## Facts

- A taxpayer owned and operated a licensed gambling casino and used the accrual method for financial and tax reporting.
- The casino extended credit to customers meeting specified creditworthiness standards.
- Customers executed promissory notes (“markers”) stating the amount of credit extended and evidencing the customer’s indebtedness.
- Customers generally used the credit proceeds (chips or cash) to gamble at the casino’s tables; any remaining chips or cash after play could be applied to the customer’s outstanding balance.
- If customers did not repay immediately, the casino held the marker until an agreed repayment date or pursued collection efforts.
- Under applicable state law, gambling debts were generally unenforceable, but more than 95% of customers repaid their markers.
- For federal income tax purposes, the casino reported income from credit transactions in the year the markers were collected, not when the credit was lost at the tables.

## Issues

1. Under § 451’s all-events test, when must an accrual-basis casino include in gross income gambling revenue arising from customers’ credit play.
2. Whether state-law unenforceability of gambling debts prevents accrual of the casino’s income from credit customers.
3. Whether a high likelihood of collection establishes a reasonable expectancy of payment sufficient to require accrual when the credit is wagered and lost.

## Decision

- The IRS concluded that the casino must include in gross income, for the taxable year of play, gambling revenue attributable to customers who wager and lose credit proceeds at the casino’s tables.
- The casino may not defer recognition of that income to the year the marker is actually collected.
- The result applies even though gambling debts are generally unenforceable under state law, where facts show a reasonable expectancy of payment (e.g., a 95%+ repayment rate).

## Legal Principles

- Under § 451, income accrues when (1) all events have occurred that fix the taxpayer’s right to receive the income and (2) the amount can be determined with reasonable accuracy.
- For credit-play gambling transactions, the right to income is fixed, and the amount is determinable, when the customer wagers and loses the credit proceeds at the casino’s tables.
- Legal enforceability under state law is not a prerequisite to satisfying the all-events test; it is relevant only to whether the taxpayer had a reasonable expectancy of payment when the right to income arose.
- Any exception from accrual based on doubtful collectibility is narrowly applied; a strong payment history supports accrual at the time the right to income becomes fixed.

## Conclusion

An accrual-basis casino must recognize gambling income from credit customers in the year the customers wager and lose the credit, because the right to receive payment is fixed and the amount is reasonably determinable at that point, and state-law unenforceability does not preclude accrual when payment is reasonably expected.


Rev. Rul. 83-106, 1983-2 C.B. 77 (1983)