After a night of gambling, it’s no fun to walk out of the casino a loser. It’s even worse when the IRS tries to tax each individual bet that was won over the course of a losing night. Enter Sang Park, a South Korean businessman who enjoyed gambling during his trips to the United States — only to then have the IRS seek more in taxes.
Until just recently, the IRS taxed non-resident alien gamblers differently than U.S. citizen gamblers. A simple hypothetical illustrates this difference: Consider two people. The first, a U.S. citizen, walks into a casino in Vegas and sits down to play slots. The player first wins $100 but then loses the $100 before leaving the casino for the night. In that hypothetical, the U.S. citizen would have $0 in income to report because the IRS interprets the applicable provision of the Tax Code to cover only gains measured over a session of gambling.
The second person, a non-resident alien, also wins $100 and then loses $100. The non-resident alien is in the same financial situation as the U.S. citizen. However, according to the IRS, the non-resident alien has $100 in income to report (the $100 he won in the initial bet) because the IRS interprets the applicable provision to require non-resident aliens to pay taxes on gains from each bet but grants no deduction for U.S. gaming losses. Talk about hitting a guy while he’s down!
In Sang Park’s case, he traveled from South Korea to the U.S. and, while here, gambled at slot machines. A lot. The IRS argued that Park now must pay taxes – $158,171.00 to be exact – on every winning pull at the slot machine during his trip, regardless of his loss pulls. Park disputed the IRS’ interpretation of the Tax Code and the U.S. Court of Appeals for the D.C. Circuit Court agreed with him.
As a result, the IRS must now allow non-resident aliens to reduce their winnings by their losses on a per session basis so that gross income from any session is winnings less losses, rather than gross winnings ignoring losses. The foreign gambler is not taking a loss deduction on his return, but rather a loss reduction from his winnings, before he realizes gross income from his gaming session.
In another recent case, Mayo v. Commissioner, the Tax Court decided to change 60 year-old tax law by holding that professional gamblers are now entitled to deduct business expenses incurred in their trade of gambling. Prior to the court’s ruling in this case, professional gamblers did not qualify for the full tax benefits of the Tax Code which generally allows a business owner to deduct any ordinary and necessary business expenses.
While professional gamblers are still limited to deducting gambling losses to the extent of their gambling winnings, professional gamblers are now entitled to deduct “ordinary and necessary” expenses (i.e. travel, meals, etc) incurred in their gambling businesses. Professional gamblers are now allowed business losses in excess of gaming wins, which losses may be applied against other income (i.e., a spouse’s wage income).
Robert D. Grossman, Jr. is a tax attorney at Tax Law Center, LLC, in Las Vegas, Nevada. Mr. Grossman has a B.A. in economics from the University of Virginia and a J.D. from the University of Florida. Mr. Grossman also has an LL.M. in taxation from New York University and was formerly a trial attorney for the IRS, Office of Chief Counsel, Tax Court Litigation Division, Trial Branch, in Washington D.C. Mr. Grossman left that office as a Senior Trial Attorney and has been in his own law practice for the last 39 years where he represents taxpayers before the IRS and in tax planning.
Derek N. Hatch is an attorney at Tax Law Center, LLC and represents clients before all federal and state tax agencies, including the IRS and Nevada Department of Taxation. Mr. Hatch previously served as a law clerk for the City of Henderson Attorney’s Office and the United States Attorney’s Office for the District of Nevada. Mr. Hatch is a graduate of Brigham Young University and received his law degree from Chapman University School of Law. Mr. Hatch also holds and LL.M. in taxation from Chapman University School of Law.
