# Petition — Hilton Hotels Corp. v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1982
- **Citation:** 459 U.S. 1036

## Text

8 2- 404 meet prane Coa US.

JUL 26 1982

No. A-1115
IN THE

Supreme Court of the United States

October Term, 1981

HILTON HOTELS CORPORATION, successor to FLAMINGO
RESORT, INC.,
Petitioner,
vs.
UNITED STATES OF AMERICA,
Respondent.

Petition for Writ of Certiorari to the
United States Court of Appeals
for tue Ninth Circuit.

Stephin TT Morris
LIONEL SAWYER & COLLINS
and

LEVENFELD, EISENBERG, JANGER,
GLASSBERG AND Lippr
1700 Valley Bank Plazi
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 385-2188

Attorneys for Petitioner.

Date: July 24, 1982

Parker & Son, Inc., Law Printers, Los Angeles. Phone 724-6622

i
Questions Presented for Review.

1. Should this Court review the decision of the Ninth
Circuit Court of Appeals, which, contrary to prior decisions
of this Court and the Tax Court and the long-standing po-
sition of the Internal Revenue Service, holds that a taxpayer
must accrue income and pay taxes upon mere promises to
pay, even though the taxpayer does not have a legally en-
forceable right to collect upon such promises under any
circumstances?

2. Should this Court review the decision of the Ninth
Circuit Court of Appeals, which departs from the clear,
certain, and administratively workable ‘‘all-events’’ test
articulated by this Court over one-half century ago (and
applied since then by this Court, the lower federal courts,
and the Internal Revenue Service) to determine when income
is realized by accrual basis taxpayers?

3. Should this Court review the decision of the Ninth
Circuit Court of Appeals, which creates serious uncertainty
for both taxpayers and the Internal Revenue Service in the
timing of deductions of business expenses for accrual basis
taxpayers, and which, if applied as written, may result in
hundreds of millions, if not billions, of dollars in business
expense deductions being accelerated to the substantial det-
riment of the United States Treasury?

Parties in the Court of Appeals.

Petitioner, Hilton Hotels Corporation, is the successor in
interest to Flamingo Resort, Inc., the plaintiff-appellant in
an action brought in the United States District Court for the
District of Nevada and subsequently appealed to the United
States Court of Appeals for the Ninth Circuit. The United
States of America is the defendant-appellee in the District
Court and in the Ninth Circuit Court of Appeals.

TABLE OF CONTENTS

Page
Questions Presented for Review ......................000 i
Parties in the Court of Appeals ..................0.cceeeees i
STII ‘viccnpsebisicininddin didaphiolemegdsscupeenseactnines 1
Grounds for Invoking This Court’s Jurisdiction ........ l

Constitutional Provisions, Statutes, and Regulations
PIL sicidndebuiibactasmidititeisdhaiithadcssdebieosindiesiod 2
NE OW IND doth nc cncctinictcbaccccsesccccevscseses 3
Reasons for Allowance of the Writ ....................... 9

I.
The Ninth Circuit Has Abandoned Legal Enforcea-

bility as an Essential Element for the Accrual of
Income, Thereby Creating a Conflict With Prior
Decisions of This Court, Other Courts of Appeal,
the Tax Court, and With the Long-Standing Posi-
tion of the Internal Revenue Service on the Meaning

and Application of the All-Events Test ............ 4
A. Decisions of This Court ................c000000 9
B. Long-standing Interpretation by the IRS ..... 12

i.
lise Ninth Circuit’s Decision Requires an Ad Hoc,
Uncertain, and Administratively Unworkable Ap-
proach to a Core Issue of the Income Tax Laws,
Which Is Significant to Millions of Taxpayers and
to the United States Treasury .................000000 16
ITIITIIIR dint cnccscathecmmdnanentoemminciiaceneioengrauanntiies 21

Page
APPENDIX
Decision of the United States Court of Appeals for the
NS IIE SOD App. p. 1

Memorandum Opinion Granting Defendant’s Motion
for Summary Judgment and Denying Plaintiff's

Motion for Partial Summary Judgment ............. 10
Judgment Filed February 28, 1980 ..................+. 36
Minutes of the Court Filed May 19, 1980 ............ 37

Order. Flamingo Resort, Inc., Plaintiff-Appellant,
v. United States of America, Defendant-Appellee.
No. 80-5318. Filed April 2, 1982. Petition for

Peeneeae TG TMMEGS nice sccsciscctevenscccsscccecess 38
Order. Desert Palace, Inc., Petitioner, v. Commis-

sioner of Internal Revenue, Respondent. Docket

No. 8531-74. Entered December 8, 1978 ......... 39

Supplemental Brief for Respondent. Desert Palace,
Inc., Petitioner, v. Commissioner of Internal Rev-
enue, Respondent. Docket No. 8531-74. Filed
NE Tie ITE Darsnsdeingbtisibdoncscccdnetesse ceronseuss 40

Reply Memorandum of Points and Authorities in Sup-
port of the Government’s Cross-Motion for Sum-
mary Judgment. Flamingo Resort, Inc., Plaintiff,

v. United States of America, Defendant. Civil No.
LV 76-19, RDF. Filed December 12, 1977 ....... 43

iv

TABLE OF AUTHORITIES CITED
Cases Page
Barker v. Magruder, 95 F.2d 122 (D.C. Cir. 1938) .. 13
Barker v. United States, 26 F. Supp. 1004 (Ct. Cl.

PEED: abcsudevnacgsspiunhienbipaceveingadndgsovevocertessvepes 13
Bell Electric Co., 45 T.C. 158 (1965) ..............20005 20
Brown v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78

Rae SUP EEIND hands soecvcgeecepcandcnescesees 19, 20, 21
Burke v. Buck, 31 Nev. 74, 99 P. 1078 (1909) ....... 5
Corbin v. O’Keefe, 87 Nev. 189, 484 P.2d 565

REEL: cba cqnndbiiitecdccsvonapoccésatinboumbadeinesguawente a

Craig v. Harrah, 66 Nev. 1, 201 P.2d 1081 (1949) ... 5

Desert Palace, Inc. v. Commissioner, 72 T.C. 1033
DUTT ixciccccdinensineenseuedianereoull 6, 7, 12, 13, 15, 16

Dixie Pine Products Co. v. Commissioner, 320 U.S.
516, 64 S.Ct. 364, 88 L.Ed. 270 (1944) ............. 18

Dunes Hotel & Country Club of Las Vegas v. Mayo,
354 N.Y.S.2d 62 (N.Y. City Ct. 1974) .............. 5

Estate of Putnam v. Commissioner, 324 U.S. 393, 65
S.Ct. 811, 89 L.Ed. 1023 (1945) ...................... 11

Evans v. Cook, 11 Nev. 69 (1876) ....................... 5

Flamingo Resort, Inc. v. United States, 485 F. bas
SE TI, BUM . co ctbidehscnutnalinweetancobbdeses a

Flamingo Resort, Inc. v. United States, 664 F.2d 1387

RI: BOGE cpnccdicshcoccccghXishabaahoentveciidasece 8, 22
Gateway Transportation Co.. Inc. v. United States, 77-

1 U.S.T.C. 99131 (W.D. Wisc. 1976) ............... 20
Hamilton v. Abadjian, 179 P.2d 804 (Cal. 1947) ..... 5
Intercontinental Hotels Corp. (Puerto Rico) v. Golden,

BOO Hh FB Bar CEs BGG), disssscccsccccesces cess 5

Jewett v. Commissioner, .... U.S. ...., 102 S.Ct. 1082
RIE ctadilnckstincdis satiate dadcunicntnetedswcdeshaeh 15, 16

J. J. Little & Ives & Co., T.C. Memo 1966-68 ....... 20
LaSalle Portland Cement Co., 4 B.T.A. 438 (1926) .. 21

Lucas v. North Texas Lumber Co., 281 U.S. 11, 50
S.Ct. 184, 74 L.Ed. 668 (1930) ................... 9, 10

The Marquardt Corporation v. Commissioner, 39 T.C.
443 (1962), acq. 1965-2 C.B. 6, nonacq. as to an-
other issue, 1965-2 C.B. 7 ...............0005: 14, 15, 16

North American Oil Consolidated v. Burnet, 286 U.S.
417, 52 S.Ct. 613, 76 L.Ed. 1197 (1932) ........... 10

Readers’ Pub. Corp. v. United States, 40 F.2d 145 (Ct.
GD, FRG cic ciillbccscncysescscepenspndvncconcerevedasess 20

Reuben H. Donnelley Corp., 22 B.T.A. 175
CUED iiccannctctnssncdiecscsnabinbbisestpandipeatndctes 20, 21

Richmond Light & Railroad Co., 4 B.T.A. 91 (1926)

IIE i: iri Os chan dence bbdibinbbenieendbanamasemadosendsohene 4
Scott v. Courtney, 7 Nev. 419 (1872) ...........c.eeee 5

Sea Air Support, Inc. v. Herrmann, 96 Nev. 574, 613
PEE AMIE 5 cnneins yoccquan cnccenuhen estebecdapendaits 4

Security Flour Mills Co. v. Commissioner, 321 U.S.
281, 64 S.Ct. 596, 88 L.Ed. 725 (1944) ........ 17, 18

Spring City Foundry Co. v. Commissioner, 292 U.S.
182, 54 S.Ct. 644, 78 L.Ed. 1200 (1934) ...... 10, 19

Thriftimart, Inc., 59 T.C. 598 (1973) ..... ppikehivdakenbe 20
United States v. Anderson, 296 U.S. 422, 46 S.Ct. 131,

FO LBS. S47 (19SB) . seriinvseritesscccccccnceees 9, 15, 18
United States v. Byrum, 408 U.S. 125, 92 S.Ct. 2382,

33 L.Bd.2d 236 (1G7Z) ......ccecsccvccccsccvccecees 11, 12
United States v. Consolidated Edison Co., 366 U.S.

380, 81 S.Ct. 1326, 6 L.Ed.2d 356 (1961) .......... 18

Page

United States v. Leslie Salt Co., 350 U.S. 383, 76 S.Ct.
416, 100 L.Ed. 441 (1956) ..........ccccccecceceeeseees 16

United States v. Safety Car Heating & Lighting Co.,
297 U.S. 88, 56 S.Ct. 353, 80 L.Ed. 500

TEED csidiiauibveliccoschebtnqesbevebaathenoeaséocsescese 10, 11
Villafranca v. Commissioner, 359 F.2d 849 (6th Cir.

SED cndkethccbpascthnonibitibndeutescscedatbscbdlbcdanidose 20
Weisbrod v. Fremont Hotel, 74 Nev. 227, 326 P.2d

SERRE SS ie a Se 5
West Indies v. First Nat. Bank, 67 Nev. 13, 214 P.2d

DEED cdbtesssecocbbeceenbsesoeitibcsewccsececececes 5
Wolpert v. Knight, 74 Nev. 322, 330 P.2d 1023

TIED ait toasted anpcanenonpatlnlinissettectbevee 5
World, Airways, Inc., 62 T.C. 786 (1974), aff'd 564

oe SS ae 20

OTHER AUTHORITIES CITED
Statutes and Treasury Regulations

NTT isniciitsadsablptiainladenanvegecesccorssedt 2
SL ED -diistsdiihen st tashtttacatehiontnscepergiuintels 2
PEATE EEIINID ccciccccal sapsionegiocemepesccesenaa 11, 12
es te ED a ctnitindbicneatenasbadboqpegeiseasnecs 2
ESTELLE. 4
Treasury Regulation § 1.166-1(C) ..............cccecceeees 19
Treasury Regulation § 1.446-1(c)(1)(ii) ......... 3, 12, 15
Treasury Regulation § 1.446-1(c)(2)(i) ...............000 16
Treasury Regulation § 1.451-I(a) .................c0ccc00 3

Treasury Regulation § 25.2511-1(C) ..........c.cccceeeees 15

Page
Other Authorities

Office Decision 1139, 5 C.B. 84 (July-December
SI idiontlincihoratatibini nda ssantian nilsiteninieds 13, 15, 21
Rev. Proc. 67-6, 1967-1 C.B. 576 .............ccceeeeees 13
Rev. Rul. 70-262, 1970-1 C.B. 122 ..............0c0000 20
Rev. Rul. 72-34, 1972-1 C.B. 132-33 ................... 19
Rev. Rul. 74-69, 1974-1 C.B. 113 .................ee eee 21

Rev. Rul. 74-621, 1974-2 C.B. 405, first published in
SPIES BP covcesccccnsdpepesoucqnosscssocccnceneet 13

ERRATA

HILTON HOTELS CORPORATION (Parent Company)

%
Hilton

Hilton Service Corporation
Statler Dallas Corporation

Main and Holcombe Corporation
Hilton Reservation Equipment Company
Beverly Hilton Joint Venture
Dallas Hilton Joint Venture
Commerce Garage Joint Venture
Compass Computer Services, Inc.
D. C. Statler Hilton Joint Venture
Hilton Burns Kona Partnership
Hilton Hawaiian Village Joint Venture
Los Angeles Hilton Joint Venture
New York Hilton Joint Venture
Rye Hilton Joint Venture

San Francisco Hilton Joint Venture
Tarrytown Hilton Joint Venture
Washington Hilton Joint Venture
Logan Hilton Joint Venture
International Rivercenter
University Plaza Ltd.
Parsippany Hilton Joint Venture
Miami Hilton Airport Venture

sruuusessseseessesssess |

No. A-1115
Supreme Court of the United States

October Term, 1981

HiLTON HOTELS CORPORATION, successor to FLAMINGO
Petitioner,

UNITED STATES OF AMERICA,
Respondent.

Petition for Writ of Certiorari to the
United States Court of Appeals
for the Ninth Circuit.

OPINIONS BELOW.

The opinion of the United States Court of Appeals for
the Ninth Circuit is reported at 664 F.2d 1387 (9th Cir.
1982), and is set out at page | of the Appendix (hereinafter
cited as “‘App. ...."’).

The opinion of the United States District Court for the
District of Nevada is reported at 485 F. Supp. 926 (D. Nev.
1980), and is set out at App. 10.

GROUNDS FOR INVOKING THIS COURT’S JURISDICTION.

The decision of the United States Court of Appeals was
issued January 7, 1982. Plaintiff-appeilant timely filed a
Petition for Rehearing En Banc, which was denied by the
United States Court of Appeals in an order entered April
2, 1982. A copy of the order is set out at App. 38. On June

ath Dottie
23, 1982, Justice Rehnquist signed an order allowing Hilton
until July 26, 1982 to file this petition.

The jurisdiction of the Court is invoked under 28 U.S.C.
§ 1254(1).

CONSTITUTIONAL PROVISIONS, STATUTES,
AND REGULATIONS INVOLVED.

Section 446 of the Internal Revenue Code, 26 U.S.C.
§ 446, provides, in relevant part:

(a) General rule. — Taxable income shall be com-

puted under the methoa of accounting on the basis of

been regularly used by the taxpayer, or if the method
used does not clearly reflect income, the computation
of taxable income shall be made under such method
as, in the opinion of the Secretary, does clearly reflect
income.

(c) Permissible methods. — Subject to the provisions
of subsections (a) and (b), a taxpayer may compute
taxable income under any of the following methods of

(1) the cash receipts and disbursements method;

(2) an . ccrual method;

(3) any other method permitted by this chapter;
or

(4) any combination of the foregoing methods
permitted under regulations prescribed by the

Secretary.

Section 451 of the Internal Revenue Code, 26 U.S.C.
$ 451, provides, in relevant part:

(a) General rule. — The amount of any item of gross
income shall be included in the gross income for the
taxable year in which received by the taxpayer, unless,
under the method of accounting used in computing

es

taxable income, such amount is to be properly ac-
counted for as of a different period.

Treasury Regulation § 1 .446-1(c)(1)(ii) provides, in relevant
part:

(ii) Accrual method. Generally, under an accrual
method, income is to be included for the taxable year
when all the events have occurred which fix the right
to receive such income and the amount thereof can be
determined with reasonable accuracy. Under such a
method, deductions are allowable for the taxable year
in which all the events have occurred which establish
the fact of the liability giving rise to such deduction
and the amount thereof can be determined with rea-
sonable accuracy. The method used by the taxpayer
in determining when income is to be accounted for will
be acceptable if it accords with generally accepted
accounting principles, is consistently used by the tax-
payer from year to year, and is consistent with the
Income Tax Regulations.

Treasury Regulation § 1.451-1(a) provides, in relevant part:

(a) General rule. Gains, profits, and income are to
be included in gross income for the taxable year in
which they are actually or constructively received by
the taxpayer unless includible for a different year in
accordance with the taxpayer’s method of accounting.
Under an accrual method of accounting, income is
includible in gross income when all the events have
occurred which fix the right to receive such income
and the amount thereof can be determined with rea-
sonable accuracy.

STATEMENT OF THE CASE.

The Internal Revenue Service asserted a deficiency in the
income tax payments of Flamingo Resort, Inc., for the pe-
riod from August 17, 1967, the date of its incorporation,
. t0 December 31, 1967. Hilton later acquired Flamingo and

—4—

succeeded to its rights and liabilities for the period in ques-
tion, as well as subsequent wears. On December 22, 1975,
Hilton, on behalf of Flamingo, paid the asserted deficiency
together with interest, which amouuts to $265,034.34, and
filed a claim for a refund in the same amount. Following
the denial of this claim by the Internal Revenue Service,
this action in the name of Flamingo was commenced in the
District Court to recover the overpayment, pursuant to 28
U.S.C. § 1346(a)(1).

Flamingo was the legal, licensed owner and operator
of a gaming resort in Las Vegas, Nevada, known as the
Flamingo Hotel and Casino. During the time in question,
Flamingo operated games of chance as a regular and
substantial part of its legitimate business activity. Many
patrons gambled with chips obtained in return for either
cash or a ‘‘marker’’ in the amount of the chips transferred
to the patron. A ‘‘marker’’ is, in form, a promise to pay.
Because markers issued for gambling purposes are legally
unenforceable, these instruments simply ‘‘mark’’ the amount
of gaming credit extended to a patron.

Exchanges of cash or markers for chips occurred either
in the “‘pit’’ area, where tne games of chance were con-
ducted, or at the ‘‘cage,’’ an enclosed portion of the gaming
area with cashiers’ windows resembling tellers’ windows
in a bank. This distinction gives rise to markers being termed
**pit markers’’ or ‘‘cage markers,’’ depending upon where
such exchanges occurred.

Markers, the consideration for which is used in gambling,
as well as any instrument given in payment of a gambling
debt, are and always have been absolutely void and unen-
forceable: under Nevada law, even in the hands of a holder
in due course. Sandler v. District Court, 96 Nev. 622, 614
P.2d 10 (1980); Sea Air Support, Inc. v. Herrmann, 96
Nev. 574, 613 P.2d 413 - 1980); Corbin v. O'Keefe, 87

Ber ce

Nev. 189, 484 P.2d 565 (1971); Wolpert v. Knigh:, 74 Nev.
322, 330 P.2d 1023 (1958); Weisbrod v. Fremont Hotel,
74 Nev. 227, 326 P.2d 1104 (1958); West Indies v. First
Nat. Bank, 67 Nev. 13, 214 P.2d 144 (1950); Burke v.
Buck, 31 Nev. 74, 99 P. 1078 (1909); Evans v. Cook, 11
Nev. 69 (1876); Scott v. Courtney, 7 Nev. 419 (1872).
Consequently, Flamingo could not enforce collectior of
such markers anywhere. Intercontinental Hotels Corp.
(Puerto Rico) v. Golden, 254 N.Y.S.2d 527 (N.Y. 1964);
Dunes Hotel & Country Club of Las Vegas v. Mayo, 354
N.Y.S.2d 62 (N.Y. City Ct. 1974); Hamilton v. Abadjian,
179 P.2d 804 (Cal. 1947).

Flamingo reported taxable income on the accrual method
of accounting. In computing its income tax liability for
1967, Flamingo did not treat its unpaid markers as assets
or revenue for tax purposes. The Internal Revenue Service
did, and increased Flamingo’s income for the year by in-
cluding as ‘‘casino receivables’? unpaid markers in the
amount of $676,432 on hand on December 31, 1967, less
$130,721 which was treated as an addition to Flamingo’s
reserve for bad debts. Flamingo instituted the District Court
action to recover the additional tax it was compelled to pay
for the tax period in question as a result of this assessment.

'The Nevada Court has certain with
to instruments in form but asserted to have been executed

in ofa transaction. See Craig v. Harrah, 66 Nev.
1, 6, 201 P.2d 1081, 1084 (1949). Consequently, an instrument cashed
at a casino may be enforceable, if its maker fails to establish that

g
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Fy
Hit
¢

ocealisinen

by moving for summary judgment on all markers, contend-
ing that legal enforcesbility was irrelevant because the ex-
change of a marker for chips was, in essence, a loan from
Flamingo to its patron; that this ‘‘loan’’ and its subsequent
coliection, if collection occurred, were non-taxable events;
that when Flamingo won back chips ‘which te patron had
**borrowed’’) income was realized; and that the amount of
such ‘‘income’’ was measured by the amount of the marker.’
While these motions were under submission in the District
Court, the Government and an unrelated taxpayer were lit-
igating the identical legal issue on substantially identical
operative facts in the United States Tax Court. Desert
Palace, Inc. v. Commissioner, 72 T.C. 1033 (1979). In
Desert Palace, in which the Tax Court held for the taxpayer,
the Government unequivocally acknowledged that Flamingo
was correct in asserting that legal enforceability of a promise
to pay was eSScuc:2l to accrual of the promise as income.
In written response to questions posed by the Tax Court,
the Government stated.
Legal enforceability of casino receivables is a neces-
sary ingredient in determining when the petitioner’s
right to receive gambling income is fixed within the
meaning of Treas. Reg. § 1.446-1(c)(1)(ii). Under an
accrual method of accounting, income accrues only
when all the events have occurred which fix the tax-
payer’s right to receive such income. United States v.
Anderson, 269 U.S. 422 (1926); Spring City Co. v.
Commissioner, 292 U.S. 182 (1934). The unenforce-
ability of the gambling debts receivables affects the
accrual of income in that it presents a contingency
which precludes accrual of income under the all events

?The District Court eventually rejected of the Govern-
ng Resort. In. ¥- United Stes, F. Supp. 926, 937

ve 3

test of Treas. Reg. § 1.446-1(c)(1){ii). (Emphasis
added. ]
Tex Court’s Order, dated December 8, 1978, and Supple-
mental Brief for Respondent (the Government) in the Desert
Palace case, set out in full in the Appendix to this petition,
beginning at page 39 and page 40, respectively.

Thereafter, in this action in the District Court, the
Government reicerated this interpretation of the Treasury
Regulations involved:

The Desert Palace case deals with issues identical to
those in the instant case. It is true that the Goverisment
there argued that, due to the legal unenforceability of
pit markers, the taxpayer casino need not accrue in-
come upon the receipt of such markers. It is likewise
true that the Government there stipulated that outstand-
ing chips do not represent legal obligations of the ca-
sino. The latter point is a matter of Nevada law, and
we do not deviate in the slightest from those positions
in this case.
Reply Memorandum of Points and Authorities in Support
of the Government’s Cross-Motion for Summary Judgment,
set out in full in the Appendix beginning at page 43, at page
47 (emphasis by the Government).

Notwithstanding this construction of its own Treasury
Regulation by the Government in two independent cases,
the District Court held that ‘‘the income represented by
casino receivables is accruable under the ‘all events’ test’’
because ‘‘legal enforceability is not a necessary element of
a fixed right to receive income.’ Flamingo Resort, Inc. v.
United States, 485 F. Supp. 926, 939 (D. Nev. 1980). On
this basis the District Court granted summary judgment to
the Government.

Flamingo appealed. The Ninth Circuit Court of Appeals
affirmed, agreeing with the District Court that because

a

Flamingo had a ‘‘reasonable expectancy of collection’’ of
many of its markers, ‘‘accrual was proper despite the ab-
sence of legal enforceability.’’ Flamingo Resort, Inc. v.
United States, 664 F.2d 1387, 1388, 1390 (9th Cir. 1982).

Hilton Hotels Corporation, as successor in interest to
Flamingo, now petitions this Court to review this conclusion
by a Writ of Certiorari to the United States Court of Appeals
for the Ninth Circuit.

vr Wa
REASONS FOR ALLOWANCE JF THE WRIT.

1.

THE NINTH CIRCUIT HAS ABANDONED LEGAL ENFORCE-
ABILITY AS AN ESSENTIAL ELEMENT FOR THE
ACCRUAL OF INCOME, THEREBY CREATING A CON-
FLICT WITH PRIOR DECISIONS OF THIS COURT,
OTHER COURTS OF APPEAL, THE TAX COURT, AND
WITH THE LONG-STANDING POSITION OF THE
INTERNAL REVENUE SERVICE ON THE MEANING
AND APPLICATION OF THE ALL-EVENTS TEST.

The conflict just described is real, as demonstrated in the
following paragraphs.
A. Decisions of This Court.

More than fifty years ago, this Court enunciated the test
which governs accrual accounting for income tax purposes
to this day. In United States v. Anderson, 269 U.S. 422,
46 S.Ct. 131, 70 L.Ed. 347 (1926), the question presented
was the deductibility of a tax, which had not been assessed,
and thus was not yet duc and payable. Holding that a de-
duction was nevertheless proper, this Court observed that
In a technical legal sense it may be argued that a tax
does not accrue until it has been assessed and becomes
due; but it is also true that in advance of the assessment
of a tax, all of the events may occur which fix the
amount of the tax and determine the liability of the
taxpayer to pay it.

269 U.S. at 441.

Four years later the Court applied this ‘‘all-events’’ test
to the corresponding question of the accrual of income for
income tax purposes. In Lucas v. North Texas Lumber Co.,
281 U.S. 11, 50 S.Ct. 184, 74 L.Ed. 668 (1930), an ex-
ecutory contract for the saie and purchase of certain real
property was entered into prior to the end of the tax year.
Closing of the transaction, including payment of the pur-

ee ee

chase price, was contingent only on the exchange of the
necessary papers, but this did not occur until the next year.
As a result, this Court refused to permit the taxpayer (the
vendor) to accrue the income represented by the purchase
price of the property because ‘‘The title and right of pos-
session remained in [the vendor] until the transaction was
closed. Consequently, unconditional liability of vendee for
the purchase price was not created in that year.’’ 281 U.S.
at 13.

At all times since these two decisions, unconditional
liability of the debtor has been an unwavering requirement
for the accrual of income and deductions for tax purposes.
Thus in North American Oil Consolidated v. Burnet, 286
U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197 (1932), this Court
rejected the Government’s contention that income should
be accrued prior to the entry of a court decree vacating a
receivership. In the Court’s view, the decree would be nec-
essary to establish the ‘‘right in the [taxpayer] company to
demand’’ payment of profits paid to the receiver (the income
in dispute). 286 U.S. at 423 (emphasis added).

Two years later, in Spring City Foundry Co. v. Com-
missioner, 292 U.S. 182, 54 S.Ct. 644, 78 L.Ed. 1200
(1934), this Court required the accrual of an account re-
ceivable in full, even though a petition in bankruptcy had
been filed against the account debtor, saying: ‘‘Keeping
accounts and making returns on the accrual basis, as dis-
tinguished from the cash basis, import that it is the right
to receive and not the actual receipt that determines the
inclusion of the amount in gross income. When the right
to receive an amount becomes fixed, the right accrues.”’
292 U.S. at 184-185 (emphasis in original).

Consistent with Spring City Foundry this Court in United
States v. Safety Car Heating & Lighting Co., 297 U.S. 88,
56 S.Ct. 353, 80 L.Ed. 500 (1936), precluded an accrual

_——_—*

ilies

basis taxpayer from including income received as a result
of patent infringement litigation as taxable income for the
year in which its claim arose, reasoning that ‘‘the existence
of any liability was contested and uncertain’’ until the in-
fringement issue was decided and ‘‘[t]he amount remained
contested and uncertain’’ until several years later, ‘‘when
there was a settlemen. of the liability. . . . Then for the
first time the profits flowing from the ‘infrincement became
taxable as income.’’ 297 U.S. at 93-94

And in the same vein in Estate of Putnam v. Commis-
sioner, 324 U.S. 393, 65 S.Ct. 811, $9 L.Ed. 1023 (1945),
this Court refused to require accrual to a deceased taxpayer)
of a corporate dividend on the date « f its declaration because
the dividend was payable and paid ‘o stockholders of record
on a later date. Noting that the identity of the recipient was
thus not determined as of the date of declaration, this Court
observed: ‘‘Such uncertainty destroys any conception of
accrual as. involving a right to receive or an obligation to
pay, elements which we think are essential for accruals
under our decisions.’’ 324 U.S. at 400 (emphasis added).

That the Court’s repeated reference to ‘‘right to receive’’
in accrual cases means ‘‘legally enforceable right’’ is un-

- equivocally established by this Court’s recent decision in

United States v. Byrum, 408 U.S. 125, 92 $.Ct. 2382, 33
L.Ed.2d 238 (1972). In Byrum this Court considered the
meaning of “‘right . . . to designate’ in Section 2036 of
the Internal Revenue Code, 26 U.S.C. § 2036(a), and con-
cluded:
The term ‘right,’ certainly when used in a tax statute,
must be given its normal and customary meaning. It.
connotes an ascertainable and legally enforceable
power. . . . Here, the right ascribed to Byrum was the
power to use his majority position and influence over
the corporate directors to ‘regulate the flow of divi-

—_)

dends’ to the trust. That ‘right’ was neither ascertain-
able nor legally enforceable and hence was not a right
in any normal sense of that term.
408 U.S. at 136-137 (emphasis added).
In short, the Ninth Circuit's decision here is in conflict
with prior decisions of this Court regarding a core concept
of the income tax laws.

B. Long-sianding Interpretation by the IRS.

The principles set out in this Court’s opinions, which are
summarized above, are emboaied in Treasury Regulation
§ 1.446-1(c)(1)(ii), which states, in pertinent part:

Accrual method. Generally, under an accrual method,
income is to be included for the taxable year when all
the events have occurred which fix the right to receive
such income and the amount thereof can be determined
with reasonable accuracy. Under such a method, de-
ductions are allowable for the taxable year in which

~ all the events have occurred which establish the fact
of the liability giving rise to such deduction and the
amount thereof can be determined with reasonable
accuracy.

In the District Court in this case the Government re-
affirmed without qualification the interpretation of Treasury
Regulation § 1.446-1(c)(1)(ii), which it formally articulated
in writing in the Desert Palace case.

Legal enforceability of casino receivables is a neces-
sary ingredient in determining when the petitioner's
right to receive gambling income is fixed within the
meaning of Treas. Reg. § 1.446-1(c)(1)(ii). Under an
accrual method of accounting, income accrues only
when all the events have occurred which fix the tax-
payer’s right to receive such income. United States v.
Anderson, 269 U.S. 422 (1926); Spring City Co. v.
Commissioner, 292 U.S. 182 (1934). The unenforce-

—13—
ability of the gambling debts receivables affects the
accrual of income in that it presents a contingency
which prec ludes accrual of income under the all events
test of Treas. Reg. § 1.446-1(c)(1)(ii).
Supplemental Brief for Respondent in the Desert Palace
case, App. 41-42; see the Reply Memorandum of Points
and Authorities in Support of the Government's Cross-
Motion for Summary Judgment, in the District Court, App.
47.

The Government's position in the District Court in this
action and in the Tax Court in Desert Palace is a contin-
uation of and completely consistent with the position of the
Internal Revenue Service for the last sixty years. In 1921
the Bureau of Internal Revenue issued a public pronounce-
ment that a taxpayer who made usurious loans could not
report the interest income from the loan prior to the year
in which it was actually received because ‘‘the unpaid notes
held by him are not legal obligations of the makers and are
not collectible under due process of law.’’ Office Decision
1139, 5 C.B. 84 (July-December 1921). This Office De-
cision has never been said to be incorrect; it was not declared
obsolete until December 1974 (see Rev. Rul. 74-621, 1974-
2 C.B. 405, first published in 1974-52 LR.B. 14), despite
the directly contrary decisions, on identical facts, in Barker
v. Magruder, 95 F.2d 122 (D.C. Cir. 1938) and Barker v.
United States, 26 F. Supp. 1004 (Ct. Cl. 1939), relied upon
by the Ninth Circuit and the District Court in this case.’

Nor had the Service’s position changed by 1974, which
was seven years after the tax period involved here. In 1965

14

the Commissioner acquiesced in the key portion of the Tax
Court's decision in The Marquardt Corporation v. Com-
missioner, 39 T.C. 443 (1962), acq. 1965-2 C.B. 6, non-
acq. as to another issue, 1965-2 C.B. 7. In Marquardt
Corporation the Tax Court refused to require a taxpayer
customarily reimbursed by Boeing Aircraft Company for
cost overruns to accrue the reimbursements when the over-
runs occurred because Boeing was not legally obligated to
make such reimbursements under its contract with the tax-
payer. The Tax Court declared:

Under the accrual method of accounting, an item of
income accrues when the taxpayer h: _—sitixed uncon-
ditional right to receive it. It is the right to receive and
not the actual receipt of an amount which determines
its accruability. Spring City Co. v. Commissioner, 292
U.S. 182 (1934); Estate of Putnam v. Commissioner,
324 U.S. 393 (1945). Until the right to an amount
becomes accruable through the fixing of the right to
receive, the taxpayer is under no “ligation to return
it as income.

We are concerned with the facts as they existed on
December 31, 1953. [Citation omitted. ] As of that date,
petitioner had no fixed or unconditional right to receive
any sum in excess of that authorized by Boeing... .
There is little doubt that petitioner hoped and desired
that it would get paid. However, this is not the test of
accruability. The question is whether petitioner had a
fixed or unconditional right. Spring City Co. v. Com-

nt

The facts do not support this contention. Even if
petitioner had customarily overexpended, this unilat-
eral action would not fix Boeing’s obligation to pay,
the thing necessary to require accrual. . . . Further-
morc, respondent’s argument overlooks the fact that
the discretion to pay or not was in Boeing, not peti-
tioner.

39 T.C. at 451-452 (emphasis in original).

In view of the Commissioner’s acquiescence in this por-
tion of Marquardt Corporation, the Government's inter-
pretation of Treasury Regulation § 1.446-1(c)(1){ii) pre-
sented in this case to the District Court, and to the Tax
Court in Desert Palace, represents a position the Commis-
sioner has maintained for over 60 years, since first asserting
it in O.D. 1139, 5 C.B. 84 (July-December 1921), five
years prior to this Court’s decision in United States v.
Anderson, supra. The Ninth Circuit’s opinion is in irrec-
oncilable conflict with this long-standing administrative
interpretation and appears to ignore this Court’s recent dec-
laration on the weight to be accorded the Commissioner’s
interpretation of his own regulation.

In Jewett v. Commissioner, ... U.S. ..., 102 S.Ct. 1082,
1090 (1982), this Court reviewed in depth the history of
Treasury Regulation § 25.2511-1(c), promulgated in 1958,
and adopted the Commissioner's position saying:

The Commissioner's interpretation of the regulation
has been consistent over the years and is entitled to
respect. This canon of construction, which generally
applies to the Commissioner’s interpretation of the In-
ternal Revenue Code, see Commissioner v. Portland
Cement Co. of Utah, 450 U.S. 156, 169, 67 L.Ed.2d
140, 101 S.Ct. 1037, is even more forceful when ap-

—l6o—
plied to the Commissioner’s interpretation of his own
regulation.
See also United States v. Leslie Salt Co., 350 U.S. 383,
396-397, 76 S.Ct. 416, 100 L.Ed. 441 (1956).

i.

THE NINTH CIRCUIT’S DECISION REQUIRES AN AD HOC,
UNCERTAIN, AND ADMINISTRATIVELY UNWORK-
ABLE APPROACH TO A CORE ISSUE OF THE INCOME
TAX LAWS, WHICH IS SIGNIFICANT TO MILLIONS OF
TAXPAYERS AND TO THE UNITED STATES TREAS-
URY.

The Tax Court decisions in Desert Palace and Marquardt
Corporation, discussed above, put that court in square con-
flict with the Ninth Circuit's decision in this case. Although
the Ninth Circuit opinion arises out of an industry operating
in only two states and on its face does not address the accrual
of deductions from income, it would be a grave mistake to
deem the opinion as being of little national significance, or
as having minimal impact on private compliance with, and
public administration of, the income tax laws. To the con-
trary, this is a case of profound significance in tax law and
to the Government and all accrual basis taxpayers. Four real

First, it is common knowledge that a great number of
taxpayers, including many of the Nation’s mavor businesses,
report income and expenses on the accrual basis. As a matter
of fact, every business which maintains an inventory for
sale must use the accrual method. Treasury Regulation
§ 1.446-1(c)(2)i).

Second, legal enforceability as a prerequisite to the
accrual of income is an issue of general concern. The issue
is not limited to casino gaming or to the banking industry
and its skirmishes with state usury laws. As demonstrated
by the Marquardt Corporation case (manufacturig), the

aw eS

issue may arise in any industry. The common, recurring
fact pattern is simply this: Payor, in its discretion, regularly
makes payments (without the legal obligation to do so) to
- an accrual basis taxpayer.

The ubiquity of this fact pattern leads to the third reason
this case is of great national significance: The long-
established approach to accrual of income — the approach
mandated by this Court’s opinions and the long-standing
interpretation of the Internal Revenue Service — is founded
on ‘legal enforceability.’’ That term has meaning, shape,
and substance to taxpayers in complying with the federal
tax laws and to the Internal Revenue Service in adminis-
tering them. Until the Ninth Circuit’s opinion, both tax-
payers and the Service had in the easily understood and
applied standard of ‘‘legal enforceability’’ a tool that cut
relatively cleanly between accrual and non-accrual and
which made for fairness and certainty, primary goals of the
tax laws. As pointed out in Security Flour Mills Co. v.
Commissioner, 321 U.S. 281, 285-286, 64 S.Ct. 596, 8
L.Ed. 725 (1944), the tax iaw must be neutral; exceptions
should not be made ‘‘for the benefit of the Government or
the taxpayer . . . because so to do would, in a given in-
stance, work a supposedly more equitable result to the Gov-
ernment or to the taxpayer.”’

In stark contrast, the Ninth Circuit’s approach is ad hoc,
uncertain, and administratively unworkable. Under the
Ninth Circuit’s newly-fashioned approach, an expectation
of payment can operate to elevate a taxpayer's legally unen-
forceable expectation to a ‘‘fixed right to receive’’: Fla-
mingo collected up to 96 percent of its markers; hence it
must accrue all markers. But what of 95 percent or 89
percent or 73 percent? How consistent must the payment
history be? No more than 5 percent deviation from the mean?

10 percent? 50 percent? And how long a payment history?

Six months, twelve months, five years? These questions
must be answered on a case-by-case basis under the Ninth
Circuit’s approach.“

The fourth reason for the belief that this case is significant
offers, in our opinion, the strongest justification for this
Court to review the Ninth Circuit’s decision: The decision
destroys the Government's ability to control and limit the
timing and character of deductions from income for business
expenses by accrual basis taxpayers. This could have a
devastating effect on the Treasury. The reasor for this result
is simple and irrefutable: Accrual of income and accrual of
deductions are simply two sides of the same coin; the same
principles which govern the accrual of income also govern
the accrual of expenses. Indeed, the venerable ‘‘all-
events’’ test and the notion that legal liability is a central
requirement for accrual accounting were first enunciated by
this Court in the context of the deductibility of expenses.
United States v. Anderson, supra; see also, United States
v. Consolidated Edison Co., 366 U.S. 380, 81 S.Ct. 1326,
6 L.Ed.2d 356 (1961); Security Flour Mills Co. v. Com-
missioner, 321 U.S. 281, 64 S.Ct. 596, 88 L.Ed. 725
(1944); Dixie Pine Products Co. v. Commissioner, 320 U.S.
516, 64 S.Ct. 364, 88 L.Ed. 270 (1944). In sum, if mere
expectations without legal enforceability require accrual of
income (as the Ninth Circuit held), they will also permit
accrual of deductions.°

That result of the Ninth Circuit’s opinion reveals two
glaring, significant flaws in the opinion. First, the decision

“We are not creating a parade of horribles here; nor is this mere
thetoric. This is the reality of the Ninth Circuit's decision.

*This will be the conclusion of not only creative and imaginative tax

, advisers, and but of the most conservative and literal

of group. This of the Ninth Circuit's opinion cannot be

ignored

icliees

is tlatly contrary to prior decisions of this Court and the
long-standing public interpretation of them by the Internal
Revenue Service, which permit deduction of only those
expenses which meet the all-events test, and which reject
the Ninth Circuit’s ‘‘mere expectations’’ concept. In Brown
v. Helvering, 291 U.S. 193, 54 S.Ct. 356, 78 L.Ed. 725
(1934), this Court rejected the deductibility of reserves for
anticipated refunds of insurance premiums due to policy
cancellations, saying that:

The liability . . . arising from expected future can-
cellations was not deductible from gross income be-
cause it was not fixed and absolute. In respect to no
particular policy written within the year could it be
known that it would de cancelled in a future year. Nor
could it be known that a definite percentage of all the
policies will be cancelled in the future years. Experi-
ence taught that there is a strong probability that many
of the policies written during the taxable year will be
so cancelled. But experience taught also that we are
not dealing here with certainties.

a bad debt deduction only if is a bona fide debt, also states: *‘A
bona fide debt is a debt which arises from a debtor-creditor relationship
ne ee ee aren oy Oe ee oe
minable sum of .”* (Emphasis -)

It would be , if not unconstitutional, to apply the Ninth
Circuit's opinion to require Flamingo to pay taxes on unenforceable

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—20—

In effect, the Ninth Circuit’s opinion in this case, if al-
lowed to stand, may overrule Brown v. Helvering and herald
the end of years of consistent application of the all-events
test, which is both fair and easily understood by taxpayers
and the Government. For the first time millions — if not
billions — of dollars of reserves for future expenses will
be deductible. Examples of such reserves for statistically
determinable expenses which would be deductible for the
first time, and the cases or Internal Revenue Service rulings
which heretofore have held such are not, include: reserve
for future warranty service [Bell Electric Co., 45 T.C. 158
(1965)]; reserve for self-insurers for future workmen’s com-
pensation claims [Thriftimart, Inc., 59 T.C. 598 (1973);
Revenue Ruling 70-262, 1970-1 C.B. 122}; reserve for
liability for accidents [Richmond Light & Railroad Co., 4
B.T.A. 91 (1926)]; reserve for future required maintenance
expense [World Airways, Inc., 62 T.C. 786 (1974), affd
564 F.2d 886 (9th Cir. 1977)]}; reserve by cargo carriers for
cargo loss and damage claims [Gateway Transportation
Co., Inc. v. United States, 77-1 U.S.T.C. 99131 (W.D.
Wis. 1976) (not officially reported)]; reserve by publishers
for returns of unsold books [/. J. Little & Ives & Co., T.C.
Memo 1966-1968]; reserve for returns of unsold magazines
from distributors [Readers’ Pub. Corp. v. United States,
40 F.2d 145 (Ct. Cl. 1930)); reserve for anticipated teaching
expenses under contracts for dance instruction [Villafranca
v. Commissioner, 359 F.2d 849 (6th Cir. 1966)]; reserve
for sales commission due when payment received from cus-
tomers [Reuben H. Donnelley Corp., 22 B.T.A. 175

eR

(1931)}; reserve for return of returnable bags [LaSalle Port-
land Cement Co., 4 B.T.A. 438 (1926)].’

In sum, the Ninth Circuit’s approach is in direct conflict
with the fundamental principles underlying both this Court’s
decision in Brown v. Helvering, supra, and the publicly
announced position of the Internal Revenue Service through
rulings, bulletins, and Treasury Regulations.

Because the Ninth Circuit’s opinion revlaces ‘‘legal en-
forceability’’ with ‘‘mere expectation’ as the definitive test
for the accrual of income and deductions, taxpayers will
now have a powerful device for manipulating the timing of
their deduction of business expenses’and for manipulating
the amount of taxes paid by them. We believe this unhappy
prospect was a major factor in causing the Internal Revenue
Service to adhere to “‘legal enforceability’ for 60 years of
consistent administrative interpretation and in this very case.
The Ninth Circuit simply ‘‘missed’’ this point and the pro-
found impact of its decision on the Federal fisc.

CONCLUSION.

For taxpayers in the Ninth Circuit, there no longer need
be a liability that is fixed, absolute, and certain for accrual
of income and the deduction of expenses. A strong prob-

"In Rev. Rul. 74-69, 1974-1 C.B. 113, the Internal Revenue Service
ee re are: sapere Saaans Wy > teins oe
chine operator could not be accrued as current expenses because payment
of them could not be legally enforced. The Service ruled that a gambling
machine operator who gave winning customers coupons redeemable in
merchandise from cooperating , whom the operator then paid
for the merchandise could not deduct the value of the coupons when
issued. The could deduct the value of the coupons only ‘“when

the liable to pay the participating merchant for
sundhandes GotS to endiemn Gee axaguns” Tien exued on toteaap
tion.

Inasmuch as Rev. Rul. 74-69 was issued in the same year that Office
Decision 1139 was declared obsolete, see page 11, supra, for discussion,
it is clear that the Commissioner did not change his insistence on legal
enforceability as a prerequisite to accrual.

ia.

ability, a mere ‘‘expectation,’’ may now require accrual,
depending on a factfinder’s conclusion on the presence or
absence, according to the Ninth Circuit, of ‘‘unique facts
and practical considerations.’’ 664 F.2d at 1389. This is not
the way in which the tax laws can be meaningfully acted
on by taxpayers or applied by the Internal Revenue Service,
nor should it be.

This Court should grant a Writ of Certiorari to the United
States Court of Appeals for the Ninth Circuit to review its
decision in this case.

Respectfully submitted,
LIONEL SAWYER & COLLINS
and
LEVENFELD, EISENBERG, JANGER,
GLASSBERG AND LIPPITZz
By STEVE Morris

Attorneys for Petitioner.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0746%3A1. Public record. Not legal advice.