Flamingo Resort, Inc. v. United States, Civ. No. LV 76-19 RDF.

• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. District of Nevada
• Citation: 485 F. Supp. 926
• Docket Number: Civ. No. LV 76-19 RDF.
• Parties: FLAMINGO RESORT, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Decision Date: 26 February 1980

485 F. Supp. 926

FLAMINGO RESORT, INC., Plaintiff,
v.
UNITED STATES of America, Defendant.

Civ. No. LV 76-19 RDF.

United States District Court, D. Nevada.

February 26, 1980.

485 F. Supp. 927

COPYRIGHT MATERIAL OMITTED

485 F. Supp. 928

Lionel, Sawyer & Collins by Stephen L. Morris, Las Vegas, Nev. and Levenfeld, Kanter, Baskes & Lippitz by Milton A. Levenfeld, Donald A. Statland, Steven A. Felsenthal, Chicago, Ill, for plaintiff

B. Mahlon Brown III, U. S. Atty., Las Vegas, Nev. by James Crowe, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., for defendant.

MEMORANDUM OPINION GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT

THE FACTS

ROGER D. FOLEY, Chief Judge.

Flamingo Resort, Inc. (Flamingo), was incorporated on August 17, 1967, and at all times relevant to this case was the owner and operator of a gaming resort in Las Vegas, Nevada. The Flamingo kept its books and reported its taxes on the accrual basis of accounting.

Flamingo filed an income tax return for the short taxable year ended December 31, 1967. The return showed a taxable income of $22,500 and, because of certain tax credits, no tax liability. Following an audit and other administrative proceedings, the Commissioner of Internal Revenue asserted a proposed deficiency in the amount of $265,034.34. Of that amount, Flamingo agreed that $3,091.69 was properly due as the result of adjustments that raised taxable income to $31,075. Flamingo continued to object to the inclusion in income of $545,711 represented by "casino receivables." While the total "casino receivables" on the books of Flamingo amounted to $676,432, the Commissioner allowed a loss deduction of $130,721 for uncollectible accounts. The Flamingo, however, paid the entire amount of the asserted deficiency, plus interest, on December 22, 1975. Then the Flamingo filed a claim for refund of an overpayment in the amount of $261,942.65, plus interest. When the claim was denied by the Internal Revenue Service, the Flamingo timely commenced this action to recover the alleged overpayment.

From August through December 1967, the taxable period in question, Flamingo operated crap games, twenty-one games and roulette wheels in the casino portion of its business. Patrons generally gambled chips at these games. Under normal circumstances, a patron would obtain chips either through the exchange of cash or a marker, which was essentially a countercheck signed by the patron in the amount of the chips transferred to him. This exchange would take place either in the "pit" area, where the games were being conducted, or at the casino cage, where chips would be exchanged by the casino for cash or counterchecks. Before credit would be extended to a patron, Flamingo conducted extensive credit checks and then established a line of credit allowable to that patron. Extensions of credit during the course of play were subject to controls by Flamingo personnel and were recorded in the pit area and reconciled at the cashier's cage. It is estimated that sixty percent of the total play in the casino resulted from extensions of credit and, as a result, such extensions are absolutely essential to the success of the Flamingo's business.

A patron was expected to settle his liability shortly after concluding his play, and the vast majority of credit extensions were satisfied on that basis. If a patron had not satisfied his marker liability by the close of his stay at the hotel, the marker became classified as a casino receivable. Extensive collection activities were undertaken with respect to these receivables and actual payment was received on the vast majority of them. The record indicates that the Flamingo's estimates of collectibility on outstanding casino receivables ranged as high as 96 percent.

In the Flamingo operation during the period in question, the marker was in the form of a countercheck with blanks left for the name of the bank and account number. In practice, the patron only signed his name after the amount had been entered without completing the blanks for bank information.

485 F. Supp. 929

The necessary information was available, however, on the credit application kept in the casino credit office. It was thus possible for the Flamingo to complete the counterchecks and submit them for payment to the makers' banks

Casino receivables, including markers, checks given in payment for the markers that were returned for insufficient funds, and checks given in payment for the markers that were post-dated beyond the close of the taxable period on December 31, 1967, net of a reserve for potential uncollectibility, were included on the Flamingo's financial statement as revenue and as assets.

In virtually all cases, a patron would receive chips in exchange for his marker or countercheck. But the patron could gamble both with chips and, to a limited degree, with cash. Any winnings would, however, be paid to the patron in chips. The inventory for each game at the casino consisted of chips. As the games progressed, additional chips would be transferred to the games from the cage to "fill" the inventory. The casino's net gambling revenue at a game for a given eight-hour shift would constitute the difference between the total volume of play at the table, which is called the "drop" (consisting of cash, markers and foreign chips), and the total "fill" at the table (opening chip inventory plus "fill," less closing inventory). For the short taxable period in issue, the Flamingo showed a "gross games revenue," drop minus fill, of $3,967,600 on a total play of $20,102,429. The Flamingo also accounted for and controlled calculation of its gaming revenue by reflecting adjustments in its "bankroll." This is essentially the book inventory maintained in the cage and, at the beginning of an accounting period, will consist of cash, chips, unpaid markers and chips from other casinos, foreign chips that were played in the Flamingo casino. The changing composition and amount of the bankroll gauges the casino's wins and losses, but the play of chips by gambling patrons is the activity that determines these amounts.

Chips in the patrons' hands represented outstanding obligations which the Flamingo always recognized. Once a patron obtained chips, he could expend them through gambling or by purchasing hotel, restaurant and bar services at either the Flamingo's business establishment or at other casinos in Las Vegas. In 1967 the casinos conducted a regular exchange of their chips at face value and, in addition, cash payments would be made, as necessary, to equalize the exchange.

In accordance with generally accepted accounting principles, the Flamingo prepared its financial statements on the basis of the accrual method of accounting. The amount of "casino receivables," less a reserve for doubtful accounts, was included in income. For tax purposes, however, Flamingo reduced its gross gaming receipts by excluding the face amount of the markers outstanding. The Flamingo argues that these are unenforceable gambling debts and are therefore not properly accruable as taxable income. The Government had not contested the Flamingo's claim that the markers may be legally unenforceable, but urges that the markers nevertheless represent income that is properly accruable for purposes of determining taxable income. Moreover, the Government contends that such accrual is mandated by the requirement that a taxpayer's method of accounting "clearly reflect income." Exclusion of the markers, argues the Government, allows Flamingo to distort income by postponing recognition of this income which results in a mismatching of income and expenses related thereto.

The Flamingo has moved for summary judgment with respect to that portion of the claim that relates exclusively to "pit markers." The motion seeks determination of the question of liability only, with the amount subject to subsequent determination. The Government has moved for summary judgment in its favor with respect to the entire controversy. If there are any genuine issues of material fact, they concern only the question of a "gambling purpose" with respect to the possible existence of cage markers and checks included in the "casino receivables" account. That issue would be relevant only if it were determined

485 F. Supp. 930

that legal enforceability is necessary for the accrual of the income in question

I. Jurisdiction

This Court has jurisdiction, 28 U.S.C. § 1346(a)(1).

II. Gambling Debts Under Nevada Law

This entire controversy arises only because of an apparent quirk of Nevada law. Despite the licensing and taxing of gaming by the State of Nevada and the state's economic dependence upon gambling, the Nevada courts have consistently refused to recognize any legally enforceable rights arising out of a gambling transaction short of the actual transfer of money.¹ The Supreme Court of the State of Nevada early held that the statute of 9 Anne, ch. 14, § 1, is part of the law of Nevada. J. E. Burke & Co. v. Buck, 31 Nev. 74, 80, 99 P. 1078, 1080 (1909); Evans v. Cook, 11 Nev. 69, 75 (1876). The language of the statute is clear to the effect that any instruments or conveyances made to cover gambling losses or to advance money for betting are void and not merely voidable.² The same rule applies whether the claim is asserted by a gambling establishment, Craig v. Harrah, 66 Nev. 1, 201 P.2d 1081 (1949), or against one, Weisbrod v. Fremont Hotel, Inc., 74 Nev. 227, 326 P.2d 1104 (1958). The taint of a gambling transaction also applies to a check written to cover a gambling loss. West Indies, Inc. v. First National Bank of Nevada, 67 Nev. 13, 214 P.2d 144 (1950); Menardi v. Wacker, 32 Nev. 169, 105 P. 287 (1909). The rule also prevents an effective assignment of a negotiable instrument. J. E. Burke & Co. v. Buck, 31 Nev. 74, 99 P. 1078 (1909).

The difficult cases are those in which instruments or conveyances,...