Appeal from the United States District Courtfor the District of NevadaHoward D. McKibben, District Judge, PresidingSubmitted December 12, 1997*San Francisco, CaliforniaFiled October 16, 1998Before: Betty B. Fletcher, Thomas G. Nelson, Circuit Judges,and Robert H. Whaley,** District Judge.Opinion by Judge WhaleySUMMARY
______________________COUNSEL Barry L. Lieberman, Dickerson, Dickerson, Lieberman &Consul, Las Vegas, Nevada, for the plaintiffs-appellees.Sally J. Schornstheimer, United States Department of Justice,Tax Division, Washington, D.C., for the defendants-appellants.
_____________________________OPINION WHALEY, District Judge:The United States of America and Commissioner of Inter-nal Revenue appeal the district court's grant of summaryjudgment in favor of Gold Coast Hotel & Casino, et al. Thedistrict court held that a casino using the accrual method ofaccounting may deduct the value of slot club points won bya slot club member in the tax year in which the member hasaccumulated the minimum number of points necessary toredeem a prize. We affirm.FACTUAL BACKGROUNDGold Coast Hotel & Casino ("Gold Coast") is a Nevadalimited partnership formed in 1985 for the purpose of operat-ing a licensed gambling casino in Las Vegas, Nevada. GoldCoast has operated a slot club since March 1987. A slot clubis a promotional tool used to attract slot machine players.After filling out the necessary paperwork, slot club membersreceive a club card, similar to an ATM card. Slot club mem-bers insert their club cards into a slot machine and a computertracks their accumulation of slot club points.Slot club points can be redeemed for prizes ranging fromcoffee mugs to Hawaiian vacations. The minimum number ofpoints needed to redeem a prize is 1,200. As stipulated to bythe parties, the market value of each club point is $0.0021.Accordingly, 100,000 points have a value of $210. GoldCoast uses a computerized data bank to track each club mem-ber's slot club points. The computer credits a member'saccount for points won and debits the account when points areredeemed for prizes.Members can redeem slot club points for prizes in twoways. First, members can go to Gold Coast's redemption cen-ter and pick their prize. Alternatively, club members can goto the redemption center and get a voucher for a prize froman off-site retailer, such as a travel agency or appliance store.The club member then takes the voucher to the off-site retailerto redeem the prize and the retailer bills Gold Coast a previ-ously agreed upon amount.At the end of 1988, the difference between the total valueof slot club points that had been accumulated by club mem-bers and the total value of slot club points that had beenredeemed by club members was $1,276,464. In 1989 mem-bers accumulated additional slot club points valued at$2,445,780 and redeemed points valued at $1,724,801. Thus,at the end of 1989 there were outstanding slot club points val-ued at $1,997,443, an increase of $720,979 over the prioryear's ending balance. Gold Coast deducted this amount --$720,979 -- as an expense on its 1989 partnership tax return.In addition, on its 1989 tax return Gold Coast recaptured asincome $105,969, representing the value of accumulated slotclub points in those accounts in which there had been noactivity for over a year, and which had been deducted as anexpense in the prior year.During 1990, club members accumulated additional slotclub points valued at $3,076,909 and redeemed points valuedat $2,386,216. Thus, at the end of 1990 the value of outstand-ing slot club points was $2,688,136, an increase of $690,693over the prior year's ending balance. Gold Coast deducted thisamount -- $690,693 -- as an expense on its 1990 partnershiptax return. Additionally, on its 1990 tax return Gold Coastrecaptured as income $68,910, representing the value of accu-mulated slot club points in those accounts in which there hadbeen no activity for over a year, and which had been deductedas an expense in the prior year.On September 26, 1994, the Commissioner of Internal Rev-enue sent the Tax Matter Partner of Gold Coast a Notice ofFinal Partnership Administrative Adjustment ("FPAA") forthe tax year ending December 31, 1989 and a Notice of FinalPartnership Administrative Adjustment for the tax year end-ing December 31, 1990. In the notices, the Commissioner pro-posed that adjustments to income be made in four categories,one of which was accrued slot club points. The FPAA for thetax year ending in 1989 proposed to increase income a totalof $1,935,469 for adjustments relating to slot club points.1While the FPAA for the tax year ending in 1990 proposed toincrease income a total of $807,330,2 the parties agree that theproposed increase for 1990 should be $738,420.3PROCEDURAL BACKGROUNDOn December 23, 1994, Gold Coast4 filed a complaint pur-suant to 26 U.S.C. S 6226 in the United States District Courtfor the District of Nevada challenging the Commissioner'sproposed adjustments as set forth in the FPAA for the 1989tax year and the FPAA for the 1990 tax year. As required toinvoke district court jurisdiction, Gold Coast had first depos-ited with the Internal Revenue Service the amounts by whichits tax liability would be increased if the Commissioner's pro-posed adjustments to income were made for the 1989 and1990 tax years.In its Complaint, Gold Coast challenged, inter alia, theCommissioner's adjustments with respect to accrued slot clubpoints and sought a determination that Gold Coast need notadjust its 1989 or 1990 income based on that category. Rely-ing on undisputed stipulated facts, the parties filed cross-motions for summary judgment on numerous issues, includingwhen the value of accumulated slot club points is "incurred"as an expense and, thus, is deductible pursuant to 26 U.S.C.S 162(a).In an order filed on September 26, 1996, the district courtrejected the Commissioner's argument that the expense of slotclub points is not incurred until the points are redeemed fora prize. Rather, the court held that Gold Coast had properlydeducted as an expense the value of those slot club points thathad been accumulated by members with more than 1,200points in their slot club account. However, the district courtdisallowed Gold Coast's deduction of the value of slot clubpoints attributable to members who had not yet earned 1,200points.The Commissioner timely filed its notice of appeal. In itsappeal, the Commissioner challenged only the district court'sallowance of a deduction for the value of accumulated slotclub points attributable to members who had more than 1,200points in their accounts. However, the Commissioner assertedfirst that this court was without jurisdiction to hear the appealbecause the judgment below was not final since it had notbeen determined by the district court how many of the out-standing slot club points in 1989 or 1990 were attributable toclub members with more than 1,200 slot club points. Accord-ingly, in an order filed on November 26, 1997, this courtordered the parties to show cause why the case should not beremanded to the district court for further proceedings.After considering the parties' letter briefs and oral argu-ment, this court concluded that the judgment of the districtcourt was not final since there were more than ministerialtasks left for the district court to resolve. Accordingly, onFebruary 20, 1998, the case was remanded to the district courtfor entry of final judgment, with such entry to include the fac-tual determination of the dollar value of slot club points thatare attributable to customers with more than 1,200 slot clubpoints for each of the tax years 1989 and 1990. The districtcourt entered final judgment on April 20, 1998. Thus, wehave jurisdiction pursuant to 26 U.S.C. SS 6226(g), 74829(a)and 28 U.S.C. S 1291.DISCUSSION[1] The Internal Revenue Code allows a deduction for "allthe ordinary and necessary expenses paid or incurred duringthe taxable year in carrying on any trade or business." 26U.S.C. S 162(a). Accordingly, taxpayers using the accrualmethod of accounting, see 26 U.S.C. S 446(c)(2), are entitledto deduct expenses in the year which they are incurred,regardless of when paid. See S 162(a); Treas. Reg. S 1.446-1(c)(1)(ii).[2] The Commissioner contends that a casino using theaccrual method of accounting does not incur the expense ofaccumulated slot club points until such time as the points areactually redeemed for a prize because until the time ofredemption "all events" fixing the casino's liability have notoccurred. Whether an expense has been "incurred " is gov-erned by the "all events" test that originated in United Statesv. Anderson,
269 U.S. 422, 441
(1926), now codified at 26U.S.C. S 461(h)(4).5 Whether a taxpayer has satisfied the "allevents" test is a question of law reviewed de novo. See Chal-lenge Publications, Inc. v. Commissioner, 845 F.2d 1541,1543 (9th Cir. 1988). The fundamental premise underlying the"all events" test is that "although expenses may be deductiblebefore they become due and payable, liability must first befirmly established." United States v. General DynamicsCorp.,
481 U.S. 239, 243
(1987). Accordingly, to be deduct-ible the liability must be fixed, absolute, see Brown v.Helvering,
291 U.S. 193, 201
(1934), and unconditional, seeLucas v. North Texas Lumber Co.,
281 U.S. 11, 13
(1930). Aliability may not be deducted if it is contested, see GeneralDynamics Corp.,
481 U.S. at 243
, or if it is contingent uponthe occurrence of a future event. See Lucas v. American CodeCo.,
280 U.S. 445, 452
(1930).[3] There are two prongs to the "all events" test, both ofwhich must be satisfied before an expense is properly deduct-ible. See United States v. Hughes Properties, Inc., 476 U.S.593, 600 (1986). First, all events that establish the fact of theliability must have occurred. See id. Second, the amount ofsuch liability must be capable of being determined with rea-sonable accuracy. See id. Accordingly, to determine whenGold Coast incurs the expense of the value of accumulatedslot club points, it is necessary to determine: first, what eventfixes Gold Coast's liability for the value of slot club points;and second, whether the amount of that liability is capable ofbeing determined with reasonable accuracy.[4] Two leading Supreme Court decisions address the firstprong of the "all events" tests, United States v. GeneralDynamics Corp.,
481 U.S. 239
(1987), and United States v.Hughes Properties, Inc.,
476 U.S. 593
(1986). Gold Coastrelies on Hughes for its position that the "last event" fixingGold Coast's liability occurs when the minimum number ofclub points necessary to earn a prize are accumulated, becauseat that time liability is fixed pursuant to Nevada gamingregulations.6 The Commissioner, however, cites GeneralDynamics as support for its position that the "last event" fix-ing Gold Coast's liability as absolute and unconditional is theredemption of club points by a club member. We agree withthe district court that the facts of this case are more analogousto those in Hughes than to those in General Dynamics and,thus, hold that the last event fixing Gold Coast's liability forthe value of slot club points is a club member's accumulationof 1,200 slot club points.In Hughes, the Supreme Court held that a casino operatorcould deduct the amount of money guaranteed for payment onprogressive slot machines even though the amount had notbeen won by the end of the tax year. See Hughes Properties,
476 U.S. at 602
-03. In doing so, the court in Hughes reasonedthat although the dollar amount of the jackpot would continueto grow until the winning combination appeared, the obliga-tion to pay the amount that had already accrued on themachine was fixed and irrevocable under state law at anymoment. Id. at 601-02. The court recognized that the jackpotmay not be won for years or that the casino may go bankruptbefore the jackpot was won. See id. at 605-06. Nonetheless,the court noted that: th[e] potential nonpayment of an incurred liability exists for every business that uses an accrual method, and it does not prevent accrual. . . . "The existence of an absolute liability is necessary; abso- lute certainty that it will be discharged by payment is not."Id. at 606 (quoting Helvering v. Russian Fin. & Constr. Corp.,77 F.2d 324, 327 (2nd Cir. 1935)). Those liabilities not dis-charged by payment, the Court noted, can simply be recap-tured as income and, thus, subject to tax. See id. Accordingly,the court in Hughes held that the "last event" fixing the casi-no's liability was the last play of the slot machine before theend of the casino's fiscal year. See id. at 602-03.[5] Here, like the guaranteed prize on the jackpot inHughes, Gold Coast's liability to redeem accumulated slotclub points is fixed and unconditional under state law once aslot club member accumulates 1,200 points. Moreover, thefact that a club member may choose not to redeem his/herpoints immediately does not render Gold Coast's otherwisefixed liability conditional. Rather, like the liability of thecasino in Hughes, which grew as the jackpot grew, the liabil-ity of Gold Coast simply increases when a slot club memberelects to let his/her club point total grow. See HughesProperties,
476 U.S. at 604
(noting that the timing of paymentis irrelevant when a taxpayer uses the accrual method ofaccounting).The Commissioner relies heavily on the fact that not all slotclub members will redeem their points for prizes to support itsposition that Gold Coast's liability is not absolute until a clubmember actually demands "payment" by redeeming his/herpoints for a prize. However, the Hughes court rejected similarreasoning when it held that a casino's fixed obligation to payout the amount shown on progressive slot machines was notrendered contingent by the fact that it was possible that theliability would not be paid. Hughes Properties , 476 U.S. at601-02. Indeed the Court in Hughes explicitly noted thatpotential nonpayment of an incurred liability exists for everybusiness that uses the accrual method of accounting, and thatfor purposes of the "all events" test, what is critical is theexistence of an absolute liability, not an absolute certainty theliability will be discharged by payment. See HughesProperties,
476 U.S. at 606
.[6] The Commissioner is correct that in Hughes the possi-bility that the liability represented by the progressive jackpotamount would not eventually be discharged was more remotethan the possibility here that a club member who has won1,200 points will not redeem a prize. Nonetheless, this courthas held that where an obligation is "fixed" and there is a"reasonable expectancy" of the obligation being convertedinto cash or its equivalent, then the obligation satisfies thefirst prong of the "all events" test, even when less than all ofthe obligation will eventually be discharged by payment. SeeFlamingo Resort, Inc. v. United States, 664 F.2d 1387, 1389(9th Cir. 1982) (interpreting the "all events " test for purposesof determining when an accrual-based taxpayer's right toreceive income is fixed and unconditional).[7] Here, Gold Coast's liability to redeem accumulated slotclub points is fixed and unavoidable under state law. In addi-tion, the record indicates that there is a reasonable expectancythat members who accumulate more than 1,200 club pointsredeem those points for prizes. Because the critical factor forpurposes of the "all events" test is the existence of an absoluteliability, not an absolute certainty that liability will be dis-charged by payment, Gold Coast's liability is not renderedconditional by the possibility that some of the slot club pointsaccumulated by members may go unredeemed.The Commissioner's reliance on General Dynamics to thecontrary is misplaced. The plaintiff in that case, GeneralDynamics Corporation, was an accrual-basis taxpayer thatself-insured its employees' medical plan. Employees seekingreimbursement for medical expenses for services provided bythird parties were required to submit properly documentedclaim forms to employee benefits personnel at GeneralDynamics. The employee benefits personnel would verify eli-gibility and forward worthy claims to the plan administrators.The administrators' claim processors would review the claimsand approve covered expenses for payment. See GeneralDynamics,
481 U.S. at 241
.Delay by employees in filing claims and the time necessaryto process claims resulted in a time lag between when medicalservices were rendered and when payment was made by Gen-eral Dynamics. Accordingly, General Dynamics established areserve account reflecting its estimated liability for medicalcare received by employees but unpaid by General Dynamics.General Dynamics sought to deduct the amount of its esti-mated liability in this account at the end of the tax year as anaccrued expense. See id. at 241-42.The Supreme Court in General Dynamics held that the esti-mated liability represented by the reserve account did not sat-isfy the first prong of the "all events" test because the lastevent necessary to fix that liability had not occurred by theend of the tax year. See General Dynamics,
481 U.S. at 244
.The Court held that, as a matter of law, General Dynamics'liability to reimburse its employees was conditioned on theemployee's submitting a properly documented claim to Gen-eral Dynamics. See id. at 244 & n.4. In doing so, the Courtreasoned that the employees had been informed that it wouldbe necessary to submit satisfactory proof of the chargesclaimed in order to obtain payment under the plan. See id. at244. The Court thus found that the filing of such a claim wasnot a mere technicality but, rather, was a condition precedentto liability on the part of General Dynamics. See GeneralDynamics,
481 U.S. at 244
n.5, 245. Since the Court held asa matter of law that General Dynamics was not liable to theemployee for payment of covered medical services until theemployee filled out and submitted a claim form with satisfac-tory proof of the charges claimed, it necessarily followed thatGeneral Dynamics was not entitled to deduct the amount inthe reserve account because the liability it represented was acontingent liability. See id. at 244.Despite the Commissioner's strenuous argument to the con-trary, General Dynamics is not controlling here. In GeneralDynamics, medical services were provided to GeneralDynamics' employees by third parties. It follows then that inorder to trigger General Dynamics' liability to reimburse itsemployees for the expenses of covered services rendered bythose third parties, an employee was required to file a prop-erly documented claim establishing General Dynamics' obli-gation. Submitting documented proof of a covered claim, theCourt found, was not a technicality.Here, a slot club member's demand for payment (redemp-tion of points) is a technicality. It is nothing more than mak-ing a demand for payment of an uncontested liability. Unlikein General Dynamics, there is no involvement of third partiesnecessitating that slot club members establish or otherwiseoffer proof of their right to payment. Rather, Gold Coast hasa fixed, unavoidable, and uncontested obligation to redeemaccumulated slot club points for prizes upon demand. Further-more, the Commissioner's argument to the contrary, that theliability represented by an uncontested obligation is notunconditional until such time as it is presented for payment,renders the difference between accrual and cash-basedaccounting methods virtually meaningless. Such a result isinconsistent with the express recognition by the Court inGeneral Dynamics that there is a legal difference between aliability being "due and payable" and it being "firmlyestablished." Id. at 243 (noting that "although expenses maybe deductible before they have become due and payable, lia-bility must first be firmly established"). Accordingly, demandfor payment is not a condition precedent to fixing GoldCoast's liability for the value of accumulated slot club points.Finally, the Commissioner also contends that Gold Coastwas not entitled to summary judgment because Gold Coastdid not satisfy the second prong of the "all events" test. Thesecond prong of the "all events" test requires that the amountof the liability be capable of being determined with reason-able certainty. See Hughes Properties,
476 U.S. at 600
.[8] Here, under state law, Gold Coast's liability is fixed forthe value of all accumulated club points in accounts withmore than 1,200 points. Since the parties have stipulated tothe value of each club point, the amount of Gold Coast's lia-bility can be determined by simply multiplying that value bythe number of accumulated points in accounts with more than1,200 points. Thus, Gold Coast's liability is known with rea-sonable certainty.[9] The Commissioner contends, however, that Gold Coasthas not estimated its liability with reasonable certaintybecause it deducts the value of all accumulated slot clubpoints in accounts with over 1,200 points. The Commissionerargues that its analysis of the data in the record suggests thatonly 69% of slot club points are actually redeemed. The Com-missioner's argument, however, confuses determining theamount of Gold Coast's liability with determining the per-centage of that liability that will be discharged by payment.The second prong of the "all events" test requires only thatthe amount of the liability be capable of being determinedwith reasonable certainty. See Hughes Properties , 476 U.S. at600. The percentage of that liability that will actually be dis-charged by payment is simply not relevant to this prong of the"all events" test.Further, the decision in Wein Consol. Airlines , relied on bythe Commissioner, is inapposite. In that case, an employerwas required to make monthly payments to the children ofdeceased employees for as long as they remained minors, andto the surviving spouses of deceased employees for as long asthey remained single. See Wein Consol. Airlines, Inc. v.Commissioner, 528 F.2d 735, 737 (9th Cir. 1976). Thus, theactual amount of the taxpayer's liability, being dependent onthe occurrence or nonoccurrence of a future event, could notbe calculated, and it was necessary for the taxpayer to useprobabilities and actuarial tables to estimate the amount of itsliability. The issue faced by the court in Wein Consol. Airlineswas whether the taxpayer's proposed estimate of its liabilitywas reasonable. See id. at 738. Since the court here is notfaced with an estimate of Gold Coast's liability, the Commis-sioner's reliance on Wein Consol. Airlines is misplaced.CONCLUSIONThe last event fixing Gold Coast's liability for the value ofslot club points is a club member's accumulation of the1,200th point. Since the parties have stipulated to the value ofa slot club point, the amount of Gold Coast's liability is capa-ble of being determined with reasonable certainty. Therefore,Gold Coast has incurred the expense of the value of those slotclub points accumulated by members with 1,200 or morepoints in their slot club accounts and it may properly deductthat expense at the end of Gold Coast's fiscal year pursuantto 26 U.S.C. S 162(a).AFFIRMED. the end
___________________________FOOTNOTES *The panel unanimously finds this case suitable for submission withoutoral argument pursuant to Fed. R. App. 34(a) and Ninth Circuit Rule 34.4.**Honorable Robert H. Whaley, United States District Judge for theEastern District of Washington, sitting by designation.1 The Commissioner arrived at this figure by disallowing as expenses (1)the value of all outstanding slot club points at the end of 1989($1,997,433) and (2) the value of all slot club points redeemed at off-siteretailers for which Gold Coast had not been billed at the end of 1989($43,995); and crediting Gold Coast for the value of slot club points inaccounts for which there had been no activity for over one year, whichGold Coast had already recaptured as income in the tax year 1989($105,969).2 The Commissioner arrived at this figure by disallowing as expenses (1)the value of the increase in outstanding slot club points at the end of 1990($752,667) and (2) the value of all slot club points redeemed at off-siteretailers for which Gold Coast had not been billed by the end of 1990($54,663).3 The error in computation was a result of the Commissioner's failure tocredit Gold Coast for the value of slot club points in accounts for whichthere had been no activity for over one year, which Gold Coast hadalready recaptured as income for the tax year 1990.4 The General Partner of Gold Coast is Plaintiff Gaughan-Herbst, Ltd.,a general partnership owned 50% by Plaintiff Michael J. Gaughan and50% by Plaintiff Jerry Herbst. Gold Coast, Gaughan-Herbst, Ltd., MichaelJ. Gaughan, and Jerry Herbst are hereinafter referred to collectively as"Gold Coast."5 The "all events" test was incorporated into the Internal Revenue Codeat 26 U.S.C. S 461(h)(4) by the Deficit Reduction Act of 1984, Pub. L. 98-369, S 91(a), 98 Stat. 494, 600. Section 461(h)(1) further provides that the"all events" test is not satisfied any earlier than when "economicperformance" has occurred. However, the parties here agree that the"economic performance" requirement does not apply to the tax years atissue here. See Treas. Reg. S 1.461-4(k)(3) (explaining that, for paymentliabilities for which payment is economic performance, the requirementapplies to liabilities that would otherwise be deductible or incurred for tax-able years beginning after December 31, 1991).6 Gold Coast submitted an uncontroverted affidavit from a formerNevada Gaming Control Board member, who states that any attempt byGold Coast not to redeem points accrued by its customers would havebeen improper under gaming regulations and would have been grounds fordisciplinary action or revocation of Gold Coast's gambling license.