United States v. Hughes Properties, Inc., 476 U.S. 593 (1986)

United States v. Hughes Properties, Inc.

No. 85-554

Argued April 23, 1986
Decided June 3, 1986
476 U.S. 593

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE FEDERAL CIRCUIT

Syllabus

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, 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. 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, affirmed.

BLACKMUN, J., delivered the opinion of the Court, in which BRENNAN, WHITE, MARSHALL, POWELL, REHNQUIST, and O’CONNOR, JJ., joined. STEVENS, J., filed a dissenting opinion, in which BURGER, C.J., joined, post, p. 607.