Desert Palace, Inc. v. Comm'r of Internal Revenue
| Decision Date | 11 September 1979 |
| Docket Number | Docket No. 8531-74. |
| Citation | 72 T.C. 1033 |
| Parties | DESERT PALACE, INC., PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held: Receivables arising from the extension of credit for gambling purposes do not represent taxable income until collected. Petitioner's right to collect upon them is subject to the defense of the obligor that the receivables were incurred for gambling purposes. Robert E. Frisch, David W. Bernstein, and Victor F. Ganzi, for the petitioner.
Lawrence G. Becker, for the respondent.
Respondent determined deficiencies in petitioner's Federal income taxes as follows:
The issues in this case have been severed and the one now presented for our decision is whether winnings from petitioner's customers who gamble on credit must be recognized as income at the time the receivable arises, or subsequently, when it is paid.
If we hold that petitioner must immediately recognize as income winnings from customers who gamble on credit, the parties have stipulated that petitioner is entitled to deductions under section 1651 or section 166 as follows:
+----------------------------------+
¦Taxable period ended ¦Deduction ¦
+----------------------+-----------¦
¦ ¦ ¦
+----------------------+-----------¦
¦Apr. 30, 1967 ¦$987,389 ¦
+----------------------+-----------¦
¦Apr. 30, 1968 ¦1,489,932 ¦
+----------------------+-----------¦
¦Apr. 30, 1969 ¦1,384,806 ¦
+----------------------+-----------¦
¦Sept. 30, 1969 ¦1,102,598 ¦
+----------------------------------+
However, we would then have to decide under which section petitioner is entitled to said deductions.
All of the facts relating to this issue have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Desert Palace, Inc. (hereafter DPI), is a Nevada corporation. DPI's tax returns for the taxable years ended April 30, 1967, 1968, and 1969 and the short taxable period ended September 30, 1969 (including an amendment on Form 1120X), were prepared on the accrual method.2 The returns for the taxable years ended April 30, 1967 and 1968, were filed with the Office of Internal Revenue Service in Reno, Nev. The returns for the taxable year ended April 30, 1969, and the short taxable period ended September 30, 1969, were filed with the office of the Internal Revenue Service in Ogden, Utah. The filing of a return for the short taxable year was due to the fact that Caesars World, Inc., acquired DPI in the summer of 1969.
DPI was located in Caesars Palace, a building situated on a portion of Las Vegas Boulevard South known as the “Strip.” During the period in question, there were approximately 17 hotel-casinos located on or near the “Strip.” Within Caesars Palace, DPI operated a hotel and various entertainment, restaurant, and bar facilities. In addition, firms not affiliated with DPI leased space in the building from which they sold various types of merchandise.
Under the laws of Nevada, a properly licensed firm or person may legally operate a gambling casino. During the entire period from August 1, 1966 (when DPI began its operations), to and including September 30, 1969 (the “period in question”), DPI held all licenses and permits necessary to enable it to operate the casino (hereafter Casino) at Caesars Palace Hotel & Casino (hereafter Caesars Palace) in Las Vegas, Nev., including an unrestricted license issued by the Nevada Gaming Commission (hereafter commission). During the entire period in question, DPI did, in fact, operate the Casino.
The principal games played in the Casino were blackjack, dice, roulette, and baccarat. In blackjack, dice, and roulette, Casino customers would make bets using chips,3 which would be redeemed at the cashier's cage (an area, similar to a tellers, area in a bank, which was adjacent to, and had an opening onto, the gambling area of the Casino) by the Casino for specified sums of money. In each of those games, if the customer won a bet, he would receive additional chips from the Casino, and if the customer lost a bet, the Casino would retain the chips bet by him. The odds on the bets which could be made at these games in most, if not all, instances favored the Casino. In baccarat, bets were made with cash. To the extent the Casino was able to control it, the cash which was used was bills which had been specially soaped to keep them from sticking together.
At all times during the period in question, as part of the normal and regular operation of the Casino, DPI extended credit to certain customers of the Casino. The magnitude of the gambling done on credit relative to the overall operation of the Casino is reflected in the following table:
+----------------------------------------------------------------+
¦ ¦ ¦ ¦Receivable2 received ¦
+--------------+-----------+--------------+----------------------¦
¦ ¦ ¦Total casino ¦at tables other ¦
+--------------+-----------+--------------+----------------------¦
¦ ¦ ¦accounts ¦than baccarat as a ¦
+--------------+-----------+--------------+----------------------¦
¦Period ended ¦Drop1 ¦receivable2 ¦percentage of drop ¦
+--------------+-----------+--------------+----------------------¦
¦ ¦ ¦ ¦ ¦
+--------------+-----------+--------------+----------------------¦
¦Apr. 30, 1967 ¦$67,501,453¦$16,793,785 ¦23% ¦
+--------------+-----------+--------------+----------------------¦
¦Apr. 30, 1968 ¦85,699,051 ¦26,273,620 ¦23.4% ¦
+--------------+-----------+--------------+----------------------¦
¦Apr. 30, 1969 ¦101,386,646¦39,443,726 ¦22.4% ¦
+--------------+-----------+--------------+----------------------¦
¦Sept. 30, 1969¦47,931,742 ¦21,436,994 ¦30.4% ¦
+----------------------------------------------------------------+
Gaming activities in the State of Nevada are regulated by the commission and the Nevada Gaming Control Board (hereafter board). The commission from time to time promulgates formal regulations relating to gaming. During the portion of the period in question prior to April 1968, although regulation 6.030-1(c) and (g) referred to accounting for uncollectible casino accounts receivable, the regulations of the commission did not specify the procedures which should be used by casinos in connection with “credit play.” In April 1968, the commission adopted regulation 6.043 governing procedures for “credit play” at various types of gaming establishments, and from that time to the end of the period in question, “credit play” procedures at the Casino were governed by that regulation.
Regulation 6.043 provided five alternate procedures for granting credit in a casino such as the Casino. These procedures were based upon procedures in use in various casinos at the time regulation 6.043 was originally adopted.
The Casino utilized the following authorized “credit play” procedure (regulation 6.043, par. 3) for baccarat during the period in question: A serialized record would be kept in the game area. All credit transactions involving each player would be kept on that form or in conjunction with a table card which would contain all or a portion of the required information. The required information would be when, where, and in what amount credit was extended. At the end of the shift, accounting day, or other period of time, when play was ultimately concluded by the player, an accounting would be made at the cashier's cage for any indebtedness; that indebtedness would be evidenced by a check or IOU,4 and a credit slip would be sent to the table.
The Casino utilized the following authorized “credit play” procedure (regulation 6.043, par. 4) for games other than baccarat: A pre-numbered master card would be maintained in the pit area (a grouping of gaming tables) by a representative of the auditing department. The master card would show the name of the player receiving credit and when, where, and in what amount credit was granted. A separate master card would normally be used for each shift. The master card would be supported by a “table card” maintained by the boxman or dealer at each table. The table card would show the name of each player receiving credit and the amount of credit given. The pit boss who authorized a credit would prepare a signed “receipt” in the form of an “advance card,” “counter-check,” “marker,” or “IOU” and would make every reasonable effort to obtain the player's signature on the receipt. The information on the receipt would immediately be transcribed on the master card. If during the course of play or at the end of play, a player paid with cash or chips all or a portion of the sum he owed, the pit boss would return an appropriate amount of customer-signed receipts and the amount and nature of payment would be noted on the master card and the table card. When a player completed playing, any balance due, which would be represented by checks, advance slips, or similar receipt forms, would be delivered to the cashier who would send a credit slip to the table. Notation would be made on the master card and on the table card that settlement had been made at the cashier's cage, and the credit slip would be dropped in the box.
The “credit play” procedure used at the Casino during the period in question was...
To continue reading
Request your trial
-
Flamingo Resort, Inc. v. United States
...the same issue with respect to taxation of markers of another Las Vegas casino (Caesars Palace). The case is Desert Palace, Inc. v. Commissioner, 72 T.C. 1033 (1979). Based upon some alleged concession therein made by the Commissioner, it appears that the Tax Court held that where a marker ......
-
Zarin v. Comm'r of Internal Revenue
...(West 1962); U.C.C. sec. 3-104(2). 3 We reached the opposite conclusion, based upon a concession by respondent, in Desert Palace, Inc. v. Commissioner, 72 T.C. 1033 (1979), revd. without published opinion 698 F.2d 1229 (9th Cir. 1982), a reversal which was foreshadowed in Flamingo Resort, I......
-
Flamingo Resort, Inc. v. U.S.
...hardship to the appellant taxpayer.5 Appellant does raise one case which squarely addresses the question now before us. Desert Palace, Inc. v. Comm'r, 72 T.C. 1033 (1979). The Tax Court ruled gambling debts were not accruable to a gambling casino until collected. The court, however, did so ......
-
HILTON HOTELS CORPORATION v. Commissioner
...notwithstanding the unenforceability of the gambling debts under state law. 664 F. 2d at 1388-1391. In Desert Palace, Inc. v. Commissioner Dec. 36,307, 72 T.C. 1033 (1979), this Court held that most of that taxpayer's "casino accounts receivable" were not includable under its accrual method......