## Facts

- Hughes Properties, Inc. operated a Reno, Nevada casino with “progressive” slot machines whose jackpot meters increased as patrons played until the jackpot was won.
- Nevada Gaming Commission regulations prohibited a casino from reducing the indicated progressive jackpot without paying it, effectively requiring payment of the posted meter amount.
- Hughes used the accrual method of accounting and, at each fiscal year-end, recorded the total of the progressive jackpot meter amounts as an accrued liability.
- Hughes deducted the year-to-year increase in the progressive jackpots as an ordinary and necessary business expense under I.R.C. § 162(a).
- The IRS disallowed the deductions, asserting the liability was contingent until a patron actually won the jackpot and thus failed the Treasury Regulation “all events” test.
- Hughes paid the assessed deficiencies and sued for a refund; the Claims Court granted summary judgment for Hughes, the Federal Circuit affirmed, and the Supreme Court granted certiorari.

## Issues

1. Whether, under the accrual-method “all events” test, a casino may accrue and deduct the annual increase in progressive slot machine jackpots before any patron wins the jackpot.
2. Whether a state regulatory prohibition on reducing posted progressive jackpots fixes the casino’s liability for federal income tax accrual purposes.

## Decision

- The Supreme Court affirmed and held Hughes was entitled to the deductions.
- Nevada law fixed Hughes’s obligation to pay the progressive jackpot amounts displayed on the meters at year-end; the liability was not contingent on identifying the eventual winner.
- The event fixing liability was the last play on each machine before the close of the fiscal year, because that play irrevocably set the posted jackpot amount the casino was required to honor.
- The amount of the liability was determinable with reasonable accuracy from the meter readings at year-end.
- Remote risks that the jackpot might never be paid (e.g., business failure, loss of license, bankruptcy) did not negate the existence of a present, fixed obligation for accrual purposes.

## Legal Principles

- Under the Treasury Regulation “all events” test, an accrual-basis taxpayer may deduct an expense when (1) all events have occurred that establish the fact of liability and (2) the amount can be determined with reasonable accuracy.
- A liability may be fixed even if the identity of the payee or the timing of payment is unknown, so long as applicable law or regulation makes the obligation legally enforceable.
- The possibility of later nonpayment due to financial or operational failure is generally a collection or performance risk and does not, by itself, prevent accrual when the obligation is otherwise fixed.

## Conclusion

The Court held that the casino could accrue and deduct the annual increases in progressive jackpot amounts because Nevada regulations made the obligation to pay the posted meter amounts legally fixed at year-end and the amounts were readily measurable, satisfying the “all events” test for accrual-method deductions under § 162(a).


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