Park v. Commissioner

• Decision Date: 13 June 2011
• Docket Number: 30063-09.,Docket Nos. 14159-09
• Citation: 136 T.C. 569
• Court: U.S. Tax Court
• Parties: SANG J. PARK & WON KYUNG O, Petitioners,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.<BR>SANG J. PARK, Petitioner,<BR>v.<BR>COMMISSIONER OF INTERNAL REVENUE, Respondent.

136 T.C. 569

SANG J. PARK & WON KYUNG O, Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
SANG J. PARK, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket Nos. 14159-09

30063-09.

06-13-2011

[136 T.C. 570]

Denis M. McDevitt, for petitioners.

Erin K. Salel, for respondent.

OPINION

COHEN, Judge:

In these consolidated cases, respondent determined a deficiency of $134,350 in income tax and an accuracy-related penalty of $20,774 with respect to the jointly filed 2006 Federal income tax return of Sang J. Park (petitioner) and Won Kyung O (petitioner wife) and a deficiency of $23,821 in income tax and an accuracy-related penalty of $4,438 with respect to petitioner's 2007 income tax return. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The issues for decision are: (1) Whether petitioner's 2006 and 2007 gambling winnings are subject to tax under section 871(a); (2) whether petitioner's gambling income is effectively connected with a U.S. trade or business; (3) whether the interest income earned in 2006 and 2007 is subject to tax; and (4) whether the section 6662(a) accuracy-related penalties imposed should be sustained.

[136 T.C. 571]

Background

These cases were submitted fully stipulated under Rule 122. The stipulated facts are incorporated as our findings by this reference. Petitioners are married and are citizens and residents of the Republic of South Korea (South Korea) and had South Korean passports during the years at issue. Petitioners were nonresident aliens in 2006 and 2007, i.e., they were not citizens of the United States, and neither had a permanent resident card (green card). Petitioner has a Social Security number that he obtained while attending college in the United States in the mid-1970s.

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

During the years in issue, petitioners traveled to the United States for vacation and to visit family a number of times. Petitioner enjoys gambling, and during these trips he frequented the Pechanga Resort & Casino (Pechanga) in Temecula, California, to play the slot machines. Petitioner 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. With respect to the gambling activity, petitioner did not have a business plan and did not keep books and records. Petitioner did not use for gambling money that was needed to support his family. Petitioner wife had no involvement in any gambling or gaming activities.

In 2006, petitioner won 138 slot machine jackpots of $1,200 or more, with total gambling winnings of $431,658. 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 petitioner had losses that exceeded his 2006 winnings by $4,663.

On February 18, 2007, petitioner 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

[136 T.C. 572]

he was a U.S. person (including a U.S. resident alien). In 2007, petitioner won 43 slot machine jackpots of $1,200 or more, with total gambling winnings of $103,874. Pechanga withheld 30 percent of the winnings for payment of Federal income tax on three jackpots (jackpots of $2,620, $1,440, and $1,380), for a total of $1,632. A report prepared by Pechanga showed that petitioner had losses that exceeded his 2007 winnings by $45,130.50.

Petitioner 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 Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect To Taxes on Income and the Encouragement of International Trade and Investment, U.S.-S. Kor., art. 12, par. (2)(a), June 4, 1976, 30 U.S.T. 5253 (U.S.-Korea income tax treaty)). Petitioner wife had no U.S. source income.

Petitioners filed a Form 1040, U.S. Individual Income Tax Return, for 2006 as married filing jointly, prepared by a bookkeeping service. Petitioners did not report any gambling winnings or any associated expenses. They did report petitioner's other U.S. source income. The payer of the interest income was listed as Bank of America.

In 2007, petitioner 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.-Korea income tax treaty, art. 12, par. (2)(a)).

Petitioner filed a Form 1040 for 2007 and reported the interest and dividend income from sources within the United States, but he did not report the gambling income or any associated expenses. The payer of $11,662 of interest income was listed as "FEDL HOME LOAN BK CONS DISC". Petitioner's 2007 return was prepared by a certified public accountant.

Pechanga reported petitioner's jackpot winnings of $1,200 or more to the Internal Revenue Service (IRS) on completed Forms W-2G, Certain Gambling Winnings, for 2006 and 2007. The IRS examined the 2006 and 2007 tax returns and determined that petitioner received unreported gambling income of $431,658 in 2006 and $103,874 in 2007. The IRS

[136 T.C. 573]

did not receive reporting from third parties with respect to the interest income of $6,585 and $11,662, as reported on the 2006 and 2007 tax returns, respectively. However, the IRS made adjustments to the interest income as reported on the 2007 return to reflect information reported from third parties: (1) $4 less $1 withholding from Wells Fargo Bank, N.A. (a U.S. national bank chartered and regulated by the Office of the Comptroller of the Currency) and (2) $165 from First Clearing, L.L.C. The IRS sent a notice of deficiency to petitioners on March 23, 2009, for determined deficiencies and an accuracy-related penalty with respect to 2006. On November 9, 2009, the IRS sent a notice of deficiency to petitioner for determined deficiencies and an accuracy-related penalty with respect to 2007.

The parties agree that petitioners are 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.

Discussion

Gambling winnings, including slot machine winnings, are gross income. See sec. 61; United States v. Monteiro, 871 F.2d 204, 206 (1st Cir. 1989); Johnston v. Commissioner, 25 T.C. 106, 107-108 (1955). In general, "interest * * *, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income" that are received by a nonresident alien from sources within the United States and that are not effectively connected with a U.S. trade or business are subject to a 30-percent tax. Sec. 871(a)(1). Gambling winnings paid to a nonresident alien fall within this provision, with limited exceptions. See sec. 871(j); Abeid v. Commissioner, 122 T.C. 404, 406-407 (2004); Barba v. United States, 2 Cl. Ct. 674, 675-678 (1983). The parties agree that petitioner's U.S. gambling winnings are considered U.S. source income.

Generally, a recreational or casual gambler's gross income from a wagering transaction should be calculated by subtracting the bets placed to produce the winnings, not as a deduction in calculating adjusted gross income or taxable income but as a preliminary computation in determining

[136 T.C. 574]

gross income. See Lutz v. Commissioner, T.C. Memo. 2002-89. A recreational gambler who plays the slot machines recognizes a wagering gain or loss at the time tokens are redeemed and the taxpayer can definitely calculate the amount above or below basis (the wager) realized. See Shollenberger v. Commissioner, T.C. Memo. 2009-306.

Section 6001 and the regulations thereunder require taxpayers to keep permanent records sufficient to substantiate the amounts of income, deductions, and credits shown on their tax returns. Sec. 1.6001-1(a), Income Tax Regs. Petitioner did not keep books and records with respect to his gambling activities. Petitioner's slot machine jackpot winnings of $1,200 or more for the years in issue are included in the record, but petitioners have not supplied evidence with respect to the wagering money used to generate the winnings on a per-session basis or otherwise.

A nonresident generally cannot deduct or offset gambling losses against gambling winnings. See sec. 873; Barba v. United States, supra; cf. sec. 165(d); Shollenberger v. Commissioner, supra (gambling losses other than in the trade or business of gambling are allowable, if at all, as itemized deductions in calculating taxable income); Mack v. Commissioner, T.C. Memo. 1969-26 (gambling losses incurred other than in the trade or business of gambling are allowable for U.S. citizens or aliens residing in the United States to the extent of the gambling winnings), affd. 429 F.2d 182 (6th Cir. 1970). Thus, a nonresident alien who is not engaged in gambling as a business within the United States is subject to tax under section 871(a)(1) on gross income from gambling without a deduction for gambling losses.

When gambling winnings of...