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Court Holds That IRS Must Calculate Gains from Gambling Winnings the Same for U.S. Citizens and Nonresident Aliens

People seem to enjoy talking about gambling.  Some people just enjoy gambling.  They also seem to enjoy topics of an international nature, traveling to other continents, and sampling foreign foods.  But unless they are tax geeks like me, they do not enjoy discussing tax issues, unless of course they are discussing how the IRS was naughty in its (mis) handling of tea party tax-exempt status applications.   Most of the many tax cases I review do not address gambling, international affairs, or other interesting topics.  They instead focus on mundane technicalities.  Earlier this week, however, I came across a tax case that addressed gambling and had an international component.   Thus, I finally found a case that may interest people other than those of us with LL.M.s in taxation.  The case, Park v. Comm’r, decided by the U.S. Court of Appeals for the D.C. Circuit on July 9, 2013, reviewed a 2011 Tax Court decision, and questioned the validity of the IRS’s practice of determining U.S. citizens’ gains from gambling winnings on a per-session basis, but nonresident aliens’ gains on a per-bet basis.

Judge Kavanaugh provides a great introduction to the case: “After a night of gambling, it’s no fun to walk out of the casino a loser. But it’s even worse when the IRS, on your way out, tries to tax you on each individual bet that you happened to win over the course of your losing night. Enter Sang Park, a South Korean businessman who gambled away thousands of dollars at slot machines on casino outings during his trips to the United States – only then to have the IRS seek more in taxes.”  In this case, the IRS contended that Mr. Park, a nonresident alien, was liable for taxes on every winning bet, and that he therefore owed the IRS over $100,000.

The issue arose because the IRS had calculated a U.S. citizen’s income from slot machines differently than that of a U.S. citizen.  I.R.C. § 165(d) provides that “Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.”   The IRS, through its interpretation of  § 165(d),  allowed a U.S. citizen gambler to subtract losses from gains within a gambling session.  Thus, at the end of a session, the U.S. citizen gambler would either have a net gain, net loss, or break even.  The U.S. citizen would only report income if he had a net gain at the end of the session.

A nonresident alien, however, is taxed pursuant to I.R.C. § 871(a)(1)(A) on all gains received from sources in the United States.  But, § 871(a)(1)(A) does not provide whether a nonresident alien’s gains from gambling are determined per gambling session or per bet, and the IRS interpreted § 871 to require a nonresident alien gambler to report income on any winning bet.  Thus, he’d have to report income even if he had a net loss or broke even at the end of the session.

The Court agreed that the IRS’s reading of the term “gains” in  § 165(d) as per session was the most sensible, administratively effective, and practical interpretation of gambling gains, as tracking the wins on every bet would be too difficult.  It noted, however, that the term “gains” in § 871 should be interpreted the same way with regard to nonresident aliens, and thus nonresident aliens should track their gains on a per-session basis.  The Court further noted that measuring gambling winnings on a per-bet, rather than per-session, basis makes little sense for either a U.S. Citizen or nonresident alien gambler.

The Court thus reversed the Tax Court decision and held that the IRS should calculate both U.S. citizen and nonresident aliens’ gains  from gambling on a per-session, not a per-bet basis.

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