Parker Pro Library
online tax research Parker Tax Pro Library tax research Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
Professional Tax Research Software
In Depth Tax Articles and News
Parker Tax Publishing - Tax Research Software
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research

Professional Tax Software

Affordable Tax Research



D.C. Circuit Reverses Tax Court; Nixes IRS's Approach to Calculating Gambling Gains of Nonresident Aliens. (Parker's Federal Tax Bulletin: July 19, 2013)

The IRS taxes nonresident alien gamblers differently than U.S. citizen gamblers. One difference concerns the period of time over which gambling winnings from casino games, such as slots, are measured. The IRS allows U.S. citizens to subtract losses from their wins within a gambling session to arrive at per-session wins or losses. However, the IRS applies a per-bet rule, rather than a per-session rule, for nonresident aliens. In Park v. Comm'r, 2013 PTC 185 (D.C. Cir. 7/9/13), the D.C. Circuit rejected this approach, reversed the Tax Court, and concluded that the relevant provision of Code Sec. 871 allows nonresident aliens to calculate winnings or losses on a per-session basis.


Sang Park is married and is a full-time, high-ranking business executive for a large chemical company in South Korea. Sang's employer pays for the Sangs' son to attend school in the United States and for the Sangs to travel to the United States to visit their son. Sang's wife also has other family living in the United States.

During the years in issue, the Sangs traveled to the United States for vacation and to visit family a number of times. Sang enjoys gambling and, during these trips, he frequented the Pechanga Resort & Casino (Pechanga) in Temecula, California, to play the slot machines. Sang gambled at Pechanga on 20 of the approximately 68 days that he was in the United States in 2006 and on 11 of the approximately 46 days that he was in the United States in 2007. Sang's wife had no involvement in any gambling or gaming activities.

In 2006, Sang won 138 slot machine jackpots of $1,200 or more, with total gambling winnings of approximately $432,000. Pechanga withheld 30 percent of the winnings for payment of federal income tax on three of those jackpots (two jackpots of $50,000 and one of $1,600), for a total of $30,480 withheld for taxes. A report prepared by Pechanga showed that Sang had losses that exceeded his 2006 winnings by $4,663.

In early 2007, Sang provided his social security number to Pechanga and signed a Form W-9, Request for Taxpayer Identification Number and Certification, certifying that he was not subject to backup withholding and that he was a U.S. person (including a U.S. resident alien). In 2007, Sang won 43 slot machine jackpots of $1,200 or more, with total gambling winnings of approximately $104,000. Pechanga withheld 30 percent of the winnings for payment of federal income tax on three jackpots, for a total withholding of $1,632. A report prepared by Pechanga showed that Sang had losses that exceeded his 2007 winnings by almost $46,000.

Sang received from sources within the United States other income that was not effectively connected with a U.S. trade or business in 2006: (1) interest income of $6,585; (2) capital gain income of $52,792; and (3) dividend income of $7,471 (taxable at a rate of 15 percent under the U.S. S. Korea tax treaty). Sang's wife had no U.S. source income.

The Sangs filed a Form 1040, U.S. Individual Income Tax Return, for 2006 as married filing jointly, prepared by a bookkeeping service. The Sangs did not report any gambling winnings or any associated expenses. They did report their other U.S. source income.

In 2007, Sang also received from sources within the United States income that was not effectively connected with a U.S. trade or business: (1) interest income of $11,830 and (2) dividend income of $3,046 (taxable at a rate of 15 percent under the U.S. - S. Korea income tax treaty).

The Sangs filed a Form 1040 for 2007 and reported the interest and dividend income from sources within the United States, but did not report the gambling income or any associated expenses. The Sangs' 2007 return was prepared by a CPA.

Pechanga reported Sang's jackpot winnings of $1,200 or more to the IRS on Forms W-2G, Certain Gambling Winnings, for 2006 and 2007. The IRS examined the 2006 and 2007 tax returns and determined that Sang received unreported gambling income of almost $432,000 in 2006 and almost $104,000 in 2007. The IRS sent a notice of deficiency to the Sangs and assessed deficiencies and an accuracy-related penalty with respect to their 2006 and 2007 tax returns.

The parties agreed that Sangs were nonresident aliens and, that for both 2006 and 2007, Forms 1040 were erroneously filed instead of Forms 1040NR, U.S. Nonresident Alien Income Tax Return.

The Parties' Arguments

According to the IRS, under Code Sec. 871, Sang should pay taxes on every winning pull at the slot machine. The IRS argued that Code Sec. 873 does not allow nonresident aliens to deduct recreational gambling losses from their income on their tax returns. In other words, once wins and losses are calculated whether on a per-bet or per-session basis nonresident aliens may not deduct losses from wins when doing their annual income taxes. As a result, the IRS said that that nonresident aliens should be required to pay taxes on each winning pull of the slot machine lever. The IRS also cited the decision in Barba v. U.S., 2 Cl. Ct. 674 (1983), in which the Claims Court ruled out a per-year approach to measuring taxable gambling winnings.

Sang disputed the IRS's interpretation of Code Sec. 871 and argued that the IRS should allow him to calculate his winnings on at least a per-session basis. More than a $100,000 of tax turned on that question for Park and the IRS.

The D.C. Circuit's Analysis

The D.C. Circuit noted that the IRS's interpretation of Code Sec. 871 as covering every winning pull of the slot machine i.e., a per-bet approach was not promulgated in an authoritative interpretation that required the court's deference. Thus, the court looked to the statutory language independently.

Code Sec. 871(a)(1)(A), the court noted, taxes nonresident aliens on all interest . . . , dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income received from sources in the United States. For purposes of Sang's situation, the court identified gains as the key term and observed that this term also appears in Code Sec. 165(d), which governs U.S. citizens. Under Code Section 165(d), losses from wagering transactions are allowed only to the extent of gains from such transactions.

The court observed that the IRS has persuasively interpreted the term gains in Code Sec. 165(d) to allow U.S. citizens to measure gains on a per-session basis. Citing a memorandum from the Office of Chief Counsel (AM 2008-11), the court noted that the IRS has stated that gain or loss may be calculated over a series of separate plays or wagers. In the memorandum, the IRS states, with respect to gambling, that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems his or her tokens and can definitively calculate net gains. Because gain or loss may be calculated over a series of wagers, the memorandum says, a taxpayer who plays the slot machine recognizes a wagering gain or loss at the time he or she redeems the tokens. Therefore, U.S. citizens do not treat every play or wager as a taxable event. The result is that U.S. citizens can measure their gambling winnings and losses on a per-session basis.

Nothing in the IRS's Code Sec. 165(d) ruling on gains, the court stated, turned on the fact that the gamblers were U.S. citizens. Rather, the court found that the IRS, in its memorandum, was trying to sensibly interpret and apply the term gains to casino gambling. The court found the IRS's reading of the term gains in Code Sec. 165(d) to be the most sensible interpretation of casino gambling gains. The court agreed with the IRS explanation that the per-session approach avoids the considerable administrative and practical difficulties that would arise if slots players had to track the wins from every pull of the slot machine lever.

The court said that the IRS's argument that nonresident aliens may not deduct gambling losses from winnings did not tell the court how to measure those losses and winnings in the first place.

With respect to the IRS's reliance on the Barba case, the court noted that the case did not consider whether to measure gains on a per-session basis or a per-bet basis and expressly left that question open.

The D.C. Circuit concluded that, with respect to calculating gambling gains, the per-session approach and not the per-bet approach was the better approach. The court declined to read the term gains in Code Sec. 871 to mean something different from what it has been interpreted to mean in Code Sec. 165(d). Thus, nonresident aliens can calculate gambling winnings or losses on a per-session basis.

Parker Tax Publishing Staff Writers


Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!


James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution.

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance