The United States Court of Appeals for the District of Columbia ruled yesterday that foreign gamblers should be treated similar to US citizens and residents. The issue has to do with a basic idea in gambling: Should gamblers be taxed on every pull of a slot machine, or just their results for their session?

Two years ago I wrote about the case of Sang Park. Mr. Park, a citizen of South Korea, liked to gamble. In the original Tax Court case, Mr. Park tried to argue that the US-South Korea Most Favored Nation Treaty didn’t allow the US to tax his gambling. He lost that argument.

Mr. Park appealed, but not on that issue. Instead, he argued that he should be allowed to be treated just like a US gambler and be able to use session accounting for his gambling. As the Court noted,

The IRS taxes non-resident alien gamblers such as Park differently than U.S. citizen gamblers. The relevant difference here concerns the period of time over which gambling winnings from casino games such as slots are measured. Are gamblers required to pay taxes on every winning bet – for example, every winning pull of the slot machine? Or can they report the overall income – gains minus losses – from a session of gambling? The IRS allows U.S. citizens to subtract losses from their wins within a gambling session to arrive at per-session wins or losses. But the IRS has applied a per-bet rule rather than a per-session rule for non-resident aliens such as Park.

The Court looked at the IRS Chief Counsel memorandum on how gambling should be taxed. I’ve noted this memorandum in the past, and the Court noted it, to:

“We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” her gains.

The Court noted that nothing in the interpretation of the portion of the Tax Code that covers US gamblers (Section 165(d)) says anything about citizens. Indeed, the Court also noted that the IRS’s approach here is, “consistent with the commonsense understanding of what it means to have gambling winnings, and of what it means therefore to have ‘gains.’”

The IRS then argued that because a recreational gambler cannot deduct losses, they can’t use session accounting. The Court wasn’t impressed.

The IRS’s reasoning is a non sequitur. What the IRS says about deductions for non-resident aliens is certainly accurate as far as it goes, but the point has nothing to do with the issue in this case. 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.

The Court’s conclusion was succinct:

We conclude that the relevant provision of the Tax Code, Section 871, allows non-resident aliens to calculate winnings or losses on a per-session basis.

The case was remanded to the Tax Court.

For Mr. Park, the ruling likely will have limited benefits. In the initial Tax Court case decision, it appeared that Mr. Park did not keep good records. If he is unable to show his gambling losses, the result will not be satisfactory to him. However, if he does have records (the ideal would be a contemporaneous written log; next best would be slot club records and ATM records), he should be able to lower his US tax.

For others, the ruling will have some benefits. For foreigners who gamble at slot machines, the ruling’s impact is clear: If you have proof of your losses during a session, you will be able to take those losses. However, if you do not have proof, the fact that you can net those losses won’t do you any good.

For poker players from abroad, the ruling has little impact. There currently is no withholding made on cash game play. Though non-resident aliens are supposed to include such gambling on their tax returns, I suspect the number who do is zero. The ruling has no impact on tournaments: Each poker tournament would be considered a separate session, so withholding would still be required based on every tournament.

Hat Tips: TaxProf Blog, TaxDood