There is apparently a wide diversity in practice regarding the manner in which a casino operator accounts for slot-machine and other jackpots. With the issuance of Accounting Standards Update No. 2010-16, Accounting for Casino Jackpot Liabilities, the Financial Accounting Standards Board has introduced a welcome degree of uniformity to this issue.
The ASU provides that an entity shall accrue a liability, and charge a jackpot, at the time the entity has the obligation to pay the jackpot. Some slot machines, the ASU notes, may contain “base” jackpots. An entity may be able to avoid the payment of a base jackpot, for example, by removing the machine from play. Accordingly, no liability associated with the base jackpot is recognized in such cases until the entity has the obligation to pay the base jackpot. This is the case even if the entity has no plan or intention of removing the machine from play and fully expects the base jackpot to be won.
Some slot machines include “progressive” jackpots. Those are machines in which the value of the jackpot increases with every game played. Entities in many gaming jurisdictions cannot avoid payment of the portion of the progressive jackpot that is incremental to the base jackpot. That’s because the gaming regulators consider such incremental portions of prizes to be funded by customers, and therefore are required to be paid out. In these cases, the incremental portion of the jackpot should be accrued as a liability at the time of funding (that is, play) by its customers.
These rules will be operative with respect to fiscal years (and interim periods within such fiscal years) beginning on or after December 15, 2010. Moreover, an entity shall apply this guidance with a “cumulative effect” adjustment recorded in retained earnings in the period of adoption of such guidance.
Tax Accounting for Jackpots
When does the jackpot liability accrue for tax purposes? This issue was addressed by the Supreme Court in United States v. Hughes Properties, Inc., 476 US 593 (1986). There, the taxpayer owned and operated slot machines at its casinos, including a number of progressive machines. A progressive machine pays a fixed amount when certain symbol combinations appear on its reels. But a progressive machine has an additional progressive jackpot which is won only when a different combination of symbols appears. The casino initially sets these jackpots at a minimal amount. The figure increases, progressively, as money is gambled on the machine. The amount of the jackpot at any given time is registered on a “payoff indicator” on the face of the machine.
At the conclusion of each fiscal year, the taxpayer entered the total of the progressive-jackpot amounts shown on the payoff indicators as an accrued liability. From that total, it subtracted the corresponding figure for the preceding year to produce the current year’s increase in accrued liability. On its tax return, the taxpayer asserted this net figure as a deduction. The Internal Revenue Service disallowed the deduction. In its view, the taxpayer’s obligation to pay a progressive jackpot “matures” only upon a winning patron’s “pull of the handle” in the future. From the perspective of the IRS, until that event occurs, the taxpayer’s liability is merely contingent. However, both the Claims Court and the Court of Appeals for the Federal Circuit ruled in favor of the taxpayer. The Supreme Court sided with the taxpayer as well.