In an opinion for the U.S. Court of Appeals for the D.C. Circuit, Judge Kavanaugh interprets section 871 of the tax code, which taxes non-U.S. residents’ earnings in this country. It applies to gambling winnings as well. In this case, the court interprets the statute to treat gambling winnings of non-residents in the same way as gambling winnings of U.S. residents.
Sang Park, an (evidently very wealthy) South Korean national, blew a lot of money playing slots. He won a few pulls along the way — enough to generate roughly $100,000 in tax liability. (I roughly estimate he must have won at least three times this amount — and probably lost even more.) But in the end, for Mr. Park, the old saying was true — the house always wins.
That makes all the difference. Under the tax code, U.S. residents are allowed to deduct their gambling losses from their gains — so when the house wins, you don’t owe the tax man at the end of the night. The IRS, trying to collect from Mr. Park, claimed that this rule (from a different section of the tax code) does not apply to the section governing winnings of non-U.S. residents. They sought to tax gross gambling gains, rather than net gains or losses.
The court disagreed. Interpreting the tax code, the court found that it was most reasonable to treat gains and losses from gambling on a net (per-session) basis, just as it does for citizens. It also found the IRS was not entitled to deference in its new interpretation because it was not a formal interpretation.
The court sends the case back to the Tax Court to calculate Mr. Park’s tax liability under a per session, gains-minus-losses formula.
If I were a betting man, I’d wager it will end up being zero.
