UNITED STATES v. HUGHES PROPERTIES, INC.
No. 85-554
Supreme Court of the United States
Argued April 23, 1986-Decided June 3, 1986
476 U.S. 593
Albert G. Lauber, Jr., argued the cause for the United States. With him on the briefs were Solicitor General Fried, Acting Assistant Attorney General Olsen, Richard Farber, and William A. Whitledge.
O. Clayton Lilienstern argued the cause for respondent. With him on the brief was Denton N. Thomas.*
*Briefs of amici curiae urging affirmance were filed for the Atlantic City Casino Association by Herbert J. Miller, Jr., and David O. Stewart;
JUSTICE BLACKMUN delivered the opinion of the Court.
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.
I
A
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 mаchine, the number of positions on each reel, and the number of winning symbols. The odds are determined by the casino, provided only that
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, inсluding license revocation, upon any casino that wrongfully refuses to pay a winning customer a guaranteed jackpot. See
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 figurе as a deduction under
On audit, the Commissioner of Internal Revenue disallowed the deduction. He did so on the ground that, under
C
Each side moved for summary judgment. App. 15, 52. Respondent contended that the year-end amounts shown on the payoff indicators of the progressive slot machines were deductible, claiming that there was a reasonable expectation that payment would be made at some future date, that the casino‘s liability was fixed and irrevocable under Nevada law, that the accrual of those amounts conformed with generally accepted accounting principles, and that deductibility effected a timely and realistic matching of revenue and expenses.
The Claims Court denied the Government‘s motion for summary judgment but granted respondent‘s motion. 5 Cl. Ct. 641 (1984). It concluded that, under the Nevada Commission‘s rule, respondent‘s liability to pay the amounts on the progressive jackpot indicators became “unconditionally fixed,” id., at 645, at “midnight of the last day of the fiscal year,” id., at 647. The final event was “the last play (successful or not) of the machine before the close of the fiscal year, that is, the last change in the jackpot amount before the amount is recorded for accounting purposes.” Id., at 645. A contrary result would mismatch respondent‘s income and expenses. The court acknowledged that, if respondent were to go out of business, it would not owe the jackpot amount to any particular person. Id., at 646. Nevertheless, the jaсkpot indicator amount “would still continue to be an incurred liability fixed by state law, for which [respondent] would continue to be responsible” (emphasis in original). Id., at 645.
The Claims Court further acknowledged that its ruling was in conflict with the decision of the Court of Appeals for the Ninth Circuit in Nightingale v. United States, 684 F. 2d 611 (1982), having to do with another Nevada casino, but it de-
The Court of Appeals for the Federal Circuit affirmed the judgment “on the basis of the United States Claims Court opinion.” 760 F. 2d 1292, 1293 (1985). It ruled that, under the accrual method of accounting, an expense is deductible in thе tax year in which all the events have occurred that determine the fact of liability and the amount thereof can be determined with reasonable accuracy, and that liability exists “if there is an obligation to perform an act and the cost of performance can be measured in money.” Ibid. The liability here was not contingent upon the time of payment or the identity of the jackpot winner. Rather, it was fixed by the Commission‘s regulation. The “contrary conclusion” of the Ninth Circuit in Nightingale was noted. 760 F. 2d, at 1293.
Because of the clear conflict between thе two Circuits, we granted certiorari. 474 U. S. 1004 (1985).
II
Under the Regulations, the “all events” test has two elements, each of which must be satisfied before accrual of an expense is рroper. First, all the events must have occurred which establish the fact of the liability. Second, the amount must be capable of being determined “with reasonable accuracy.”
III
The Court‘s cases have emphasized that “a liability does not accrue as long as it remains contingent.” Brown v. Helvering, 291 U. S. 193, 200 (1934); accord, Dixie Pine Products Co. v. Commissioner, 320 U. S. 516, 519 (1944). Thus, to satisfy the all-events test, a liability must be “final and definite in amount,” Security Flour Mills Co. v. Commissioner, 321 U. S. 281, 287 (1944), must be “fixed and absolute,” Brown v. Helvering, 291 U. S., at 201, and must be “unconditional,” Lucas v. North Texas Lumber Co., 281 U. S. 11, 13 (1930). And one may say that “the tax law requires that a deduction be deferred until ‘all the events’ have
A
The Government argues that respondent‘s liability for the progressive jackpots was not “fixed and certain,” and was not “unconditional” or “absolute,” by the end of the fiscal year, for there existed no person who could assert any claim to those funds. It takes the position, quoting Nightingale v. United States, 684 F. 2d, at 614, that the indispensable event “is the winning of the progressive jackpot by some fortunate gambler.” It says that, because respondent‘s progressive jackpots had not been won at the close of the fiscal year, respondent had not yet incurred liability. Nevada law places no restriction on the odds set by the casino, as long as a possibility exists that the winning combination can appear. Thus, according to the Government, by setting very high odds respondent can defer indefinitely into the future the time when it actually will have to pay off the jackpot. The Government argues that if a casino were to close its doors and go out of business, it would not owe the jackpots to anyone. Similarly, if it were to sell its business, or cease its gaming operations, or go into bankruptcy, or if patrons were to stop playing its slot machines, it would have no obligation.
B
We agree with the Claims Court and with the Federal Circuit and disagree with the Government for the following reasons:
1. The effect of the Nevada Gaming Commission‘s regulations was to fix respondent‘s liability. Section 5.110.2 forbade reducing the indicated payoff without paying the jackpot, except to correct a malfunction or to prevent exceeding the limit imposed. App. 55. Respondent‘s liability, that is, its obligation to pay the indicated amount, was not contingent. That an extrеmely remote and speculative possibility
2. The Government misstates the need for identification of the winning player. That is, or should be, a matter of no relevance for the casino operator. The obligation is there, and whether it turns out that the winner is one patron or another makes no conceivable difference as to basic liability.
3. The Government‘s heavy reliance on Brown v. Helvering, 291 U. S. 193 (1934), in our view, is misplaced. That case concerned an agent‘s commissions on sales of insurance policies, and the agent‘s obligation to return a proportionate part of the commissiоn in case a policy was canceled. The agent sought to deduct from gross income an amount added during the year to his reserve for repayment of commissions. This Court agreed with the Commissioner‘s disallowance of the claimed deduction because the actual event that would create the liability-the cancellation of a particular policy in a later year-“[did] not occur during the taxable year,” id., at 200, but rather occurred only in the later year in which the policy was in fact canceled. Here, however, the event creating liability, as the Claims Court recognized, was the last play of the machine before the end of the fiscal year,
4. The Government‘s argument that the fact that respondent treats unpaid jackpots as liabilities for financial accounting purposes does not justify treating them as liabilities for tax purposes is unpersuasive. Proper financial accounting and acceptable tax accounting, to be sure, are not the same. Justice Brandeis announced this fact well over 50 years ago: “The prudent businеss man often sets up reserves to cover contingent liabilities. But they are not allowable as deductions.” Lucas v. American Code Co., 280 U. S. 445, 452 (1930). See also Brown v. Helvering, 291 U. S., at 201-202, and Lucas v. Kansas City Structural Steel Co., 281 U. S. 264, 269 (1930). The Court has long recognized “the vastly different objectives that financial and tax accounting have.” Thor Power Tool Co. v. Commissioner, 439 U. S., at 542. The goal of financial accounting is to provide useful and pertinent information to management, shareholders, and creditors. On the other hand, the major responsibility of the Internal Revenue Service is to protect the public fisc. Ibid. Therefore, although
Granting all this-that the Commissioner has broad discretion, that financial accounting does not control for tax purposes, and that the mere desirability of matching expenses
5. The Government suggests that respondent‘s ability to control the timing of payouts shows both the contingent nature of the claimed deductions and a potential for tax avoidance. It speaks of the time value of money, of respondent‘s ability to earn additional income upon the jackpot amounts it retains until a winner comes along, of respondent‘s “virtually unrestricted discretion in setting odds,” Brief for United States 31, and of its ability to transfer amounts from one machine to another with the accompanying capacity to defer indefinitely into the future the time at which it must make payment to its customers. All this, the Government says, unquestionably contains the “potential for tax avoidance.” See Thor Power Tool Co. v. Commissioner, 439 U. S., at 538. And the Government suggests that a casino operator could put extra machines on the floor on the last day of the tax year with whatever initial jackpots it specifies and with whatever odds it likes, and then, on the taxpayer‘s theory,
None of the components that make up this parade of horribles, of course, took place here. Nothing in this record even intimates that respondent used its progressive machines for tax-avoidance purposes. Its income from these machines was less than 1% of its gross revenue during the tax years in question. See App. 35-36. Respondent‘s revenue from progressive slot machines depends on inducing gamblers to play the machines, and, if it sets unreasonably high odds, customers will refuse to play and will gamble elsewhere. Thus, respondent‘s economic self-interest will keep it from setting odds likely to defer payoffs too far into the future.5 Nor, with Nevada‘s strictly imposed controls, was any abuse of the kind hypothesized by the Government likely to happen. In any event, the Commissioner‘s ability, under
6. There is always a possibility, of course, that a casino may go out of business, or surrender or lose its license, or go
7. Finally, the result in United States v. Anderson, 269 U. S. 422 (1926), a case to which the Government makes repeated referencе, is itself instructive. The issue there was the propriety of the accrual of a federal munitions tax prior to its actual assessment. The assessment was required before the tax became due. The Government‘s position, in contrast to its position in the present case, was that the tax liability accrued before assessment. The Court held that the absence of the assessment did not prevent accrual of the tax. It recognized that the taxpayer‘s “true income for the year ... could not have been determined without deducting ... the expenses attributable to the production of that income during the year.” Id., at 440. One of the expenses that necessarily attended the production of munitions income was the commitment of a particular portion of the revenue generated to a “reserve for munitions taxes.” Ibid. Similarly, 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 revenue generated to an irrevocable jackpot. Respondent‘s true income from its progressive slot machines is only that portion of the money gambled which it is entitled to keep.
The judgment of the Court of Appeals is affirmed.
It is so ordered.
Unlike the Court, see ante, at 605-606, I believe that the distinction between the nonpayment of an existing obligation and the nonexistence of an obligation is of controlling importance in this case.
It is common ground that the taxpayer can accrue as a deduction the jackpots in its progressive slot machines only if “all the events have ... occurred which fix the liability.”
“Under Nevada law,” if the taxpayer in this case “were to surrender its gaming license, it would no longer be subject to the gaming laws and regulations and could thus avoid the payment of the liability.” App. 23. Thus, “the bankruptcy of the [taxpayer], or the surrender of its gaming license could relieve it of its obligation.” Id., at 44.
On these facts, the taxpayer has no present liability to accrue. Rather, the taxpayer‘s obligation to pay the jackpots in this case resembles the taxpayer‘s obligation to pay the cost of overhauling its aircraft engines and airframes in World Airways, Inc. v. Commissioner, 62 T. C. 786 (1974), aff‘d, 564 F. 2d 886 (CA9 1977). In that case, the Tax Court held that the taxpayer, an airline, did not satisfy the “all events” test and hence could not accrue and deduct any portion of these costs, 62 T. C., at 802, 805-despite the existence of contracts obligating the taxpayer to pay, upon the completion of an overhaul, an amount for each hour of
“The bankruptcy of petitioner [the taxpayer] or the crash or permanent grounding of an aircraft might conceivably relieve petitioner of the payment of overhaul costs. The occurrenсes of any of these contingencies, however, would not relieve petitioner of an existing obligation to pay any overhaul costs. Rather, the occurrence would mean that no obligation to pay would ever come into existence. Petitioner has not shown that its liability for the accrued overhaul costs was absolutely fixed in the year of accrual. The contingencies referred to would act to prevent a potential liability from coming into existence.” Id., at 804 (emphasis in original).
The court recognized that the risk of bankruptcy or disаster was remote. But it added that “there exists another contingency whose occurrence is not unlikely“: “Petitioner has sold five piston aircraft and one jet aircraft since 1965. The five piston aircraft owned by petitioner during 1965, and 1966, were sold prior to the time when major airframe overhaul was required.” Ibid.
Here, too, the taxpayer has no obligation that could be discharged in a bankruptcy court - a fact that confirms that it has no present liability to pay the jackpots on its progressive slot machines. And there likewise exists a сontingency under which it is not at all unlikely that a slot machine owner would elect to escape its liability. If the gross amount of the accruals on these machines should ever exceed the net value of the business-perhaps as a result of shrewd management-it could liquidate at a profit without having any liabil-