to tax matters, primarily state and local tax matters and incentives. Mark is a Fellow in the American College of Tax Counsel, one of only four from the Commonwealth of Kentucky, and also is a recognized “Super Lawyer” in Kentucky. Mark has also been recognized as one of the Best Lawyers in America for twenty plus year in Tax Law and in Litigation & Controversy — Tax. Mark was honored by State Tax Notes as one of its two “Practitioners of the Year” in 2015 and one of its “Persons of the Year” in 2013 making him the first person so recognized two times. Mark has written extensively in the area of state and local taxation and is a frequent speaker and lecturer on state and local tax matters. Mark obtained his JD from the University of Cincinnati College of Law and his BSBA from Xavier University.

Let's talk about what really matters: horses. We'll soon have a new Kentucky Derby winner. One leg of the Triple Crown will be over. Will you bet the big race? Will you “cash?”

Hit the Tri

The really big question is whether you “hit the tri.” That's Bluegrass for cashing a trifecta ticket – a hugely popular, and oftentimes very profitable bet: pick the first three finishing horses, in order, for a $2.00 bet. This is one of about 15 different bets (each having even more variations specifically) which are called exotic bets, and generally the trifecta is the most popular one.

Wagering on relatively untested three-year-old thoroughbreds, massive in size (Secretariat's heart alone weighed 17 lbs. – twice the average) running 1 1/4 miles in around 2:00 minutes at an average speed of 45 mph – exciting, risky and rewarding (hopefully) all at once. Or perhaps disappointing, doubt raising or, in some instances, tragic. But almost always just a great time with a modicum of risk such that it is exhilarating, all the while involving the type of effort where most involved at least read up on the topic, study the players involved and try to understand the risk, and then make a bet and literally watch to see if it pays off. Sounds familiar – kind of like SALT planning or controversy matters.

Maybe you hit big in your strategy, like a Kentucky Derby Trifecta: the median payout on a $2.00 trifecta bet at the Derby over a recent study of 12 consecutive years scores out to a $3,445.60 payoff. Yes, some real longshots are in that base, but regardless, we are talking about big money here! Odds are that your bet was a bust – maybe you had the top three finishers, just not in the proper order. Akin to litigating a SALT case where after winning remedial tax legislation is enacted 20 years retroactive in effect, right? You win the battle but lose the war.

Winning Trifecta Bet

A winning trifecta bet on 2015's Triple Crown Winner, American Pharaoh , paid large, with a $2.00 bet paying out $202.00 at Churchill Downs. The 2016 Derby winner, Nyquist, returned $346.80 on a $2.00 trifecta bet. How? Why? It traces to many things, some of which are akin to what we in SALT refer to as “hazard of litigation.” If it is so easy, everyone would do it, right? Things happen … it happens – and you have to deal with it – that's why we in SALT, and those on the backside and in the press boxes at Churchill Downs, give odds on any given horse race – odds which change all of the time. It is all functionally a measurement of risk – again not much different from SALT matters.

Of course, the $2.00 tri bet, cashed last year at the track on Derby Day for $346.80, would yield taxable income of no more than $344.80, and perhaps less if you had a particularly bad day at the betting window as losses may offset winnings for tax purposes. But for SALT nerds, isn't the question to ask whether you have nexus with Kentucky for income tax purposes? What about Louisville Metro's occupational license tax, and and and? See, all of these tax issues arise just from hittin’ the tri at the Derby!! What a good problem that would be.

SALT and Bluegrass

What's the point of this? Let's not take our world of SALT so seriously — by now hopefully you are starting to see similarities and analogies in the SALT world when viewed from a horse racing prism, or better stated, track binoculars. Blending SALT with the Bluegrass State, with maybe a pour of our signature drink, along with horse racing and its betting, pageantry, business, tradition, big money, joy and heartbreaks will help all have fun in our world of SALT.

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