United States v. Hughes Properties, Inc.

Hughes Properties, Inc. (Hughes) (plaintiff) owned and operated a casino in Reno, Nevada, where it operated a number of progressive slot machines. These slot machines paid a progressive jackpot that could only be won upon a specified combination appearing on a machine. The jackpot increased as patrons continued to gamble at the progressive machines according to a ratio set by the casino. The total progressive jackpot at any given time was shown on the payoff indicator on the face of the machine. Under Nevada gaming regulations, although casinos could set odds for progressive jackpots however they wished, they could not ever decrease the number shown on the payoff indicator and could never decrease the amount of the jackpot unless it was won by a player. Nevada law also required that each casino maintain cash reserves sufficient to pay the progressive jackpot. At the end of each fiscal year, Hughes deducted the amount of the progressive jackpot as an ordinary and necessary expense incurred during the taxable year in carrying on its trade or business. Following an audit, the Internal Revenue Service (IRS) (defendant) disallowed the deduction, and Hughes brought an action in federal court to challenge that determination. After Hughes prevailed in the lower courts, the IRS petitioned the Supreme Court for review, and the Supreme Court granted the petition. The IRS argued that the guaranteed payments could not be considered an accrued liability because the payments had not yet been won by any player. In the IRS’s view, because the jackpot had not yet been won, the liability was not fixed and certain. In theory, the payment could be postponed indefinitely by establishing smaller odds of winning or by closing or selling the business entirely.