Gold Coast Hotel & Casino v. U.S.

• Decision Date: 12 December 1997
• Docket Number: No. 96-17236,96-17236
• Citation: 158 F.3d 484
• Parties: -6714, 98-2 USTC P 50,800, 98 Cal. Daily Op. Serv. 7817, 98 Daily Journal D.A.R. 10,860 GOLD COAST HOTEL & CASINO, a Nevada Limited Partnership, Gaughan Herbst, Ltd., a Nevada General Partnership, Michael J. Gaughan and Jerry Herbst, Plaintiffs-Appellees, v. UNITED STATES of America and Commissioner of Internal Revenue Service, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 484

158 F.3d 484

82 A.F.T.R.2d 98-6714, 98-2 USTC P 50,800,

98 Cal. Daily Op. Serv. 7817,

98 Daily Journal D.A.R. 10,860

GOLD COAST HOTEL & CASINO, a Nevada Limited Partnership, Gaughan Herbst, Ltd., a Nevada General Partnership, Michael J. Gaughan and Jerry Herbst, Plaintiffs-Appellees, v. UNITED STATES of America and Commissioner of Internal

Revenue Service, Defendants-Appellants.

No. 96-17236.

United States Court of Appeals, Ninth Circuit.

Submitted Dec. 12, 1997. ^*

Decided Oct. 16, 1998.

Barry L. Lieberman, Dickerson, Dickerson, Lieberman & Consul, Las Vegas, NV, for plaintiffs-appellees.

Sally J. Schornstheimer, United States Department of Justice, Tax Division, Washington, DC, for defendants-appellants.

Appeal from the United States District Court for the District of Nevada; Howard D. McKibben, District Judge, Presiding. D.C. No. CV-94-01146-HDM.

Before: FLETCHER, T.G. NELSON, Circuit Judges, and WHALEY, ^** District Judge.

WHALEY, District Judge.

The United States of America and Commissioner of Internal Revenue appeal the district court's grant of summary judgment in favor of Gold Coast Hotel & Casino, et al. The district court held that a casino using the accrual method of accounting may deduct the value of slot club points won by a slot club member in the tax year in which the member has accumulated the minimum number of points necessary to redeem a prize. We affirm.

FACTUAL BACKGROUND

Gold Coast Hotel & Casino ("Gold Coast") is a Nevada limited partnership formed in 1985 for the purpose of operating a licensed gambling casino in Las Vegas, Nevada. Gold Coast has operated a slot club since March 1987. A slot club is a promotional tool used to attract slot machine players. After filling out the necessary paperwork, slot club members receive a club card, similar to an ATM card. Slot club members insert their club cards into a slot machine and a computer tracks their accumulation of slot club points.

Slot club points can be redeemed for prizes ranging from coffee mugs to Hawaiian vacations. The minimum number of points needed to redeem a prize is 1,200. As stipulated to by the parties, the market value of each club point is $0.0021. Accordingly, 100,000 points have a value of $210. Gold Coast uses a computerized data bank to track each club member's slot club points. The computer credits a member's account for points won and debits the account when points are redeemed for prizes.

Members can redeem slot club points for prizes in two ways. First, members can go to Gold Coast's redemption center and pick their prize. Alternatively, club members can go to the redemption center and get a voucher for a prize from an off-site retailer, such as a travel agency or appliance store. The club member then takes the voucher to the off-site retailer to redeem the prize and the retailer bills Gold Coast a previously agreed upon amount.

At the end of 1988, the difference between the total value of slot club points that had been accumulated by club members and the total value of slot club points that had been During 1990, club members accumulated additional slot club points valued at $3,076,909 and redeemed points valued at $2,386,216. Thus, at the end of 1990 the value of outstanding slot club points was $2,688,136, an increase of $690,693 over the prior year's ending balance. Gold Coast deducted this amount--$690,693--as an expense on its 1990 partnership tax return. Additionally, on its 1990 tax return Gold Coast recaptured as income $68,910, representing the value of accumulated slot club points in those accounts in which there had been no activity for over a year, and which had been deducted as an expense in the prior year.

redeemed by club members was $1,276,464. In 1989 members accumulated additional slot club points valued at $2,445,780 and redeemed points valued at $1,724,801. Thus, at the end of 1989 there were outstanding slot club points valued at $1,997,443, an increase of $720,979 over the prior year's ending balance. Gold Coast deducted this amount--$720,979--as an expense on its 1989 partnership tax return. In addition, on its 1989 tax return Gold Coast recaptured as income $105,969, representing the value of accumulated slot club points in those accounts in which there had been no activity for over a year, and which had been deducted as an expense in the prior year.

On September 26, 1994, the Commissioner of Internal Revenue sent the Tax Matter Partner of Gold Coast a Notice of Final Partnership Administrative Adjustment ("FPAA") for the tax year ending December 31, 1989 and a Notice of Final Partnership Administrative Adjustment for the tax year ending December 31, 1990. In the notices, the Commissioner proposed that adjustments to income be made in four categories, one of which was accrued slot club points. The FPAA for the tax year ending in 1989 proposed to increase income a total of $1,935,469 for adjustments relating to slot club points. ¹ While the FPAA for the tax year ending in 1990 proposed to increase income a total of $807,330, ² the parties agree that the proposed increase for 1990 should be $738,420. ³

PROCEDURAL BACKGROUND

On December 23, 1994, Gold Coast ⁴ filed a complaint pursuant to 26 U.S.C. § 6226 in the United States District Court for the District of Nevada challenging the Commissioner's proposed adjustments as set forth in the FPAA for the 1989 tax year and the FPAA for the 1990 tax year. As required to invoke district court jurisdiction, Gold Coast had first deposited with the Internal Revenue Service the amounts by which its tax liability would be increased if the Commissioner's proposed adjustments to income were made for the 1989 and 1990 tax years.

In its Complaint, Gold Coast challenged, inter alia, the Commissioner's adjustments with respect to accrued slot club points and sought a determination that Gold Coast need not adjust its 1989 or 1990 income based on that category. Relying on undisputed stipulated facts, the parties filed cross-motions for summary judgment on numerous issues, including when the value of accumulated slot club points is "incurred" as an expense and In an order filed on September 26, 1996, the district court rejected the Commissioner's argument that the expense of slot club points is not incurred until the points are redeemed for a prize. Rather, the court held that Gold Coast had properly deducted as an expense the value of those slot club points that had been accumulated by members with more than 1,200 points in their slot club account. However, the district court disallowed Gold Coast's deduction of the value of slot club points attributable to members who had not yet earned 1,200 points.

thus, is deductible pursuant to 26 U.S.C. § 162(a).

The Commissioner timely filed its notice of appeal. In its appeal, the Commissioner challenged only the district court's allowance of a deduction for the value of accumulated slot club points attributable to members who had more than 1,200 points in their accounts. However, the Commissioner asserted first that this court was without jurisdiction to hear the appeal because the judgment below was not final since it had not been determined by the district court how many of the outstanding slot club points in 1989 or 1990 were attributable to club members with more than 1,200 slot club points. Accordingly, in an order filed on November 26, 1997, this court ordered the parties to show cause why the case should not be remanded to the district court for further proceedings.

After considering the parties' letter briefs and oral argument, this court concluded that the judgment of the district court was not final since there were more than ministerial tasks left for the district court to resolve. Accordingly, on February 20, 1998, the case was remanded to the district court for entry of final judgment, with such entry to include the factual determination of the dollar value of slot club points that are attributable to customers with more than 1,200 slot club points for each of the tax years 1989 and 1990. The district court entered final judgment on April 20, 1998. Thus, we have jurisdiction pursuant to 26 U.S.C. §§ 6226(g), 74829(a) and 28 U.S.C. § 1291.

DISCUSSION

The Internal Revenue Code allows a deduction for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." 26 U.S.C. § 162(a). Accordingly, taxpayers using the accrual method of accounting, see 26 U.S.C. § 446(c)(2), are entitled to deduct expenses in the year which they are incurred, regardless of when paid. See § 162(a); Treas. Reg. § 1.446-1(c)(1)(ii).

The Commissioner contends that a casino using the accrual method of accounting does not incur the expense of accumulated slot club points until such time as the points are actually redeemed for a prize because until the time of redemption "all events" fixing the casino's liability have not occurred. Whether an expense has been "incurred" is governed by the "all events" test that originated in United States v. Anderson, 269 U.S. 422, 441, 46 S.Ct. 131, 70 L.Ed. 347 (1926), now codified at 26 U.S.C. § 461(h)(4). ⁵ Whether a taxpayer has satisfied the "all events" test is a question of law reviewed de novo. See Challenge Publications, Inc. v. Commissioner, 845 F.2d 1541, 1543 (9th Cir.1988). The fundamental premise underlying the "all events" test is that "although expenses may be deductible before they become due and payable, liability must first be firmly established." United States v. General Dynamics Corp., 481 U.S. 239, 243, 107 S.Ct. 1732, 95 L.Ed.2d 226 (1987). Accordingly, to be deductible the liability must be fixed, absolute, see Brown v. Helvering, 291 U.S. 193, 201, 54 S.Ct. 356, 78 L.Ed. 725 (1934), and unconditional, see Lucas v. North Texas Lumber Co., 281 U.S. 11, 13, 50 S.Ct.

184, 74 L.Ed. 668 (1930). A liability may not be deducted if it is contested, see General Dynamics Corp., 481 U.S. at 243, ...