Read the D.C. Circuit’s decision: Park v. Commissioner [PDF 32 KB]
The IRS determined that the winnings of non-resident alien gamblers—such as the taxpayer in this case, a South Korean businessman—are to be taxed differently from those of U.S. citizen gamblers.
U.S. citizens are able to subtract losses from their wins within a “gambling session” to arrive at per-session wins or losses. However, for non-resident aliens, the IRS applied a per-bet rule—rather than a per-session rule.
The D.C. Circuit provided an example as to how U.S. citizens and non-resident aliens are taxed differently with respect to gambling winnings.
- A U.S. citizen plays slot machines in a casino. The player first wins $100 but then loses the $100 before leaving the casino for the night. Here, the U.S. citizen would have $0 in income to report because the IRS interprets gambling winnings to cover only gains measured over a session of gambling.
- A non-resident alien also plays slot machines in a U.S. casino, and wins $100 and then loses $100. While the non-resident alien is in the same financial situation the U.S. person, the IRS treats the non-resident alien as having $100 in income to report (the $100 he won in the initial bet) because non-resident aliens are required to pay taxes on gains from each bet.
The taxpayer in this case (after being assessed for over $134,000 on slot machine winnings) claimed that he ought to be allowed to calculate his winnings on a per-session basis. The Tax Court, however, agreed with the IRS that a non-resident alien generally cannot deduct or offset gambling losses against gambling winnings.
On appeal, the D.C. Circuit concluded that a per-session approach was appropriate for measuring the gambling winnings of non-resident aliens, and reversed the Tax Court.
First, the D.C. Circuit examined section 871 which imposes taxes on non-resident aliens for all “interest . . . dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income” received from sources in the United States. Here, the key term was “gains.”
As the D.C. Circuit observed, the IRS interpreted section 871 as covering every winning pull of the slot machine—a per-bet approach.
Next, the D.C. Circuit noted that the key term “gains” also appears in section 165(d) which applies to U.S. citizens, and that section 165(d) provides that:
Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.
The IRS thus interpreted the term “gains” in section 165(d) to allow U.S. citizens to measure gains/losses on a per-session basis.
At this point, the D.C. Circuit found that since the same term—gains—is used in both sections 871 and 165(d), it “makes little sense” whether a gambler is a U.S. citizen or a non-resident alien to measure gambling winnings on casino games such as slots on a per-bet rather than per-session basis.
The IRS had responded that the tax law does not allow non-resident aliens to deduct recreational gambling losses from their income on their tax returns. However, the court found that simply because non-resident aliens may not deduct gambling losses from gambling winnings does not indicate how to measure those losses and winnings in the first place.
The D.C. Circuit concluded the per-session approach and not the per-bet approach is the better approach for measuring gambling gains of non-resident aliens. The case was remanded to the Tax Court for a determination of the taxpayer’s per-session winnings.