United States v. Hughes Properties, Inc.

Background

A Nevada casino operator that ran progressive slot machines recorded the jackpot amounts shown on each machine’s display at midnight on the last day of its fiscal year. Using accrual accounting (recording expenses when they are incurred, not when paid), the casino deducted the year-to-year increase in those accrued jackpot amounts on its federal tax returns. The IRS disallowed the deductions, and the dispute made its way through the Claims Court and the Federal Circuit up to the Supreme Court.

Reasoning

The Court examined whether the casino’s obligation to pay the displayed jackpots was already fixed at year-end even though particular jackpots had not yet been won. The Court relied on Nevada Gaming Commission rules that forbid reducing the displayed jackpot except when it is paid or to correct a malfunction. Those state rules made the casino’s obligation to the jackpots fixed under state law. Because the amount was fixed and could be measured accurately, the Court held the casino had incurred the liability and could deduct it in the accrual year, even if the actual payout and the identity of a winner occurred later.

Real world impact

Casinos that use the accrual method can record and deduct progressive jackpots at year-end when state rules fix the amounts. The IRS retains the power to challenge abusive practices or require a different accounting method if a taxpayer tries to manipulate timing to avoid tax. Deducted amounts could be taxed later if the liability is canceled or otherwise recaptured.

Dissents or concurrances

Justice Stevens dissented, arguing the obligation was not truly fixed because the casino could avoid payment by surrendering its gaming license or through bankruptcy, creating a risk of tax avoidance that the IRS may lawfully prevent.