Document: 476 U.S. 593 106 S.Ct. 2092 90 L.Ed.2d 569 UNITED STATES, Petitionerv.HUGHES PROPERTIES, INC. No. 85-554. Argued April 23, 1986. Decided June 3, Syllabus Respondent, in its gambling casino 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 jackpot that is won only different specified combination appears. The amount the increases as money gambled machine until won. A Nevada Gaming Commission regulation prohibits reducing indicated payoff without jackpot. Utilizing accrual method accounting, respondent's practice was, at end each fiscal year, enter total progressive an accrued liability books, and from subtract corresponding figure for preceding year produce current tax year's increase liability. On federal income returns years, respondent claimed this net deduction under § 162(a) Internal Revenue Code 1954, ordinary necessary business expense incurred during taxable year. Commissioner (Commissioner) disallowed deductions ground that, Treasury Regulations, may not be deducted "all events occurred which determine fact thereof can determined with reasonable accuracy," patron actually jackpot, pay was contingent therefore deductible expense. Accordingly, deficiencies taxes years question. Respondent paid deficiencies, and, claims refunds were denied, brought suit Claims Court. court granted motion summary judgment, holding jackpots by regulation. Court Appeals affirmed. Held: entitled claim Pp. 599-606. (a) events" test prescribed Regulations requires before regarded "incurred" purposes, must absolute. 600-601. (b) Here, effect fix Identification winning players irrelevant respondent, since obligation exists whether it turns out winner one or another makes no difference event creating last play irrevocably. That Brown v. Helvering, 291 193, 54 356, 78 L.Ed. 725, distinguished. 601-603. (c) Granting has broad discretion taxpayer's accounting methods clearly reflect income, financial does control mere desirability matching expenses will necessarily sustain deduction, disallowance justified. As noted, liabilities fixed, exact times payment winners' identity remained uncertain. 603-604. (d) Nothing record indicates used tax-avoidance purposes. 604-605. (e) potential operator might go business, surrender lose license, into bankruptcy, result would never paid, prevent 605-606. (f) One attends production commitment particular portion generated irrevocable Cf. United States Anderson, 269 422, 46 131, 70 347. Respondent's true keep. P. 606. 760 F.2d 1292 (Fed.Cir.1986), BLACKMUN, J., delivered opinion Court, BRENNAN, WHITE, MARSHALL, POWELL, REHNQUIST, O'CONNOR, JJ., joined. STEVENS, filed dissenting opinion, BURGER, C.J., joined, post, p. 607. Albert G. Lauber, Jr., Washington, D.C., petitioner. O. Clayton Lilienstern, Houston, Tex., respondent. Justice BLACKMUN 1 This case concerns deductibility utilizing guaranteed but yet playing patrons. 2 * A. 3 There dispute relevant facts; many them are stipulated. Hughes Properties, Inc., corporation. It owns Harolds Club, casino, Nev. keeps books files accounting. During question (the ended 30 1973 1977, inclusive), owned casino. Among what called machine, like regular one, pays reels. But additional sets initially minimal amount. increases, according ratio machine. any given time registered "payoff indicator" face continues patrons maximum, also reached. 4 odds obviously function reels positions reel, symbols. provided there possibility symbols appear.1 5 closely regulates industry State, including operation September 1972, promulgated 5.110 Regulations. See App. 55. section gaming establishment least once day 5.110.5. Furthermore, 6 "[n]o indicator shall turned back lesser amount, unless been player, change reading necessitated through malfunction, explanation entered daily report required subsection 5." 5.110.2; 7 strictly enforced. Nevada, statute, authorizes impose severe administrative sanctions, license revocation, upon wrongfully refuses customer Nev.Rev.Stat. 463.310 (1985). 8 remove deposited customers twice every week month. regulate use funds thus collected, but, maintain cash reserve sufficient provide all available public. Nev.Gaming Regs. 5.110(3); 56. B 9 At conclusion is, midnight 30, shown indicators books. From total, subtracted return 1973, 1974, 1975, asserted amended, 26 U.S.C. 162(a), "paid carrying trade business."2 so qualifies proper running business. Tr. Oral Arg. 7. 10 audit, deduction. He did Treas.Reg. 1.461-1(a)(2), CFR 1.461-1(a)(2) (1985), accuracy." his view, matures patron's pull handle future. According Commissioner, occurs, gives rise Indeed, then, who make payment. 11. $433,441.88, attributable solely denial deductions. timely refund. When C 11 Each side moved judgment. 15, 52. contended year-end deductible, claiming expectation made some future date, casino's law, those conformed generally accepted principles, effected realistic revenue expenses. 12 denied Government's judgment motion. Cl.Ct. 641 (1984). concluded Commission's rule, became "unconditionally fixed," id., 645, "midnight year," 647. final "the (successful not) close recorded purposes." Id., 645. contrary mismatch acknowledged if owe person. 646. Nevertheless, "would still continue state [respondent] responsible" (emphasis original). 13 further ruling conflict decision Ninth Circuit Nightingale States, 684 611 (1982), having do declined follow precedent specifically disavowed reasoning. Cl.Ct., 644-647. 14 Federal affirmed "on basis opinion." 1292, 1293 ruled accuracy, "if perform act cost performance measured money." Ibid. here winner. Rather, "contrary conclusion" noted. F.2d, 1293. 15 Because clear between two Circuits, we certiorari. 474 1004, 522, 88 455 II 16 Section allows business." 446(a) provides "shall computed taxpayer regularly computes keeping books." Under "cash receipts disbursements method," recognized 446(c)(1), deduct they paid. §§ 1.446-1(c)(1)(i) 1.461-1(a)(1), 1.446-1(c)(1)(i), 1.461-1(a)(1) permits compute employment "an method." 446(c)(2). An accrual-method "incurred," regardless 17 For standard determining purposes 1.446-1(c)(1)(ii) (accruals general); 1.451-1(a) (accrual income); deductions). appears had origin single phrase Court's 441, 134, 347 (1926) ("[I]t advance assessment tax, occur it"). Since described "established" Anderson 'touchstone' item accrues," "a fundamental principle accounting." Consolidated Edison Co. New York, 366 380, 385, 81 1326, 1329, 356 (1961) (citing cases). 18 elements, satisfied proper. First, establish Second, capable being "with 1.446-1(c)(1)(ii). first element, parties agree second fully satisfied. III 19 cases emphasized accrue long remains contingent." 200, 359, 725 (1934); accord, Dixie Pine Products 320 516, 519, 64 364, 365, 270 (1944). Thus, satisfy all-events test, "final definite amount," Security Flour Mills 321 281, 287, 596, 599, (1944), "fixed absolute," U.S., 201, S.Ct., 360, "unconditional," Lucas North Texas Lumber Co., 281 11, 13, 50 184, 185, 74 668 (1930). And say law deferred 'all events' certain." Thor Power Tool 439 543, 99 773, 786, 58 785 (1979). 20 Government argues certain," "unconditional" "absolute," existed person could assert funds. takes position, quoting 614, indispensable "is fortunate gambler." says because places restriction set appear. Government, setting very high defer indefinitely off doors anyone. Similarly, sell cease operations, stop machines, obligation. 21 We disagree following reasons: 22 1. regulations 5.110.2 forbade except correct malfunction exceeding limit imposed. liability, contingent. extremely remote speculative won,3 matter escape. Nevada's equivalent situation where aside escrow pending ascertainment winners. concedes latter case, accrued, 20-21, even though same exist occur. 23 2. misstates need identification player. should be, relevance operator. there, conceivable basic 24 3. heavy reliance (1934), our misplaced. concerned agent's commissions sales insurance policies, proportionate part commission policy canceled. agent sought gross added repayment commissions. agreed Commissioner's actual create liability—the cancellation later "[did] rather however, recognized, 25 4. argument treats unpaid justify treating unpersuasive. Proper acceptable sure, same. Brandeis announced well over ago: "The prudent man often up reserves cover liabilities. allowable deductions." American 280 445, 452, 202, 204, 538 201-202, Kansas City Structural Steel 264, 269, 263, 265, 848 vastly objectives have." 542, 786. goal useful pertinent information management, shareholders, creditors. other hand, major responsibility Service protect public fisc. Therefore, although 446(c)(2) he uses keep 446(b) "does income," income." "Commissioner powers Hansen, 360 446, 467, 79 1270, 1282, 1360 (1959). 532, 781; Automobile Assn. 367 687, 697-698, 1727, 1732, 1109 (1961). carry down treatment item." 1.446-1(a)(1). this—that discretion, see 690, 1728; 541, 785—the justified case. stated above, definitely fixed. machine's intake out, known, itself timing factor controls method.4 27 5. suggests ability payouts shows both nature avoidance. speaks value money, earn retains comes along, "virtually unrestricted odds," Brief 31, transfer accompanying capacity customers. All this, says, unquestionably contains "potential avoidance." 538, 784. put extra floor whatever initial specifies likes, theory, take full citing Nightingale, 615. 28 None components parade horribles, course, took place here. intimates Its less than 1% 35-36. depends inducing gamblers unreasonably odds, refuse gamble elsewhere. economic self-interest likely payoffs too far future.5 Nor, imposed controls, abuse kind hypothesized happen. event, ability, Code, 446(b), such complete practical answer concern. If manipulates avoid taxes, power find accurately require more appropriate method. Finally, course earns as-yet-unwon jackpots, overestimates 29 6. always possibility, nonpayment method, accrual. See, e.g., Wien Airlines, Inc. 528 735 (CA9 1976). existence absolute necessary; certainty discharged not." Helvering Russian Finance & Constr. Corp., 77 324, 327 (CA2 1935). occur, qualify recaptured subject tax. 1.461-1(a)(2). (1926), repeated reference, instructive. issue propriety munitions prior assessment. due. contrast position present held absence "true . deducting year." 440, 134. attended "reserve taxes." 31 32 ordered. whom THE CHIEF JUSTICE joins, dissenting. 33 Unlike ante, 605-606, I believe distinction existing nonexistence controlling importance 34 common liability." 284, (1944); 200-201, 359-360, (1934). 385-386, 1329-1330, "obligation" created rules defeasible election "fixed" within meaning Regulation. To me, "no." 35 "Under law," "were longer laws 23. bankruptcy [taxpayer], relieve obligation." 44. 36 facts, accrue. resembles overhauling aircraft engines airframes World Airways, 62 T.C. 786 (1974), aff'd, 564 886 1977). Tax taxpayer, airline, hence costs, T.C., 802, 805 despite contracts obligating pay, completion overhaul, hour flight previous 791-793, statutory overhaul after hours, 803. Of critical us today, distinguished legal considering bankruptcy: 37 petitioner [the taxpayer] crash permanent grounding conceivably costs. occurrences contingencies, occurrence mean ever come existence. Petitioner costs absolutely contingencies referred coming existence." 804 38 risk disaster remote. "there contingency whose unlikely": "Petitioner sold five piston jet 1965. 1965, 1966, airframe required." 39 too, court—a confirms likewise unlikely owner elect escape accruals exceed perhaps shrewd management—it liquidate profit anyone mistakenly describes By simply tendering jackpots. option exercisable sole point time. My research revealed instance forced allow avoided entirely taxpayer. feature avoidance," 784, (1979), think lies authority interpret Regulation forbid it, 449, 203, respectfully dissent. 1976 study four-reel then average period approximately 41/2 months, months 1, 1976. frequency ranged 14.3 low 1.9 months. No aggregate 1975. affidavit president Club Division, submitted support states subsequently customers." 62. Congress briefly adopted provisions permitted anticipated mechanism hardly significant. 462(a) (d)(1)(B) 1954 originally adopted, 68A Stat. 158-159, repealed retroactively Act 1955, ch. 143, 69 135. Deficit Reduction 1984, 91(a), 98 598. risk. money. gets soon goes service, recoup casinos tend relying percentage contribute bulk

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