Sang Park, et al v. Commissioner of IRS

Filing

OPINION filed [1445657] (Pages: 7) for the Court by Judge Kavanaugh [12-1058, 12-1059]

USCA Case #12-1058

Document #1445657

Filed: 07/09/2013

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 11, 2013

Decided July 9, 2013
No. 12-1058

SANG J. PARK AND WON KYUNG O,
APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE

Consolidated with 12-1059

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
KAVANAUGH.

the

Court

filed

by

Circuit

Judge

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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
1

Resident aliens are taxed in the same manner as U.S. citizens
for these purposes.

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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 persession 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 (2001). As the

2

Section 871(j) exempts non-resident aliens from taxation on
winnings from blackjack, baccarat, craps, roulette, and big-6 wheel.
26 U.S.C. § 871(j).

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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

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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 practical difficulties 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 gambler is a U.S. citizen or a non-resident alien, it makes
little sense – as the IRS itself explained in the Section 165(d)
context – to measure gambling winnings on casino games
such as slots on a per-bet rather than per-session basis.
The IRS’s only real response is that the Tax Code does
not allow non-resident aliens to deduct recreational gambling
losses from their income on their tax returns. See 26 U.S.C.
§ 873. In other words, once wins and losses are calculated –
whether on a per-bet or per-session basis – non-resident aliens
may not deduct losses from wins when doing their annual
income taxes. The IRS therefore concludes that non-resident
aliens should be required to pay taxes on each winning pull of
the slot machine lever.
The IRS’s reasoning is a non sequitur. What the IRS
says about deductions for non-resident aliens is certainly
accurate as far as it goes, but the point has nothing to do with
the issue in this case. The fact that non-resident aliens may
not deduct gambling losses from gambling winnings does not

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tell us how to measure those losses and winnings in the first
place.
The IRS also cites Barba v. United States, a 1983
decision from the Claims Court. 2 Cl. Ct. 674 (1983). But
Barba is not binding on us, and in any event, it merely ruled
out a per-year approach to measuring taxable gambling
winnings. 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. Id. at 678 (“there is no allegation that
the losses were from the same transaction”).
On the question actually before us – the meaning of
“gains” – we are persuaded that the per-session approach and
not the per-bet approach is the better approach for the reasons
the IRS itself persuasively explained with respect to U.S.
citizens. We thus decline the IRS’s invitation to read the term
“gains” in Section 871 to mean something different from what
it has been interpreted to mean in Section 165(d). See
Barnhill v. Johnson, 503 U.S. 393, 406 (1992) (“Normally,
we assume that the same terms have the same meaning in
different sections of the same statute.”).
We conclude that the relevant provision of the Tax Code,
Section 871, allows non-resident aliens to calculate winnings
or losses on a per-session basis. 3

3

The IRS also assessed an accuracy-related penalty against
Park. See 26 U.S.C. § 6662. Because we conclude that the IRS
used the wrong methodology to assess Park’s tax liability, we need
not separately analyze the penalty issue.

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***
We reverse the judgment of the Tax Court. Because the
record does not reflect Park’s per-session winnings, we
remand to the Tax Court so the parties can determine the
proper amount of Park’s tax liability.
So ordered.

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