Sang J. Park v. Comm'r of Internal Revenue Serv.

• Decision Date: 09 July 2013
• Docket Number: 12–1059.,Nos. 12–1058,s. 12–1058
• Citation: 722 F.3d 384
• Parties: Sang J. PARK and Won Kyung O, Appellants v. COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

722 F.3d 384

Sang J. PARK and Won Kyung O, Appellants

v.COMMISSIONER OF INTERNAL REVENUE SERVICE, Appellee.

Nos. 12–1058, 12–1059.

United States Court of Appeals,District of Columbia Circuit.

Argued April 11, 2013.

Decided July 9, 2013.

On Appeals from the United States Tax Court.

Denis M. McDevitt argued the cause for appellants. With him on the briefs was Drew M. Bouchard.

John A. Dudeck Jr., Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief was Richard Farber, Attorney.

Before: TATEL and KAVANAUGH, Circuit Judges, and SENTELLE, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge KAVANAUGH.

KAVANAUGH, Circuit Judge:

After a night of gambling, it's no fun to walk out of the casino a loser. But it's even worse when the IRS, on your way out, tries to tax you on each individual bet that you happened to win over the course of your losing night. Enter Sang Park, a South Korean businessman who gambled away thousands of dollars at slot machines on casino outings during his trips to the United States—only then to have the IRS seek more in taxes.

The IRS taxes non-resident alien gamblers such as Park differently than U.S. citizen gamblers. The relevant difference here concerns the period of time over which gambling winnings from casino games such as slots are measured. Are gamblers required to pay taxes on every winning bet—for example, every winning pull of the slot machine? Or can they report the overall income—gains minus losses—from a session of gambling? The IRS allows U.S. citizens to subtract losses from their wins within a gambling session to arrive at per-session wins or losses. But the IRS has applied a per- bet rule rather than a per- session rule for non-resident aliens such as Park.

A simple hypothetical illustrates how U.S. citizens and non-resident aliens are taxed differently with respect to gambling winnings: Consider two people. The first, a U.S. citizen, walks into a casino 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.¹

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 our U.S. friend. But 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.

In this case, Sang Park traveled from South Korea to the United States and, while here, gambled at slot machines. A lot. The IRS contends that Park now must pay taxes on every winning pull at the slot machine. Park disputes that interpretation of the Tax Code. Park contends that the IRS should allow him to calculate his winnings on at least a per-session basis. It appears that more than a hundred thousand dollars turn on the question for Park and the IRS.

The relevant provision of the Tax Code, Section 871, taxes non-resident aliens for 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. 26 U.S.C. § 871(a)(1)(A).² For purposes of this case, the key term in Section 871 is “gains.” In Park's case, the IRS interpreted Section 871 as covering every winning pull of the slot machine—a per-bet approach. That interpretation was not promulgated in an authoritative interpretation that triggers Chevron deference. See United States v. Mead Corp., 533 U.S. 218, 228–32, 121 S.Ct. 2164, 150 L.Ed.2d 292 (2001). As the IRS acknowledges, we therefore analyze the statutory language independently.

We begin our independent analysis by noting that the key term in interpreting Section 871—“gains”—also appears in Section 165(d), which governs U.S. citizens. Section 165(d) provides: “Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.” 26 U.S.C. § 165(d).

The IRS has persuasively interpreted the term “gains” in Section 165(d) to allow U.S. citizens to measure gains on a per-session basis. The IRS stated that “gain or loss may be calculated over a series of separate plays or wagers.” Memorandum AM2008–11, Office of Chief Counsel, Internal Revenue Service 4 (2008) (emphasis added). In the IRS's words: “We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate” her net gains. Id. Because gain or loss may be calculated over a series of wagers, a “taxpayer who plays the slot machines[ ] recognizes a wagering gain or loss at the time she redeems her tokens.” Id. Therefore, U.S. citizens do not “treat every play or wager as a taxable event.” Id. The result is that U.S. citizens can measure their gambling winnings and losses on a per- session basis. See also Shollenberger v. Commissioner, 98 T.C.M. (CCH) 667, 2009 WL 5103973, at *2 (Tax Ct.2009) (same).

Nothing in the IRS's Section 165(d) ruling on “gains” turned on the fact that the gamblers were U.S. citizens. Rather, the IRS was trying to sensibly interpret and apply the term “gains” to casino gambling. We think that the IRS's reading of the term “gains” in Section 165(d) is the most sensible interpretation of casino gambling “gains.” The IRS's approach is consistent with the commonsense understanding of what it means to have gambling winnings, and of what it means therefore to have “gains.” Moreover, as the IRS itself explained, the per-session approach avoids the considerable administrative and practicaldifficulties that would arise if slots players had to track the wins from every pull of the slot machine lever. See id. at *3 (referring to “the practical difficulties of tracking the basis of each wager individually in a session of like play”).

Turning back to Section 871, we see again that Section 871 uses the same key term that Section 165(d) uses—“gains.” And the logic and analysis of the IRS's per-session approach to U.S. taxpayers in Section 165(d) has no less force when applied to non-resident aliens in Section 871. Whether a...