Mr. Park Goes to D.c.: Federal Taxation of Nonresident Aliens' Wagering Gains from Slot Machines and the Per-session Rule

• Publication year: 2022

48 Creighton L. Rev. 65. MR. PARK GOES TO D.C.: FEDERAL TAXATION OF NONRESIDENT ALIENS' WAGERING GAINS FROM SLOT MACHINES AND THE PER-SESSION RULE

MR. PARK GOES TO D.C.: FEDERAL TAXATION OF NONRESIDENT ALIENS' WAGERING GAINS FROM SLOT MACHINES AND THE PER-SESSION RULE

DENIS M. MCDEVITT, LL.M., CPA (CALIFORNIA) MICHAEL D. MCDEVITT, J.D., CPA (CALIFORNIA, MISSOURI) DREW M. BOUCHARD, J.D. (CALIFORNIA)(fn*)

AUTHORS' NOTE

There is a scene from the movie, Moneyball, where Billy Beane (played by Brad Pitt) says, "If we can win [the World Series] with this team, on this budget, we will have changed the game . . . that's what I want." The authors had a similar feeling about the Sang Park case. Short on legal precedent and up against an IRS practice that had gone on as long as anyone could remember, success in Mr. Park's case required a fresh approach. Like Moneyball, Sang Park is the story of a struggle to change the way things have always been done in the past. Our mantra was, "If we can win this case for Mr. Park (and others like him) and put an end to a practice that has never been challenged, we will change the rules for the way foreign gamblers are taxed . . . that's what we want." Mr. Park did win his appeal. The Sang Park decision will radically change the way foreign gamblers compute tax on their slot jackpots and other U.S. source gambling income. How the case came about and how it was ultimately resolved is a fascinating story. What happens from this point forward depends upon the Internal Revenue Service, Congress, the casino industry, and the foreign taxpayers who were freed from the oppression of paying tax on their own money. The authors are just content that Sang Park "changed the rules of the game."

ABSTRACT

Nonresident alien individuals who visit the United States and play slot machines in a state where slots are legal have always been subject to tax at a thirty percent rate, unless exempted by treaty, on their U.S. source wagering gains as defined by I.R.C. § 871(a)(1)(A). This tax is enforced by a withholding system that requires casinos to withhold thirty percent of each slot jackpot of $1,200 or more and remit those funds to the United States government. (fn1) The definition of wagering gains was first addressed in Barba v. United States.(fn2) The Barba case instituted the per-bet rule that defined wagering gains to be equal to gross winnings taxable under I.R.C. § 871(a). Under the per-bet rule, all wagers and wagering losses were never considered in calculating the amount of tax due. The per-bet rule ignored the fact that gambling is by nature a series of individual bets and had the practical result that no foreign slot player could ever recover any of the taxes withheld by the casino on their jackpots. Between 1983 and 2011, no taxpayer ever questioned the per-bet rule and it was not until the case of Sang Park v. Commissioner,(fn3) a case recently decided by the United States Court of Appeals for the District of Columbia Circuit, that a court revisited the issue of defining wagering gains for purposes of I.R.C. § 871(a). Sang Park v. Commissioner rejects the per-bet rule from Barba and puts an end to the Internal Revenue Service ("IRS") practice of keeping all of the taxes withheld on slot jackpots. Instead, foreign slot players should calculate their wagering gains from slot play on the same basis as domestic slot players utilizing the per-session approach that was suggested by a government ruling and approved by the Tax Court in Shollenberger v. Commissioner.(fn4) Under the per-ses-sion rule, wagering gains are calculated and taxed based upon an overall result of wins and losses during a specified period of time called a session. There is still work to be done in defining what a session means and to explore whether the per-session approach might apply to games other than just slots. The Sang Park case opens the possibility of foreign slot players recalculating their tax based upon the per-session rule and filing for refund for taxes withheld in any tax year not closed by the statute of limitations.

I. INTRODUCTION

This is the story of a thirty-year-old case precedent gone rogue, resulting in the overpayment of tax by foreign taxpayers on their slot machine jackpots and how one such foreigner challenged that precedent and won. It is also a cautionary tale for tax counsel who must defend the taxpaying public from rules that may be well entrenched in the tax law but simply defy logic. Although the only taxpayers affected here were nonresident aliens sufficiently well-heeled to gamble on slot machines in U.S. casinos, there may well be other every day inequities in our tax laws that trap unwary taxpayers who can ill afford to pay more tax. The case of Sang Park v. Commissioner (fn5) demonstrates why tax professionals must always question tax rules that make no sense rather than accept the explanation that, "this is the way it has always been done."

In hindsight, it is difficult to understand how the per-bet rule, as announced in Barba v. United States,(fn6) which taxed every jackpot of a foreign gambler but completely ignored the rest of their play, could have gone unchallenged for so long. The Sang Park case rejected the per-bet rule's taxation of every successful bet and replaced it with the per-session rule, which taxes foreign slot players only to the extent they leave the casino with more cash than they brought.

The United States Court of Appeals for the District of Columbia decided Sang Park was a good fit for this case and deserves credit for resisting the temptation to maintain the status quo.(fn7) The big winner, however, is the casino industry. After the Sang Park case, foreign slot players can now afford to play more knowing that at year's end they will now be able to seek a refund of taxes previously denied to them by the per-bet rule. On the other hand, Mr. Park and other foreign slot players like him might wonder why the gaming industry did not intervene sooner on their behalf. The Sang Park case does not guarantee every foreign slot player a refund of federal taxes, but these folks will now only pay tax when they leave the casino a winner rather than paying tax on jackpots that merely represent a return of their own money.

II. BACKGROUND

A. HOW SLOT MACHINES WORK

For those who may not be initiated into the world of slot machines, or maybe have never been inside a casino, it is helpful to understand how slot machines operate. Also, in case the reader has never had a slot jackpot of $1,200 or more, a summary of the issuance of Form W-2G or Form 1042-S is also included.

Slot machine action begins when money is inserted into the slot machine, which then registers the appropriate amount of credits. The "play" button is pressed (or, the slot handle is pulled) and the amount of credits bet is subtracted from the balance of credits remaining. The slot game is then generated. At the end of the game, any credits won are added to the balance of the credits remaining, provided the amount won is less than $1,200. The machine is then ready to continue play for the next game.

When play on a particular machine ends, the slot player has the option to press a "cash out" button and receive a printed paper voucher, which is not the equivalent of cash or currency.(fn8) To convert the paper voucher to currency, the player must proceed to the cashier's cage. In the alternative, there are ATM-type machines stationed throughout the casino that will also redeem the voucher for U.S. currency.

When a single slot spin results in a payout of $1,200 or more, regardless of the amount bet, the slot machine is set to lock-up and a slot attendant is called for a hand pay and issues a tax form.(fn9) If the winner is a domestic player with a social security number, he will receive a Form W-2G. If the winner is foreign and not otherwise exempt from withholding, a Form 1042-S is issued to the player.(fn10) When there is a hand pay, the player has the option to receive winnings in the form of a paper voucher, cash, or the credits may simply be added to the credits on the machine. The slot machine behaves the same whether the slot player is foreign or domestic.

If a jackpot requiring either a Form W-2G or Form 1042-S occurs, the casino asks the player for a social security number (usually requesting a signed Form W-9) and often picture identification before the jackpot is paid to the player.(fn11) The player will be issued one or more copies of the Form W-2G or Form 1042-S, which shows date, time, amount of gross winnings, and tax withheld, if any. In the case of foreigners, who have no social security number, thirty percent of the gross jackpot is withheld and the tax will be remitted to the U.S. government. The remaining balance of the jackpot is paid to the foreign player. Since there is no identifying player number for foreign players, it will be important for the player to retain a copy of their Form 1042-S if or when they file for a refund of the taxes withheld.

B. FOREIGN SLOT PLAY IN THE UNITED STATES

Las Vegas-style slots are now offered in thirty-eight states, a testament to their popularity and the societal acceptance of the gaming industry.(fn12) While casino gambling is supposed to be recreation, there is no doubt that casino gamblers have a profit motive. The connection between gambling and investing was made by Massachusetts Institute of Technology ("MIT") mathematician John Kelly, Jr., the author of the formula for "risk of ruin" still used on Wall Street, who observed that, "gambling and investment differ only by a minus...