Foreign gamblers cannot be taxed on every winning bet they make in U.S. casinos when they end up losing money overall, a federal appeals court ruled on Tuesday, rejecting current Internal Revenue Service policy.
The U.S. Court of Appeals for the District of Columbia Circuit ruled that the IRS must treat foreign gamblers the same way it taxes U.S. bettors when they visit a casino.
"After a night of gambling, it's no fun to walk out of the casino a loser," wrote Judge Brett Kavanaugh for a unanimous three-judge panel. "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."
U.S. citizens are taxed on the gains they make per session. When a gambler cashes out at the end of the night, he or she owes income tax on any profits. If the session was unsuccessful, the bettor owes nothing.
That has not been the case with foreign gamblers, who were taxed on every winning bet made in games like slot machines regardless of whether they ended up losing money.
Sang Park, a South Korean businessman, visited the Pechanga Casino and Resort in California in 2006 and 2007. While he won more than $500,000 playing slot machines, he lost even more, leaving him with more than $50,000 in losses for those two years of gambling, according to court documents.
Nevertheless, the IRS taxed him on his winnings, claiming he owed more than $150,000 despite the fact that he lost money. Park filed a lawsuit challenging his tax bill.
The ruling overturned a decision from the U.S. Tax Court upholding the IRS policy.
A spokeswoman for the IRS declined to comment.
The tax agency had based its policy on the fact that foreigners cannot deduct gambling losses from their income, as U.S. residents can, and thus should not be allowed to do so during individual gambling sessions.
Kavanaugh, however, called that a "non sequitur."
"The fact that non-resident aliens may not deduct gambling losses from gambling winnings does not tell us how to measure those losses and winnings in the first place," he wrote.
Denis McDevitt, Park's attorney, did not immediately respond to a request for comment.
The case is Park v. Commissioner of Internal Revenue Service, U.S. Court of Appeals for the District of Columbia Circuit, No. 12-1058.