D.C. Circuit rejects per-bet approach for nonresident alien

The D.C. Circuit reversed a Tax Court decision by allowing a nonresident alien to use the same approach (per-session) to compute his gambling gains as used by U.S. citizens. The court found no reason nonresident aliens should have to use a different approach and remanded the case to the Tax Court to determine the proper tax liability.

Generally, nonresident aliens who gamble in the United States must pay U.S. tax on their gambling income won in the United States; however, the United States has tax treaties with 27 countries (see IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities) that exempt their citizens from tax on U.S. gambling winnings. U.S. citizens may deduct their gambling losses to the extent of their gambling gains; however, recreational nonresident alien gamblers may not deduct any gambling losses. IRS Advice Memorandum 2008-011 permits U.S. citizens to compute their gambling gains for each gambling session (per-session approach) rather than for each bet placed (per-bet approach). Nonresident aliens engaged in the trade or business of gambling in the United States may deduct their gambling losses.

Sang J. Park, a South Korean  national and citizen, played slot machines recreationally in the United States in 2006 and 2007, winning $431,658 and $103,874, respectively (but also losing more than that each year). Park did not report those winnings on his 2006 and 2007 federal income tax returns. After the IRS issued deficiency notices for both years, the taxpayer petitioned the Tax Court for relief. The Tax Court held the income was taxable to the United States because an existing treaty between the United States and South Korea did not exempt the gambling winnings of South Korean citizens from U.S. tax and the income was not effectively connected with a U.S. trade or business. The taxpayer appealed the decision to the D.C. Circuit.

Park did not appeal whether the gambling winnings were taxable but rather the approach used to compute the amount of income. The IRS argued that the per-session approach applies only to U.S. citizens and that gambling gains for nonresident aliens should be calculated on a per-bet basis, since recreational nonresident alien gamblers are not allowed to deduct gambling losses from their winnings. The appellate court rejected this argument, stating, “The fact that non-resident aliens may not deduct gambling losses from gambling winnings does not tell us how to measure those losses and winnings in the first place.” Also, according to the court, the per-session approach used by U.S. citizens is the best way to measure gambling gains, and there is no reason nonresident aliens should be prevented from using it. Because there was no court record of the taxpayer’s tax liability using the per-session approach, the court remanded the case to the Tax Court to properly compute the taxpayer’s tax liability under that approach.

  Park, No. 12-1058 (D.C. Cir. 7/9/13)

By Charles J. Reichert, CPA, instructor of accounting, University of Minnesota–Duluth.