United States v. Hughes Properties, Inc.

PETITIONER: United States
RESPONDENT: Hughes Properties, Inc.
LOCATION: Harold’s Club

DOCKET NO.: 85-554
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Federal Circuit

CITATION: 476 US 593 (1986)
ARGUED: Apr 23, 1986
DECIDED: Jun 03, 1986
GRANTED: Dec 02, 1985

ADVOCATES:
Albert G. Lauber, Jr. - on behalf of Petitioner
O. Clayton Lilienstern - on behalf of Respondent

Facts of the case

Hughes Properties owned a casino called Harold’s Club in Reno, Nevada. This casino operated slot machines that featured “progressive” jackpots. This jackpot increased as gamblers played and only paid out when the machine hit a certain combination. State gaming regulations prohibited lowering the jackpot until someone won. At the end of each fiscal year, Hughes took the year’s total progressive jackpots and subtracted the amount of last year’s jackpots to claim that amount as a business expense deduction. The Internal Revenue Service disallowed the deduction, reasoning that until a patron won the jackpot, the liability was contingent.

The IRS determined a tax deficiency amount, which Hughes paid before suing for a refund. The United States Claims Court granted summary judgment to Hughes on the ground that the jackpot amount was contingent until someone won it. The U.S. Court of Appeals for the Federal Circuit affirmed, holding that the casino’s liability was not contingent because state regulations barred a decrease in the amount.

Question

Can Hughes deduct the fixed jackpot amount as a business expense at the end of each fiscal year?

Media for United States v. Hughes Properties, Inc.

Audio Transcription for Oral Argument - April 23, 1986 in United States v. Hughes Properties, Inc.

Warren E. Burger:

Mr. Lauber, you may proceed whenever you are ready.

Albert G. Lauber, Jr.:

Mr. Chief Justice, and may it please the Court:

This case involves the proper time for claiming deductions by taxpayers that use the accrual basis of accounting.

Under this Court's decision, the proper time for accruing tax deductions is governed by the 1926.

As the Court noted 50 years ago, in Brown versus Helvering and more recently in Thor Power Tool Company in 1979, the all events test helps to serve the objectives of tax accounting.

William H. Rehnquist:

Well, Mr. Lauber, you refer to the Court enunciating a principle, and it was just a sentence in Justice Stone's opinion, wasn't it?

Albert G. Lauber, Jr.:

Well, that's all it began its life as, but it has since taken on a kind of talismanic quality in tax jurisprudence.

It's one of the great traditional tests that has come down to us through the years.

And, the meaning of the test is what governs the time of taking accrued deductions by taxpayers, previous accrual, accrual basis.

I don't think Justice Stone intended it to have that quality, but it has been seized upon and elaborated by the Court itself in later years.

And the way the all events test helps to serve the objectives of tax accounting is to protect the fisc and to help achieve equality of treatment for taxpayers by insisting upon a high degree of certainty before deductions are permitted for tax purposes.

The all events test has two elements.

It requires that an item of expense be taken as a tax deduction, be accrued for the taxable year in which all the events have occurred that create on the part of the taxpayer a fixed and unconditional obligation to pay the expense, and secondly, which permit the amount of that payment to be determined with reasonable accuracy.

This case involves the proper application of the first component of the test, that is, the requirement that the taxpayer have at the end of the year a fixed obligation to make a payment.

The taxpayer here is a Nevada gambling casino that operates, on the casino floor, gambling devices called progressive slot machines.

A progressive slot machine is like an ordinary slot machine except that it has, besides its usual jackpot, an additional progressive jackpot whose amount is shown on a little meter on the face of the machine, and every time somebody plays the machine and loses, the meter goes up and it keeps on going up until somebody actually wins the jackpot.

In order to win a jackpot the player must gamble the required amount of money, which is the case of a multiple coin machine is the maximum amount that can be gambled.

And, he must pull the handle and come up with the winning combination of symbols.

The odds of winning a progressive jackpot are determined by the casino.

By adjusting the number of wheels on the machine, the number of symbols on each wheel, the number of winning symbols, the casino can determine the odds of winning the jackpot, and based on the expected frequency of the machine's play, it can predict a projected payoff date of any particular progressive jackpot.

John Paul Stevens:

Mr. Lauber, can I interrupt you?

Does this case just concern progressive jackpots?

Why wouldn't it also concern regular jackpots, if you had a fixed amount that would be payable, predictably within--

Albert G. Lauber, Jr.:

My understanding is that the regular jackpots tend to be in smaller amounts and are won much more frequently, and I don't believe the Nevada Gaming Commission regulates regular jackpots, only progressive jackpots.

So, respondents don't have the argument available to them here, that the Commission's regulations give them a fixed liability--

John Paul Stevens:

--The regular jackpots, they just do that on a cash basis, then, presumably?

Albert G. Lauber, Jr.:

--I couldn't be sure of that.

The projected payoff date for these jackpots can range from several months down the road to several years down the road.

The money corresponding to the jackpots does not sit physically in the machine.

The casinos typically collect the coins out of the machine a couple of times a week.