United States v. Hughes Properties, Inc
| Decision Date | 03 June 1986 |
| Docket Number | No. 85-554,85-554 |
| Citation | 476 U.S. 593,90 L.Ed.2d 569,106 S.Ct. 2092 |
| Parties | UNITED STATES, Petitioner v. HUGHES PROPERTIES, INC |
| Court | U.S. Supreme Court |
Respondent, in its gambling casino in Reno, Nev., operated a number of "progressive" slot machines. In addition to paying fixed amounts when certain symbol combinations appear on their reels, these machines have a "progressive" jackpot that is won only when a different specified combination appears. The amount of the jackpot increases as money is gambled on the machine until the jackpot is won. A Nevada Gaming Commission regulation prohibits reducing the indicated payoff without paying the jackpot. Utilizing the accrual method of accounting, respondent's practice was, at the end of each fiscal year, to enter the total of the progressive jackpot amounts as an accrued liability on its books, and from that total to subtract the corresponding figure for the preceding year to produce the current tax year's increase in accrued liability. On its federal income tax returns for certain fiscal years, respondent claimed this net figure as a deduction under § 162(a) of the Internal Revenue Code of 1954, as an ordinary and necessary business expense incurred during the taxable year. The Commissioner of Internal Revenue (Commissioner) disallowed the deductions on the ground that, under Treasury Regulations, an expense may not be deducted until "all the events have occurred which determine the fact of liability and the amount thereof can be determined with reasonable accuracy," and that, until a patron actually won a progressive jackpot, respondent's liability to pay the jackpot was contingent and therefore was not a deductible expense. Accordingly, the Commissioner determined deficiencies in respondent's income taxes for the years in question. Respondent paid the deficiencies, and, when its claims for refunds were denied, brought suit in the Claims Court. The court granted respondent's motion for summary judgment, holding that respondent's liability to pay the progressive jackpots was fixed by the Nevada regulation. The Court of Appeals affirmed.
Held: Respondent was entitled to claim the deductions in question. Pp. 599-606.
(a) The "all events" test prescribed by the Treasury Regulations requires that before an expense can be regarded as "incurred" for federal income tax purposes, a liability must be fixed and absolute. Pp. 600-601.
(b) Here, the effect of the Nevada regulation was to fix respondent's liability. Identification of the winning players is irrelevant to respondent, since the obligation to pay exists and whether it turns out that the winner is one patron or another makes no difference as to liability. The event creating liability was the last play of each progressive slot machine before the end of the fiscal year, since that play fixed the jackpot amount irrevocably. That event occurred during the taxable year. Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725, distinguished. Pp. 601-603.
(c) Granting that the Commissioner has broad discretion to determine whether a taxpayer's accounting methods clearly reflect income, that financial accounting does not control for tax purposes, and that the mere desirability of matching expenses with income will not necessarily sustain a taxpayer's deduction, the disallowance of respondent's deductions was not justified. As noted, the jackpot liabilities were fixed, and only the exact times of payment and the winners' identity remained uncertain. Pp. 603-604.
(d) Nothing in the record indicates that respondent used its progressive slot machines for tax-avoidance purposes. Pp. 604-605.
(e) The potential that a casino operator might go out of business, or surrender or lose its license, or go into bankruptcy, with the result that the progressive jackpot would never be paid, does not prevent accrual of the expense. Pp. 605-606.
(f) One of the expenses that necessarily attends the production of income from a progressive slot machine is the commitment of a particular portion of the income generated to an irrevocable jackpot. Cf. United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347. Respondent's true income from its progressive slot machines is only that portion of the money gambled that it is entitled to keep. P. 606.
760 F.2d 1292 (Fed.Cir.1986), affirmed.
Albert G. Lauber, Jr., Washington, D.C., for petitioner.
O. Clayton Lilienstern, Houston, Tex., for respondent.
This case concerns the deductibility for federal income tax purposes, by a casino operator utilizing the accrual method of accounting, of amounts guaranteed for payment on "progressive" slot machines but not yet won by playing patrons.
There is no dispute as to the relevant facts; many of them are stipulated. Respondent Hughes Properties, Inc., is a Nevada corporation. It owns Harolds Club, a gambling casino, in Reno, Nev. It keeps its books and files its federal income tax returns under the accrual method of accounting. During the tax years in question (the fiscal years that ended June 30 in 1973 to 1977, inclusive), respondent owned and operated slot machines at its casino. Among these were a number of what are called "progressive" machines. A progressive machine, like a regular one, pays fixed amounts when certain symbol combinations appear on its reels. But a progressive machine has an additional "progressive" jackpot, which is won only when a different specified combination appears. The casino sets this jackpot initially at a minimal amount. The figure increases, according to a ratio determined by the casino, as money is gambled on the machine. The amount of the jackpot at any given time is registered on a "payoff indicator" on the face of the machine. That amount continues to increase as patrons play the machine until the jackpot is won or until a maximum, also determined by the casino, is reached.
The odds of winning a progressive jackpot obviously are a function of the number of reels on the machine, the number of positions on each reel, and the number of winning symbols. The odds are determined by the casino, provided only that there exists a possibility that the winning combination of symbols can appear.1
The Nevada Gaming Commission closely regulates the casino industry in the State, including the operation of progressive slot machines. In September 1972, the Commission promulgated § 5.110 of the Nevada Gaming Regulations. See App. 55. This section requires a gaming establishment to record at least once a day the jackpot amount registered on each progressive machine. § 5.110.5. Furthermore,
"[n]o payoff indicator shall be turned back to a lesser amount, unless the amount by which the indicator has been turned back is actually paid to a winning player, or unless the change in the indicator reading is necessitated through a machine malfunction, in which case an explanation must be entered on the daily report as required in subsection 5." § 5.110.2; App. 55.
The regulation is strictly enforced. Nevada, by statute, authorizes the Commission to impose severe administrative sanctions, including license revocation, upon any casino that wrongfully refuses to pay a winning customer a guaranteed jackpot. See Nev.Rev.Stat. § 463.310 (1985).
It is respondent's practice to remove the money deposited by customers in its progressive machines at least twice every week and also on the last day of each month. The Commission does not regulate respondent's use of the funds thus collected, but, since 1977, it has required that a casino maintain a cash reserve sufficient to provide payment of the guaranteed amounts on all its progressive machines available to the public. Nev.Gaming Regs. § 5.110(3); App. 56.
At the conclusion of each fiscal year, that is, at midnight on June 30, respondent entered the total of the progressive jackpot amounts shown on the payoff indicators as an accrued liability on its books. From that total, it subtracted the corresponding figure for the preceding year to produce the current tax year's increase in accrued liability. On its federal income tax return for each of its fiscal years 1973, 1974, 1975, and 1977, respondent asserted this net figure as a deduction under § 162(a) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. § 162(a), as an ordinary and necessary expense "paid or incurred during the taxable year in carrying on any trade or business." 2 There is no dispute as to the amounts so determined or that a progressive jackpot qualifies for deduction as a proper expense of running a gambling business. See Tr. of Oral Arg. 7.
On audit, the Commissioner of Internal Revenue disallowed the deduction. He did so on the ground that, under Treas.Reg. § 1.461-1(a)(2), 26 CFR § 1.461-1(a)(2) (1985), an expense may not be deducted until "all the events have occurred which determine the fact of the liability and the amount thereof can be determined with reasonable accuracy." In his view, respondent's obligation to pay a particular progressive jackpot matures only upon a winning patron's pull of the handle in the future. According to the Commissioner, until that event occurs, respondent's liability to pay the jackpot is contingent and therefore gives rise to no deductible expense. Indeed, until then, there is no one who can make a claim for payment. See Tr. of Oral Arg. 11. Accordingly, the Commissioner determined deficiencies in respondent's income taxes for the years in question in the total amount of $433,441.88, attributable solely to the denial of these pro- gressive jackpot deductions. Respondent paid the asserted deficiencies and filed timely claims for refund. When the claims were denied, respondent brought...
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