Nonresident alien gamblers get similar treatment as U.S. gamblers.

• Author: Borkes, Jason

The recent case of Park, No. 12-1058 (D.C. Cir. 2013), was a big step toward nonresident alien gamblers' being treated similar to U.S. citizen gamblers. Sang Park, a Korean businessman, regularly traveled to the United States and played slot machines at a casino in California. Even though he won hundreds of thousands of dollars over the course of a year, he lost even more, creating a net loss. Notwithstanding Park's net loss position, he was subject to a significant tax liability on his gambling earnings, because the IRS required nonresident aliens to calculate their income from gambling using a per-bet approach instead of a per-session approach, as it allows U.S. taxpayers to do.

Park filed suit in the Tax Court, which ultimately agreed with the IRS that his winnings were properly taxed, since the Code did not allow nonresident alien gamblers to deduct their gambling losses against winnings (Park, 136 T.C. 569 (2011)). On appeal, the D.C. Circuit reversed the Tax Court's decision, holding that nonresident aliens should measure their gambling gains and losses under the "per-session" approach, the same method that U.S. citizens follow.

Background

In general, nonresident aliens are required to pay tax on all income generated in the United States. Regs. Sec. 1.8714 provides that income can be divided into three categories:

* Income connected with a U.S. trade or business;

* Income not effectively connected with a U.S. trade or business; and

* Income that is exempt from U.S. tax. Deductions against income are allowed only if they are associated with the conduct of a trade or business in the United States.

Per-Bet vs. Per-Session Approach

Under the "per-bet" approach, nonresident alien gamblers were required to track winnings and losses on a per-transaction basis (e.g., each hand of poker or pull of the slot machine). In contrast, the "per-session" approach applicable to U.S. citizen gamblers allows gambling gains and losses to be calculated over a series of separate plays and wagers in a single session--not until the taxpayer redeems his or her tokens can net gains be calculated. Consider the following examples that illustrate the difference between the per-bet approach and the per-session approach:

Example 1: A U.S. citizen walks into a casino and plays a slot machine. Within the first 10 minutes the player wins $200. The player continues playing and an hour later has lost the entire $200. In this situation the U.S. citizen has $0 income to...