U.S. Supreme Court Commissioner v. Kowalski, 434 U.S.
77 (1977) Commissioner of Internal Revenue v.
Kowalski No. 76-1095 Argued October 12,
1977 Decided November 29,
1977 434 U.S.
77 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE THIRD
CIRCUIT Syllabus New Jersey provides a cash meal allowance for its state police
troopers, which is paid biweekly in advance in an amount varying
with the trooper's rank and is included, although separately
stated, with his salary and in his gross pay for purposes of
calculating pension benefits. Although troopers are required to
remain on call in their assigned patrol areas during their midshift
break, they are not required to eat lunch at any particular
location, and indeed may eat at home, nor are they required to
spend the meal allowance on food. No reduction in the allowance is
made for periods when a trooper is not on patrol. Respondents, a
trooper and his wife, included only a part of the meal allowances
received by the trooper in their 1970 federal income tax return,
and the Commissioner assessed a deficiency with respect to the
remainder. The respondents argued in the Tax Court that the
allowance was not income within § 61(a) of the Internal Revenue
Code of 1954, which defines gross income as "all income from
whatever source derived, including (but not limited to) . . . (1)
Compensation for services, including fees, commissions, and similar
items." In the alternative, they argued that the allowances were
excludable from § 61 income because of § 119 of the Code, which
creates an exclusion for

															"the value of any meals . . . furnished to [an employee] by his
employer for the convenience of the employer, but only if . . . the
meals are furnished on the business premises of the employer,"

															and further provides that,

															"[in] determining whether meals are furnished . . . for the
convenience of the employer, the provisions of an employment
contract or of a State statute fixing terms of employment shall not
be determinative of whether the meals . . . are intended as
compensation."

															The Tax Court rejected both contentions, but the Court of
Appeals reversed. Held: 1. In the absence of a specific exemption, the cash meal
allowance payments are included in gross income under § 61(a),
since they are "undeniabl[y] accessions to wealth, clearly
realized, and over which the [trooper has] complete dominion." Commissioner v. Glenshaw Glass Co., 348 U.
S. 426 , 348 U. S. 431 .
Pp. 434 U. S.
82 -84.

															2. The payments are not subject to exclusion from gross income
under Page 434 U. S. 78 § 119, since § 119, by its terms, covers meals furnished by the
employer, and not cash reimbursements for meals. P. 434 U. S.
84 .

															3. No specific exemption for the payments can be claimed on the
basis of the once-recognized doctrine that benefits conferred by an
employer on an employee "for the convenience of the employer" are
not income within the meaning of the Internal Revenue Code, since
it appears from the legislative history of § 119 that it was
intended comprehensively to modify the prior law, both expanding
and contracting the exclusion for meals previously provided, and
therefore it must be construed as a replacement for the prior law,
designed to end the confusion that had developed respecting the
"convenience of the employer" doctrine as a determinant of the tax
status of meals. Pp. 434 U. S.
84 -95.

															544 F.2d 686, reversed.

															BRENNAN, J., delivered the opinion of the Court, in which
STEWART, WHITE, MARSHALL, POWELL, REHNQUIST, and STEVENS, JJ.,
joined. BLACKMUN, J., filed a dissenting opinion, in which BURGER,
C.J., joined, post, p. 434 U. S.
96 .

															MR. JUSTICE BRENNAN delivered the opinion of the Court.

															This case presents the question whether cash payments to state
police troopers, designated as meal allowances, are included in
gross income under § 61(a) of the Internal Revenue Code of 1954, 26
U.S.C. § 61(a), [ Footnote 1 ]
and, if so, are otherwise excludable under § 119 of the Code, 26
U.S.C. § 119. [ Footnote 2 ] Page 434 U. S. 79 I The pertinent facts are not in dispute. Respondent [ Footnote 3 ] is a state police trooper
employed by the Division of State Police of the Department of Law
and Public Safety of the State of New Jersey. During 1970, the tax
year in question, he received a base salary of $8,739.38, and an
additional $1,697.54 [ Footnote
4 ] designated as an allowance for meals.

															The State instituted the cash meal allowance for its state
police officers in July, 1949. Prior to that time, all troopers
were provided with midshift [ Footnote 5 ] meals in kind at various meal stations located
throughout the State. A trooper unable to eat at an official meal
station could, however, eat at a restaurant and obtain
reimbursement. The meal station system proved unsatisfactory to the
State because it required troopers to leave their assigned areas of
patrol unguarded for extended Page 434 U. S. 80 periods of time. As a result, the State closed its meal stations
and instituted a cash allowance system. Under this system, troopers
remain on call in their assigned patrol areas during their midshift
break. Otherwise, troopers are not restricted in any way with
respect to where they may eat in the patrol area and, indeed, may
eat at home if it is located within that area. Troopers may also
bring their midshift meal to the job and eat it in or near their
patrol cars.

															The meal allowance is paid biweekly in advance and is included,
although separately stated, with the trooper's salary. The meal
allowance money is also separately accounted for in the State's
accounting system. Funds are never commingled between the salary
and meal allowance accounts. Because of these characteristics of
the meal allowance system, the Tax Court concluded that the "meal
allowance was not intended to represent additional compensation."
65 T.C. 44, 47 (1975).

															Notwithstanding this conclusion, it is not disputed that the
meal allowance has many features inconsistent with its
characterization as a simple reimbursement for meals that would
otherwise have been taken at a meal station. For example, troopers
are not required to spend their meal allowances on their midshift
meals, nor are they required to account for the manner in which the
money is spent. With one limited exception not relevant here,
[ Footnote 6 ] no reduction in
the meal allowance is made for periods when a trooper is not on
patrol because, for example, he is assigned to a headquarters
building or is away from active duty on vacation, leave, or sick
leave. In addition, the cash allowance for meals is described on a
state police recruitment brochure as an item of salary to be
received in addition to an officer's base salary and the amount of
the meal allowance is a subject of negotiations between the State
and the police troopers' union. Finally, the amount of an
officer's Page 434 U. S. 81 cash meal allowance varies with his rank, [ Footnote 7 ] and is included in his gross pay for
purposes of calculating pension benefits.

															On his 1970 income tax return, respondent reported $9,066 in
wages. That amount included his salary plus $326.45 which
represented cash meal allowances reported by the State on
respondent's Wage and Tax Statement (Form W-2). [ Footnote 8 ] The remaining amount of meal
allowance, $1,371.09, was not reported. On audit, the Commissioner
determined that this amount should have been included in
respondent's 1970 income, and assessed a deficiency.

															Respondent sought review in the United States Tax Court, arguing
that the cash meal allowance was not compensatory, but was
furnished for the convenience of the employer, and hence was not
"income" within the meaning of § 61(a), and that, in any case, the
allowance could be excluded under § 119. In a reviewed decision,
the Tax Court, with six dissents, [ Footnote 9 ] held that the cash meal payments were income
within the meaning of § 61 and, further, that such payments were
not excludable under § 119. [ Footnote 10 ] 65 T. C 44 (1975). The Court of Appeals
for Page 434 U. S. 82 the Third Circuit, in a per curiam opinion, held that its
earlier decision in Saunders v. Commissioner, 215 F.2d 768
(1954), which determined that cash payments under the New Jersey
meal allowance program were not taxable, required reversal. 544
F.2d 686 (1976). We granted certiorari to resolve a conflict among
the Courts of Appeals on the question. [ Footnote 11 ] 430 U.S. 944 (1977). We reverse. II A The starting point in the determination of the scope of "gross
income" is the cardinal principle that Congress in creating the
income tax intended "to use the full measure of its taxing power." Helvering v. Clifford, 309 U. S. 331 , 309 U. S. 334 (1940); accord, Helvering v. Midland Mutual Life Ins. Co., 300 U. S. 216 , 300 U. S. 223 (1937); Douglas v. Willcuts, 296 U. S.
1 , 296 U. S. 9 (1935); Irwin v. Gavit, 268 U. S. 161 , 268 U. S. 166 (1925). In applying this principle to the construction of § 22(a)
of the Internal Revenue Code of 1939, [ Footnote 12 ] this Court stated that

															"Congress applied no limitations as to the source of taxable
receipts, nor restrictive labels as to their nature[, but intended]
to tax all Page 434 U. S. 83 gains except those specifically exempted." Commissioner v. Glenshaw Glass Co., 348 U.
S. 426 , 348 U. S.
429 -430 (1955), citing Commissioner v.
Jacobson, 336 U. S. 28 , 336 U. S. 49 (1949), and Helvering v. Stockholms Enskilda, Bank, 293 U. S. 84 , 293 U. S. 87 -91
(1934). Although Congress simplified the definition of gross income
in § 61 of the 1954 Code, it did not intend thereby to narrow the
scope of that concept. See Commissioner v. Glenshaw lass Co.,
supra at 348 U. S. 432 ,
and n. 11; H.R.Rep. No. 1337, 83d Cong., 2d Sess., A18 (1954);
S.Rep. No. 1622, 83d Cong., 2d Sess., 168 (1954). [ Footnote 13 ] In the absence of a specific
exemption, therefore, respondent's meal allowance payments are
income within the meaning of § 61 since, like the payments involved
in Glenshaw Glass Co., the payments are "undeniabl[y]
accessions to wealth, clearly realized, and over which the
[respondent has] complete dominion." Commissioner v. Glenshaw
Glass Co., supra at 348 U. S. 431 . See also Commissioner v. LoBue, 351 U.
S. 243 , 351 U. S. 247 (1956); Van Rosen v. Commissioner, 17 T.C. 834, 83
(1951).

															Respondent contend,. however, that § 119 can be construed to be
a specific exemption covering the meal allowance payments to New
Jersey troopers. Alternatively, respondent argues that
notwithstanding § 119, a specific exemption may be found in a line
of lower court cases and administrative rulings which recognize
that benefits conferred by an employer on an employee "for the
convenience of the employer" -- at least when such benefits are not
"compensatory" -- are not income within the meaning of the Internal
Revenue Code. In responding to these contentions, we turn first to
§ 119. Since we hold that § 119 does not cover cash payments of any
kind, we then trace the development over several decades of the
"convenience of the employer" doctrine as a determinant Page 434 U. S. 84 of the tax status of meals and lodging, turning finally to the
question whether the doctrine as applied to meals and lodging
survives the enactment of the Internal Revenue Code of 1954. B Section 119 provides that an employee may exclude from
income

															"the value of any meals . . . furnished to him by his employer
for the convenience of the employer, but only if . . . the meals
are furnished on the business premises of the employer. . . ."

															By its terms, § 119 covers meals furnished by the employer, and
not cash reimbursements for meals. This is not a mere oversight. As
we shall explain at greater length below, the form of § 119 which
Congress enacted originated in the Senate and the Report
accompanying the Senate bill is very clear: "Section 119 applies
only to meals or lodging furnished in kind." S.Rep. No. 1622, 83d
Cong., 2d Sess., 190 (1954). See also Treas.Reg. §
1.119-1(c)(2), 26 CFR § 1.119-1 (1977). Accordingly, respondent's
meal allowance payments are not subject to exclusion under §
119. C The "convenience of the employer" doctrine is not a tidy one.
The phrase "convenience of the employer" first appeared in O. D.
265, 1 Cum.Bull. 71 (1919), in a ruling exempting from the income
tax board and lodging furnished seamen aboard ship. The following
year, T. D. 2992, 2 Cum.Bull. 76 (1920), was issued, and added a
"convenience of the employer" section to Treas.Regs. 45, Art. 33,
the income tax regulations then in effect. [ Footnote 14 ] As modified, Art. 33 stated:

															"Art. 33. Compensation paid other than in cash. . . .
When living quarters such as camps are furnished to Page 434 U. S. 85 employees for the convenience of the employer, the ratable value
need not be added to the cash compensation of the employee, but
where a person receives as compensation for services rendered a
salary and in addition thereto living quarters, the value to such
person of the quarters furnished constitutes income subject to tax.
. . ."

															While T. D. 2992 extended the "convenience of the employer" test
as a general rule solely to items received in kind, O.D. 514, 2
Cum.Bull. 90 (1920), extended the "convenience of the employer"
doctrine to cash payments for "supper money." [ Footnote 15 ]

															The rationale of both T. D. 2992 and O.D. 514 appears to have
been that benefits conferred by an employer on an employee in the
designated circumstances were not compensation for services, and
hence not income. Subsequent rulings equivocate on whether the
noncompensatory character of a benefit could be inferred merely
from its characterization by the employer, or whether there must be
additional evidence that employees are granted a benefit solely
because the employer's business could not function properly unless
an employee was furnished that benefit on the employer's premises.
O.D. 514, for example, focuses only on the employer's
characterization. [ Footnote
16 ] Two rulings issued in 1921, however, Page 434 U. S. 86 dealing respectively with cannery workers [ Footnote 17 ] and hospital employees, [ Footnote 18 ] emphasize the necessity
of the benefits to the functioning of the employer's business, and
this emphasis was made the authoritative interpretation of the
"convenience of the employer" provisions of the regulations in Mim.
5023, 1940-1 Cum.Bull. 14. [ Footnote 19 ]

															Adding complexity, however, is Mim. 6472, 1950-1 Cum.Bull. 15,
issued in 1950. This mimeograph states in relevant part:

															"The 'convenience of the employer' rule is simply an
administrative test to be applied only in cases in which the
compensatory character of . . . benefits is not otherwise
determinable. It follows that the rule should not be applied in any
case in which it is evident from the other circumstances involved
that the receipt of quarters or meals by the employee represents
compensation for services rendered." Ibid. Page 434 U. S. 87 Mimeograph 6472 expressly modified all previous rulings which
had suggested that meals and lodging could be excluded from income
upon a simple finding that the furnishing of such benefits was
necessary to allow an employee to perform his duties properly.
[ Footnote 20 ] However, the
ruling apparently did not affect O.D. 514, which, as noted above,
creates an exclusion from income based solely on an employer's
characterization of a payment as noncompensatory.

															Coexisting with the regulations and administrative
determinations of the Treasury, but independent of them, is a body
of case law also applying the "convenience of the employer" test to
exclude from an employee's statutory income benefits conferred by
his employer.

															An early case is Jones v. United States, 60 Ct.Cl. 552
(1925). There, the Court of Claims ruled that neither the value of
quarters provided an Army officer for nine months of a tax year nor
payments in commutation of quarters paid the officer for the
remainder of the year were includable in income. The decision
appears to rest both on a conclusion that public quarters, by
tradition and law, were not "compensation received as such" within
the meaning of § 213 of the Revenue Act of 1921, 42 Stat. 237, and
also on the proposition that "public quarters for the housing of .
. . officers is as much a military necessity as the procurement of
implements of warfare or the training of troops." 60 Ct.Cl. at 569; see id. at 565-568. The Court of Claims, in addition,
rejected the argument that money paid in commutation of quarters
was income on the ground that it was not "gain derived . . . from
labor" within the meaning of Eisner v. Macomber, 252 U. S. 189 (1920), but apparently was, at most, a reimbursement to the officer
for furnishing himself with a necessity of his job in those
instances in which the Government found it convenient to leave the
task of procuring quarters to an individual officer. 60 Ct.Cl. at
574-578. Page 434 U. S. 88 Subsequent judicial development of the "convenience of the
employer" doctrine centered primarily in the Tax Court. In two
reviewed cases decided more than a decade apart, Benagli v.
Commissioner, 36 B.T.A. 838 (1937), and Van Rosen v.
Commissioner, 17 T.C. 834 (1951), that court settled on the
business necessity rationale for excluding food and lodging from an
employee's income. [ Footnote
21 ] Van Rosen's unanimous decision is of particular
interest in interpreting the legislative history of the 1954
recodification of the Internal Revenue Code, since it predates that
recodification by only three years. There, the Tax Court expressly
rejected any reading of Jones, supra, that would make tax
consequences turn on the intent of the employer, even though the
employer in Van Rosen, as in Jones, was the
United States, and, also as in Jones, the subsistence
payments involved in the litigation were provided by military
regulation. [ Footnote 22 ] In
addition, Van Rosen refused to follow Page 434 U. S. 89 the Jones holding with respect to cash allowances,
apparently on the theory that a civilian who receives cash
allowances for expenses otherwise nondeductible has funds he can
"take, appropriate, use and expend," 17 T.C. at 838, in
substantially the same manner as "any other civilian employee whose
employment is such as to permit him to live at home while
performing the duties of his employment." Id. at 836; see id. at 839-840. It is not clear from the opinion
whether the last conclusion is based on notions of equity among
taxpayers or is simply an evidentiary conclusion that, since Van
Rosen was allowed to live at home while performing his duties,
there was no business purpose for the furnishing of food and
lodging.

															Two years later, the Tax Court, in an unreviewed decision in Doran v. Commissioner, 21 T.C. 374 (1953), returned in
part to the "employer's characterization" rationale rejected by Van Rosen. In Doran, the taxpayer was furnished
lodging in kind by a state school. State law required the value of
the lodging to be included in the employee's compensation. Although
the court concluded that the lodging was furnished to allow the
taxpayer to be on 24-hour call, a reason normally sufficient to
justify a "convenience of the employer" exclusion, [ Footnote 23 ] it required the value of the
lodging to be included in income on the basis of the
characterization of the lodging as compensation under state law.
The approach taken in Doran is the same as that in Mim.
6472, supra. [ Footnote
24 ] However, the Court of Appeals for the Second Circuit, in Diamond v. Sturr, 221 Page 434 U. S. 90 F.2d 264 (1955), on facts indistinguishable from Doran, reviewed the law prior to 1954 and held that the business necessity
view of the "convenience of the employer"' test, "having persisted
through the interpretations of the Treasury and the Tax Court
throughout years of reenactment of the Internal Revenue Code," was
the sole test to be applied. 221 F.2d at 268. D Even if we assume that respondent's meal allowance payments
could have been excluded from income under the 1939 Code pursuant
to the doctrine we have just sketched, we must nonetheless inquire
whether such an implied exclusion survives the 1954 recodification
of the Internal Revenue Code. Cf. Helvering v. Winmill, 305 U. S. 79 , 305 U. S. 83 (1938. Two provisions of the 1954 Code are relevant to this
inquiry: § 119 and § 120, [ Footnote 25 ] now repealed, [ Footnote 26 ] which allowed police officers to exclude
from income subsistence allowances of up to $5 per day.

															In enacting § 119, the Congress was determined to "end the
confusion as to the tax status of meals and lodging furnished an
employee by his employer." H.R.Rep. No. 1337, 83d Cong., 2d Sess.,
18 (19;4); S.Rep. No. 1622, 83d Cong., 2d Sess., 19 (1954).
However, the House and Senate initially Page 434 U. S. 91 differed on the significance that should be given the
"convenience of the employer" doctrine for the purposes of § 119.
As explained in its Report, the House proposed to exclude meals
from gross income

															"if they [were] furnished at the place of employment and the
employee [was] required to accept them at the place of employment
as a condition of his employment."

															H.R.Rep. No. 1337, supra, at 18; see H.R.
8300, 83d Cong., 2d Sess., § 119 (1954). Since no reference
whatsoever was made to the concept, the House view apparently was
that a statute "designed to end the confusion as to the tax status
of meals and lodging furnished an employee by his employer"
required complete disregard of the "convenience of the employer"
doctrine.

															The Senate, however, was of the view that the doctrine had at
least a limited role to play. After noting the existence of the
doctrine and the Tax Court's reliance on state law to refuse to
apply it in Doran v. Commissioner, supra, the Senate
Report states:

															"Your committee believes that the House provision is ambiguous
in providing that meals or lodging furnished on the employer's
premises, which the employee is required to accept as a condition
of his employment, are excludable from income whether or not
furnished as compensation. Your committee has provided that the
basic test of exclusion is to be whether the meals or lodging are
furnished primarily for the convenience of the employer (and thus
excludable), or whether they were primarily for the convenience of
the employee (and therefore taxable). However, in deciding whether
they were furnished for the convenience of the employer, the fact
that a State statute or an employment contract fixing the terms of
the employment indicate the meals or lodging are intended as
compensation is not to be determinative. This means that employees
of State institutions who are required to live and eat on the
premises will not be taxed Page 434 U. S. 92 on the value of the meals and lodging even though the State
statute indicates the meals and lodging are part of the employee's
compensation."

															S.Rep. No. 1622, supra, at 19. In a technical appendix,
the Senate Report further elaborated:

															"Section 119 applies only to meals or lodging furnished in kind.
Therefore, any cash allowances for meals or lodging received by an
employee will continue to be includible in gross income to the
extent that such allowances constitute compensation." Id. at 190-191.

															After conference, the House acquiesced in the Senate's version
of § 119. Because of this, respondent urges that § 119, as passed,
did not discard the "convenience of the employer" doctrine, but
indeed endorsed the doctrine shorn of the confusion created by Mim.
6472 and cases like Doran. Respondent further argues that,
by negative implication, the technical appendix to the Senate
Report creates a class of noncompensatory cash meal payments that
are to be excluded from income. We disagree.

															The Senate unquestionably intended to overrule Doran and rulings like Mim. 6472. Equally clearly, the Senate refused
completely to abandon the "convenience of the employer" doctrine as
the House wished to do. On the other hand, the Senate did not
propose to leave undisturbed the convenience of the employer
doctrine as it had evolved prior to the promulgation of Mim. 6472.
The language of § 119 [ Footnote
27 ] quite plainly rejects the reasoning behind rulings like
O.D. 514, see n. 15, supra, which rest on the
employer's characterization of the nature of a payment. [ Footnote 28 ] This conclusion is
buttressed Page 434 U. S. 93 by the Senate's choice of a term of art, "convenience of the
employer," in describing one of the conditions for exclusion under
§ 119. In so choosing, the Senate obviously intended to adopt the
meaning of that term as it had developed over time, except, of
course, to the extent § 119 overrules decisions like Doran. As we have noted above, Van Rosen v.
Commissioner, 17 T.C. 834 (1951), provided the controlling
court definition at the time of the 1954 recodification, and it
expressly rejected the Jones theory of "convenience of the
employer" -- and, by implication, the theory of O.D. 514 -- and
adopted as the exclusive rationale the business necessity theory. See 17 T.C. at 838-840. The business necessity theory was
also the controlling administrative interpretation of "convenience
of the employer" prior to Mim. 6472. See supra at 434 U. S. 85 -86,
and n 19. Finally, although
the Senate Report did not expressly define "convenience of the
employer," it did describe those situations in which it wished to
reverse the courts and create an exclusion as those where "an
employee must accept . . . meals or lodging in order properly to
perform his duties." S.Rep. No. 1622, supra, at 19.

															As the last step in its restructuring of prior law, the Senate
adopted an additional restriction, created by the House and not
theretofore a part of the law, which required that meals subject to
exclusion had to be taken on the business premises of the employer.
Thus, § 119 comprehensively modified the prior law, both expanding
and contracting the exclusion for meals and lodging previously
provided, and it must therefore be construed as its draftsmen
obviously intended it to be -- as a replacement for the prior law,
designed to "end [its] confusion."

															Because § 119 replaces prior law, respondent's further argument
-- that the technical appendix in the Senate Report Page 434 U. S. 94 recognized the existence under § 61 of an exclusion for a class
of noncompensatory cash payments -- is without merit. If cash meal
allowances could be excluded on the mere showing that such payments
served the convenience of the employer, as respondent suggests,
then cash would be more widely excluded from income than meals in
kind, an extraordinary result given the presumptively compensatory
nature of cash payments and the obvious intent of § 119 to narrow
the circumstances in which meals could be excluded. Moreover, there
is no reason to suppose that Congress would have wanted to
recognize a class of excludable cash meal payments. The two
precedents for the exclusion of cash -- O.D. 514 and Jones v.
United States -- both rest on the proposition that the
convenience of the employer can be inferred from the
characterization given the cash payments by the employer, and the
heart of this proposition is undercut by both the language of § 119
and the Senate Report. Jones also rests on Eisner v.
Macomber, 252 U. S. 189 (1920), but Congress had no reason to read Eisner's definition of income into § 61 and, indeed, any assumption that
Congress did is squarely at odds with Commissioner v. Glenshaw
Glass Co., 348 U. S. 426 (1955). [ Footnote 29 ] See id. at 348 U. S.
430 -431. Finally, as petitioner suggests, it is much
more reasonable to assume that the cryptic statement in the
technical appendix -- "cash allowances . . . will continue to be
includable in gross income to the extent that such allowances
constitute compensation" -- was meant to indicate Page 434 U. S. 95 only that meal payments otherwise deductible under § 162(a)(2)
of the 1954 Code [ Footnote
30 ] were not affected by § 119.

															Moreover, even if we were to assume with respondent that cash
meal payments made for the convenience of the employer could
qualify for an exclusion notwithstanding the express limitations
upon the doctrine embodied in § 119, there would still be no reason
to allow the meal allowance here to be excluded. Under the pre-1954
"convenience of the employer" doctrine, respondent's allowance is
indistinguishable from that in Van Rosen v. Commissioner,
supra, and hence it is income. Indeed, the form of the meal
allowance involved here has drastically changed from that passed on
in Saunders v. Commissioner, 215 F.2d 768 (CA3 1954),
relied on by the Third Circuit below see supra at 434 U. S. 82 ,
and, in its present form, the allowance is not excludable even
under Saunders' analysis. [ Footnote 31 ] In any case, to avoid the completely
unwarranted result of creating a larger exclusion for cash than
kind, the meal allowances here would have to be demonstrated to be
necessary to allow respondent "properly to perform his duties."
There is not even a suggestion on this record of any such
necessity.

															Finally, respondent argues that it is unfair that members of the
military may exclude their subsistence allowances from income,
while respondent cannot. While this may be so, arguments of equity
have little force in construing the boundaries Page 434 U. S. 96 of exclusions and deductions from income many of which, to be
administrable, must be arbitrary. In any case, Congress has already
considered respondent's equity argument and has rejected it in the
repeal of § 120 of the 1954 Code. That provision, as enacted,
allowed state troopers like respondent to exclude from income up to
$5 of subsistence allowance per day. Section 120 was repealed after
only four years, however, because it was

															"inequitable, since there are many other individual taxpayers
whose duties also require them to incur subsistence expenditures
regardless of the tax effect. Thus, it appears that certain police
officials, by reason of this exclusion, are placed in a more
favorable position tax-wise than other individual income taxpayers
who incur the same types of expense. . . ."

															H.R.Rep. No. 775, 85th Cong., 1st Sess., 7 (1957). Reversed. [ Footnote 1 ]

															"§ 61. Gross income defined."

															"(a) General definition."

															"Except as otherwise provided in this subtitle, gross income
means all income from whatever source derived, including (but not
limited to) the following items:"

															"(1) Compensation for services, including fees, commissions, and
similar items. . . ."

															[ Footnote 2 ]

															"§ 119. Meals or lodging furnished for the convenience of the
employer."

															"There shall be excluded from gross income of an employee the
value of any meals or lodging furnished to him by his employer for
the convenience of the employer, but only if -- "

															"(1) in the case of meals, the meals are furnished on the
business premises of the employer. . . . "

															"In determining whether meals . . . are furnished for the
convenience of the employer, the provisions of an employment
contract or of a State statute fixing terms of employment shall not
be determinative of whether the meals or lodging are intended as
compensation."

															[ Footnote 3 ]

															References to "respondent" are to Robert J. Kowalski. Nancy A.
Kowalski, also a respondent, is a party solely because she filed a
joint return with her husband for the 1970 tax year.

															[ Footnote 4 ]

															Respondent was entitled to $1,740 in meal allowances, see n 7, infra, but, for reasons not disclosed by the record,
received the lesser amount.

															[ Footnote 5 ]

															While on active duty, New Jersey troopers are generally required
to live in barracks. Meals furnished in kind at the barracks before
or after a patrol shift are not involved in this case. Nor is the
meal allowance intended to pay for meals eaten before or after a
shift in those instances in which the trooper is not living in the
barracks. However, because of the duration of some patrols, a
trooper may be required to eat more than one meal per shift while
on the road.

															[ Footnote 6 ]

															The amount of the allowance is adjusted only when an officer is
on military leave.

															[ Footnote 7 ]

															Troopers, such as respondent, and other noncommissioned officers
received $1,740 per year; lieutenants and captains received $1,776,
majors $1,848, and the Superintendent $2,136.

															[ Footnote 8 ]

															On October 1, 1970, the Division of State Police began to
withhold income tax from amounts paid as cash meal allowances. No
claim has been made that the change in the Division's withholding
policy has any relevance for this case.

															[ Footnote 9 ]

															A seventh judge concurred in the majority opinion with respect
to §§ 61 and 119, but dissented on the ground that the meal
allowance was deductible under § 162(a) of the Code, see n 30, infra, as
"ordinary and necessary expenditures required as a part of
petitioner's duties." 65 T.C. at 63. Since respondent has not made
this contention here, we have no occasion to consider it.

															[ Footnote 10 ]

															The Tax Court also determined that amounts of meal allowance
attributable to respondent's expenses while "away from home" as
defined in § 162(a)(2) of the Code, see n 30, infra, were properly
deducted from respondent's income as travel expenses. See
United States v. Correll, 389 U. S. 299 (1967). The Commissioner did not appeal from this holding.

															[ Footnote 11 ] See Wilson v. United States, 412 F.2d 694 (CA1 1969)
(troopers' subsistence allowance taxable); United States v.
Keeton, 383 F.2d 429 (CA10 1967) (per curiam) (troopers'
subsistence allowance nontaxable); United States v.
Morelan, 356 F.2d 199 (CA8 1966) (same); United States v.
Barrett, 321 F.2d 911 (CA5 1963) (same); Magness v.
Commissioner, 247 F.2d 740 (CA5 1957) (troopers' subsistence
allowance taxable), cert. denied, 355 U.S. 931 (1958); Saunders v. Commissioner, 215 F.2d 768 (CA3 1954)
(troopers' meal allowance nontaxable). See also Ghastin v.
Commissioner, 60 T.C. 264 (1973) (troopers' subsistence
allowance taxable); Hyslope v. Commissioner, 21 T.C. 131
(1953) (troopers' meal allowance taxable).

															[ Footnote 12 ]

															53 Stat. 9, as amended, ch. 59, 53 Stat. 574. This section
provided:

															"(a) GENERAL DEFINITION. -- 'Gross income' includes gains,
profits, and income derived from salaries, wages, or compensation
for personal service, . . . or gains or profits and income
derived from any source whatever. "

															(Emphasis added.)

															[ Footnote 13 ]

															The House and Senate Reports state:

															"[Section 61] corresponds to section 22(a) of the 1939 Code.
While the language in existing section 22(a) has been simplified,
the all-inclusive nature of statutory gross income has not been
affected thereby. Section 61(a) is as broad in scope as section
22(a) ."

															[ Footnote 14 ]

															Substantially identical language appeared in the income tax
regulations on the date of the 1954 recodification of the Internal
Revenue Code. See Treas.Regs. 111, § 29.22(a)-3 (1943);
Treas.Regs. 118, § 39.22(a)-3 (1953) .

															[ Footnote 15 ]

															"'Supper money' paid by an employer to an employee, who
voluntarily performs extra labor for his employer after regular
business hours, such payment not being considered additional
compensation and not being charged to the salary account, is
considered as being paid for the convenience of the employer. . .
."

															(Emphasis added.)

															[ Footnote 16 ] See n 15, supra. O.D. 914, 4 Cum.Bull. 85 (1921), is another ruling
that makes tax consequences turn on the intention of the employer.
Under O.D. 914, lodging furnished to employees of the Indian
Service was determined to be income if the Department of the
Interior charged such lodging to the appropriation from which
compensation was normally paid; otherwise, it was not. See
also O.D. 11, 1 Cum.Bull. 66 (1919) ( semble )
("maintenance" paid to Red Cross workers includable in income only
to the extent it exceeds actual living expenses).

															[ Footnote 17 ]

															"Where, from the location and nature of the work, it is
necessary that employees engaged in fishing and canning be
furnished with lodging and sustenance by the employer, the value of
such lodging and sustenance may be considered as being furnished
for the convenience of the employer and need not, therefore, be
included in computing net income. . . ."

															O.D. 814, 4 Cum.Bull. 84, 84-85 (1921).

															[ Footnote 18 ]

															"Where the employees of a hospital are subject to immediate
service on demand at any time during the twenty-four hours of the
day and on that account are required to accept quarters and meals
at the hospital, the value of such quarters and meals may be
considered as being furnished for the convenience of the hospital
and does not represent additional compensation to the employees. On
the other hand, where the employees . . . could, if they so
desired, obtain meals and lodging elsewhere than in the hospital
and yet perform the duties required of them by such hospital, the
ratable value of the board and lodging furnished is considered
additional compensation."

															O.D. 915, 4 Cum.Bull. 85, 85-86 (1921).

															[ Footnote 19 ]

															"3. As a general rule, the test of 'convenience of the employer'
is satisfied if living quarters or meals are furnished to an
employee who is required to accept such quarters and meals in order
to perform properly his duties."

															1941 Cum.Bull., at 15, citing O.D. 915, supra, n.
18.

															[ Footnote 20 ] See 1951 Cum.Bull. at 16.

															[ Footnote 21 ]

															"The better and more accurate statement of the reason for the
exclusion from the employee's income of the value of subsistence
and quarters furnished in kind is found, we think, in Arthur
Benagli, 36 B.T.A. 838, where it was pointed out that, on the
facts, the subsistence and quarters were not supplied by the
employer and received by the employee 'for his personal
convenience[,] comfort or pleasure, but solely because he could not
otherwise perform the services required of him.' In other words,
though there was an element of gain to the employee, in that he
received subsistence and quarters which otherwise he would have had
to supply for himself, he had nothing he could take, appropriate,
use and expend according to his own dictates, but, rather, the ends
of the employer's business dominated and controlled, just as in the
furnishing of a place to work and in the supplying of the tools and
machinery with which to work. The fact that certain personal wants
and needs of the employee were satisfied was plainly secondary and
incidental to the employment." Van Rosen v. Commissioner, 17 T.C. at 838.

															[ Footnote 22 ]

															Van Rosen was a civilian ship captain employed by the United
States Army Transportation Corps. Id. at 834. In this
capacity, his pay and subsistence allowances were determined by the
Marine Personnel Regulations of the Transportation Corps of the
Army. Id. at 837. His principal argument in the Tax Court
was the factual similarity of his case to Jones v. United
States, 60 Ct.Cl. 552 (1925). See 17 T.C. at 837.

															[ Footnote 23 ] See Benaglia v. Commissioner, 36 B.T.A. 838, 839-840
(1937); O.D. 915, supra, n 18.

															[ Footnote 24 ] See also Diamond v. Sturr, 116 F. Supp. 28 (NDNY 1953), rev'd, 221 F.2d 264 (CA2 1955) (value of lodgings held
taxable on same facts as Doran ); Romer v.
Commissioner, 28 T.C. 1228 (1957) (following Doran for tax years governed by 1939 Code); Dietz v.
Commissioner, 25 T.C. 1255 (1956) (holding the value of an
apartment to be includable in income under 1939 Code where the
apartment was the only consideration received by the taxpayers for
performing janitorial services).

															[ Footnote 25 ]

															"Sec. 120. STATUTORY SUBSISTENCE ALLOWANCE RECEIVED BY
POLICE."

															"(a) GENERAL RULE. -- Gross income does not include any amount
received as a statutory subsistence allowance by an individual who
is employed as a police official. . . . "

															"(b) LIMITATIONS -- "

															"(1) Amounts to which subsection (a) applies shall not exceed $5
per day."

															"(2) If any individual receives a subsistence allowance to which
subsection (a) applies, no deduction shall be allowed under any
other provision of this chapter for expenses in respect of which he
has received such allowance, except to the extent that such
expenses exceed the amount excludable under subsection (a) and the
excess is otherwise allowable as a deduction under this
chapter."

															68A Stat. 39.

															[ Footnote 26 ] See Technical Amendments Act of 1958, § 3, 72 Stat.
1607.

															[ Footnote 27 ]

															"[T]he provisions of an employment contract . . . shall not be
determinative of whether . . . meals . . . are intended as
compensation."

															[ Footnote 28 ]

															We do not decide today whether, notwithstanding § 119, the
"supper money" exclusion may be justified on other grounds. See, e.g., Treasury Department, Proposed Fringe Benefit
Regulations, 40 Fed.Reg. 41118, 41121 (1975) (example 8). Nor do we
decide whether sporadic meal reimbursements may be excluded from
income. Cf. United States v. Correll, 389 U.
S. 299 (1967).

															[ Footnote 29 ]

															Moreover, it must be recognized that § 213 of the Revenue Act of
1921, 42 Stat. 237, which was involved in Jones v. United
States, made a distinction by its terms between "gross income"
which included "salaries, wages, or compensation for personal
service" and the "compensation received as such" by an officer of
the United States. See 60 Ct.Cl. at 563. The Court of
Claims assumed that Congress, by so distinguishing, intended to tax
United States officers more narrowly than other taxpayers by
levying the income tax only on amounts expressly characterized by
Congress as compensation. See ibid. For this reason, Jones is of limited value in construing § 61, which
contains no language even remotely similar to § 213.

															[ Footnote 30 ]

															"§ 162. Trade or business expenses."

															"(a) In general. -- There shall be allowed as a deduction all
the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including --
"

															"(1) . . . ;"

															"(2) Traveling expenses (including amounts expended for meals
and lodging other than amounts which are lavish or extravagant
under the circumstances) while away from home in the pursuit of a
trade of business . . . ."

															[ Footnote 31 ] Compare supra at 434 U. S. 80 -81
and Magness v. Commissioner, 247 F.2d 740 (CA5 1957), with Saunders v. Commissioner. MR. JUSTICE BLACKMUN, with whom THE CHIEF JUSTICE joins,
dissenting.

															More than a decade ago, the United States Court of Appeals for
the Eighth Circuit, in United States v. Morelan, 356 F.2d
199 (1966), held that the $3-per-day subsistence allowance paid
Minnesota state highway patrolmen was excludable from gross income
under § 119 of the Internal Revenue Code of 1954, 26 U.S.C. § 119.
It held, alternatively, that, if the allowance were includable in
gross income, it was deductible as an ordinary and necessary meal
cost trade or business expense under § 162(a)(2) of the Code, 26
U.S.C. § 162(a)(2). I sat as a Circuit Judge on that case. I was
happy to join Chief Judge Vogel's opinion because I then felt, and
still do, that it was correct on both grounds. Certainly, despite
the usual persistent Government opposition in as many Courts of
Appeals as were available, the ruling was in line with other
authority at the appellate level at that time. * Page 434 U. S. 97 Two cases, Magness v. Commissioner, 247 F.2d 740 (CA5
1957), cert. denied, 355 U.S. 931 (1958), and Hyslope
v. Commissioner, 21 T.C. 131 (1953), were distinguished. 356
F.2d at 207.

															On December 11, 1967, however, this Court, by a 5-3 vote,
decided United States v. Correll, 389 U.
S. 299 , restricting to overnight trips the travel
expense deduction for meal costs under § 162(a)(2). That decision
of course, disapproved Morelan's alternative ground for
decision. I am frank to say that, had I been a Member of this Court
at the time Correll was decided, I would have joined its
dissent, 389 U.S. at 389 U. S. 307 ,
for I fully agree with Mr. Justice Douglas' observation there,
joined by Justices Black and Fortas -- an observation which, for
me, is unanswerable and unanswered -- that the Court, with a bow to
the Government's argument for administrative convenience, and
conceding an element of arbitrariness, id. at 389 U. S. 303 ,
read the word "overnight" into § 162(a)(2), a statute that speaks
only in geographical terms.

															The taxpayer in the present case, faced with Correll, understandably does not press the § 162(a)(2) issue, but confines
his defense to §§ 61 and 119.

															I have no particular quarrel with the conclusion that the
payments received by the New Jersey troopers constituted income to
them under § 61. I can accept that, but my stance in Morelan leads me to disagree with the Court's conclusion
that the payments are not excludable under § 119. The Court draws
an in-cash or in-kind distinction. This has no appeal or persuasion
for me, because the statute does not speak specifically in such
terms. It does no more than refer to "meals . . . furnished on the
business premises of the employer," and, from those words, the
Court draws the in-kind consequence. I am not so sure. In any
event, for me, as was the case in Morelan, the business
premises of the State of Page 434 U. S. 98 New Jersey, the trooper's employer, are wherever the trooper is
on duty in that State. The employer's premises are statewide.

															The Court, in its opinion, makes only passing comment, with a
general reference to fairness, on the ironical difference in tax
treatment it now accords to the paramilitary New Jersey state
trooper structure and the federal military. The distinction must be
embarrassing to the Government in its position here, for the
Internal Revenue Code draws no such distinction. The Commissioner
is forced to find support for it -- support which the Court in its
opinion in this case does not stretch to find -- only from a
regulation, Treas.Reg. § 1.612(b), 26 CFR § 1.61-2(b) (1977),
excluding subsistence allowances granted the military, and the
general references in 37 U.S.C. § 101(25) (1970 ed., Supp. V),
added by Pub.L. 9319, § 1, 88 Stat. 1152, to "regular military
compensation" and "Federal tax advantage accruing to the
aforementioned allowances because they are not subject to Federal
income tax." This, for me, is thin and weak support for recognizing
a substantial benefit for the military and denying it for the New
Jersey state trooper counterpart.

															I fear that state troopers the country over, not handsomely paid
to begin with, will never understand today's decision. And I doubt
that their reading of the Court's opinion -- if, indeed, a layman
can be expected to understand its technical wording -- will
convince them that the situation is as clear as the Court purports
to find it.

															* Saunders v. Commissioner, 215 F.2d 768 (CA3 1954); United States v. Barrett, 321 F.2d 911 (CA5 1963); Hanson v. Commissioner, 298 F.2d 391 (CA8 1962). As in Morelan, certiorari apparently as not sought in any of
this line of cases up to that time.

Summary: The Supreme Court held that cash meal allowance payments to New Jersey state police troopers are taxable income and not exempt under Section 119 of the Internal Revenue Code, which excludes meals furnished by employers for their convenience. The Court distinguished between meals furnished in-kind and cash reimbursements, finding that Section 119 only applies to the former. The dissenting opinion disagreed with this interpretation, arguing that the employer's premises for state troopers are statewide and that the distinction between in-kind and cash reimbursements is not explicitly stated in the statute.


U.S. Supreme Court United States v. Hughes Properties,
Inc., 476
U.S. 593 (1986) United States v. Hughes Properties,
Inc. No. 85-554 Argued April 23, 1986 Decided June 3, 1986 476
U.S. 593 CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE FEDERAL CIRCUIT Syllabus Respondent, in its gambling casino in Reno, Nev., operated a
number of "progressive" slot machines. In addition to paying fixed
amounts when certain symbol combinations appear on their reels,
these machines have a "progressive" jackpot that is won only when a
different specified combination appears. The amount of the jackpot
increases as money is gambled on the machine, until the jackpot is
won. A Nevada Gaming Commission regulation prohibits reducing the
indicated payoff without paying the jackpot. Utilizing the accrual
method of accounting, respondent's practice was, at the end of each
fiscal year, to enter the total of the progressive jackpot amounts
as an accrued liability on its books, and from that total to
subtract the corresponding figure for the preceding year to produce
the current tax year's increase in accrued liability. On its
federal income tax returns for certain fiscal years, respondent
claimed this net figure as a deduction under § 162(a) of the
Internal Revenue Code of 1954, as an ordinary and necessary
business expense incurred during the taxable year. The Commissioner
of Internal Revenue (Commissioner) disallowed the deductions on the
ground that, under Treasury Regulations, an expense may not be
deducted until "all the events have occurred which determine the
fact of liability and the amount thereof can be determined with
reasonable accuracy," and that, until a patron actually won a
progressive jackpot, respondent's liability to pay the jackpot was
contingent, and therefore was not a deductible expense.
Accordingly, the Commissioner determined deficiencies in
respondent's income taxes for the years in question. Respondent
paid the deficiencies, and, when its claims for refunds were
denied, brought suit in the Claims Court. The court granted
respondent's motion for summary judgment, holding that respondent's
liability to pay the progressive jackpots was fixed by the Nevada
regulation. The Court of Appeals affirmed. Held: Respondent was entitled to claim the deductions
in question. Pp. 476 U. S.
599 -606.

															(a) The "all events" test prescribed by the Treasury Regulations
requires that before an expense can be regarded as "incurred" for
federal income tax purposes, a liability must be fixed and
absolute. Pp. 476 U. S.
600 -601. Page 476 U. S. 594 (b) Here, the effect of the Nevada regulation was to fix
respondent's liability. Identification of the winning players is
irrelevant to respondent, since the obligation to pay exists, and
whether it turns out that the winner is one patron or another makes
no difference as to liability. The event creating liability was the
last play of each progressive slot machine before the end of the
fiscal year, since that play fixed the jackpot amount irrevocably.
That event occurred during the taxable year. Brown v.
Helvering, 291 U. S. 193 ,
distinguished. Pp. 476 U. S.
601 -603.

															(c) Granting that the Commissioner has broad discretion to
determine whether a taxpayer's accounting methods clearly reflect
income, that financial accounting does not control for tax
purposes, and that the mere desirability of matching expenses with
income will not necessarily sustain a taxpayer's deduction, the
disallowance of respondent's deductions was not justified. As
noted, the jackpot liabilities were fixed, and only the exact times
of payment and the winners' identity remained uncertain. Pp. 476 U. S.
603 -604.

															(d) Nothing in the record indicates that respondent used its
progressive slot machines for tax-avoidance purposes. Pp. 476 U. S.
604 -605.

															(e) The potential that a casino operator might go out of
business, or surrender or lose its license, or go into bankruptcy,
with the result that the progressive jackpot would never be paid,
does not prevent accrual of the expense. Pp. 476 U. S.
605 -606.

															(f) One of the expenses that necessarily attends the production
of income from a progressive slot machine is the commitment of a
particular portion of the income generated to an irrevocable
jackpot. Cf. United States v. Anderson, 269 U.
S. 422 . Respondent's true income from its progressive
slot machines is only that portion of the money gambled that it is
entitled to keep. P. 476 U. S.
606 .

															760 F.2d 1292, affirmed.

															BLACKMUN, J., delivered the opinion of the Court, in which
BRENNAN, WHITE, MARSHALL, POWELL, REHNQUIST, and O'CONNOR, JJ.,
joined. STEVENS, J., filed a dissenting opinion, in which BURGER,
C.J., joined, post, p. 476 U. S.
607 . Page 476 U. S. 595 JUSTICE BLACKMUN delivered the opinion of the Court.

															This case concerns the deductibility for federal income tax
purposes, by a casino operator utilizing the accrual method of
accounting, of amounts guaranteed for payment on "progressive" slot
machines but not yet won by playing patrons. I A There is no dispute as to the relevant facts; many of them are
stipulated. Respondent Hughes Properties, Inc., is a Nevada
corporation. It owns Harolds Club, a gambling casino, in Reno, Nev.
It keeps its books and files its federal income tax returns under
the accrual method of accounting. During the tax years in question
(the fiscal years that ended June 30 in 1973 to 1977, inclusive),
respondent owned and operated slot machines at its casino. Among
these were a number of what are called "progressive" machines. A
progressive machine, like a regular one, pays fixed amounts when
certain symbol combinations appear on its reels. But a progressive
machine has an additional "progressive" jackpot, which is won only
when a different specified combination appears. The casino sets
this jackpot initially at a minimal amount. The figure increases,
according to a ratio determined by the casino, 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. That
amount continues to increase as patrons play the machine until the
jackpot is won or until a maximum, also determined by the casino,
is reached.

															The odds of winning a progressive jackpot obviously are a
function of the number of reels on the machine, the number of
positions on each reel, and the number of winning symbols. The odds
are determined by the casino, provided only that Page 476 U. S. 596 there exists a possibility that the winning combination of
symbols can appear. [ Footnote
1 ]

															The Nevada Gaming Commission closely regulates the casino
industry in the State, including the operation of progressive slot
machines. In September, 1972, the Commission promulgated § 5.110 of
the Nevada Gaming Regulations. See App. 55. This section
requires a gaming establishment to record at least once a day the
jackpot amount registered on each progressive machine. § 5.110.5.
Furthermore,

															"[n]o payoff indicator shall be turned back to a lesser amount,
unless the amount by which the indicator has been turned back is
actually paid to a winning player, or unless the change in the
indicator reading is necessitated through a machine malfunction, in
which case an explanation must be entered on the daily report as
required in subsection 5."

															§ 5.110.2; App. 55. The regulation is strictly enforced. Nevada,
by statute, authorizes the Commission to impose severe
administrative sanctions, including license revocation, upon any
casino that wrongfully refuses to pay a winning customer a
guaranteed jackpot. See Nev.Rev.Stat. § 463.310
(1985).

															It is respondent's practice to remove the money deposited by
customers in its progressive machines at least twice every week,
and also on the last day of each month. The Commission does not
regulate respondent's use of the funds thus collected, but, since
1977, it has required that a casino maintain a cash reserve
sufficient to provide payment of the guaranteed amounts on all its
progressive machines available to the public. Nev.Gaming Regs. §
5.110(3); App. 56. Page 476 U. S. 597 B At the conclusion of each fiscal year, that is, at midnight on
June 30, respondent entered the total of the progressive jackpot
amounts shown on the payoff indicators as an accrued liability on
its books. From that total, it subtracted the corresponding figure
for the preceding year to produce the current tax year's increase
in accrued liability. On its federal income tax return for each of
its fiscal years 1973, 1974, 1975, and 1977, respondent asserted
this net figure as a deduction under § 162(a) of the Internal
Revenue Code of 1954, as amended, 26 U.S.C. § 162(a), as an
ordinary and necessary expense "paid or incurred during the taxable
year in carrying on any trade or business." [ Footnote 2 ] There is no dispute as to the amounts
so determined, or that a progressive jackpot qualifies for
deduction as a proper expense of running a gambling business. See Tr. of Oral Arg. 7.

															On audit, the Commissioner of Internal Revenue disallowed the
deduction. He did so on the ground that, under Treas.Reg. §
1.461-1(a)(2), 26 CFR § 1.461-1(a)(2) (1985), an expense may not be
deducted until

															"all the events have occurred which determine the fact of the
liability and the amount thereof can be determined with reasonable
accuracy."

															In his view, respondent's obligation to pay a particular
progressive jackpot matures only upon a winning patron's pull of
the handle in the future. According to the Commissioner, until that
event occurs, respondent's liability to pay the jackpot is
contingent, and therefore gives rise to no deductible expense.
Indeed, until then, there is no one who can make a claim for
payment. See Tr. of Oral Arg. 11. Accordingly, the
Commissioner determined deficiencies in respondent's income taxes
for the years in question in the total amount of $433,441.88,
attributable solely to the denial of these progressive Page 476 U. S. 598 jackpot deductions. Respondent paid the asserted deficiencies
and filed timely claims for refund. When the claims were denied,
respondent brought this suit for refunds in the Claims Court. C Each side moved for summary judgment. App. 15, 52. Respondent
contended that the year-end amounts shown on the payoff indicators
of the progressive slot machines were deductible, claiming that
there was a reasonable expectation that payment would be made at
some future date, that the casino's liability was fixed and
irrevocable under Nevada law, that the accrual of those amounts
conformed with generally accepted accounting principles, and that
deductibility effected a timely and realistic matching of revenue
and expenses.

															The Claims Court denied the Government's motion for summary
judgment, but granted respondent's motion. 5 Cl.Ct. 641 (1984). It
concluded that, under the Nevada Commission's rule, respondent's
liability to pay the amounts on the progressive jackpot indicators
became "unconditionally fixed," id. at 645, at "midnight
of the last day of the fiscal year," id. at 647. The final
event was

															"the last play (successful or not) of the machine before the
close of the fiscal year, that is, the last change in the jackpot
amount before the amount is recorded for accounting purposes." Id. at 645. A contrary result would mismatch
respondent's income and expenses. The court acknowledged that, if
respondent were to go out of business, it would not owe the jackpot
amount to any particular person. Id. at 646. Nevertheless,
the jackpot indicator amount "would still continue to be an incurred liability fixed by state law, for which
[respondent] would continue to be responsible" (emphasis in
original). Id. at 645.

															The Claims Court further acknowledged that its ruling was in
conflict with the decision of the Court of Appeals for the Ninth
Circuit in Nightingale v. United States, 684 F.2d 611
(1982), having to do with another Nevada casino, but it
declined Page 476 U. S. 599 to follow that precedent and specifically disavowed its
reasoning. 5 Cl.Ct. at 644-647.

															The Court of Appeals for the Federal Circuit affirmed the
judgment "on the basis of the United States Claims Court opinion."
760 F.2d 1292, 1293 (1985). It ruled that, under the accrual method
of accounting, an expense is deductible in the tax year in which
all the events have occurred that determine the fact of liability
and the amount thereof can be determined with reasonable accuracy,
and that liability exists "if there is an obligation to perform an
act and the cost of performance can be measured in money." Ibid. The liability here was not contingent upon the time
of payment or the identity of the jackpot winner. Rather, it was
fixed by the Commission's regulation. The "contrary conclusion" of
the Ninth Circuit in Nightingale was noted. 760 F.2d at
1293.

															Because of the clear conflict between the two Circuits, we
granted certiorari. 474 U.S. 1004 (1985). II Section 162(a) of the Internal Revenue Code allows a deduction
for "all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business."
Section 446(a) provides that taxable income "shall be computed
under the method of accounting on the basis of which the taxpayer
regularly computes his income in keeping his books." Under the
"cash receipts and disbursements method," specifically recognized
by § 446(c)(1), a taxpayer is entitled to deduct business expenses
only in the year in which they are paid. Treas.Reg. §§
1.446-1(c)(1)(i) and 1.461-1(a)(1), 26 CFR §§ 1.446-1(c)(1)(i),
1.461-1(a)(1) (1985). The Code also permits a taxpayer to compute
taxable income by the employment of "an accrual method." §
446(c)(2). An accrual-method taxpayer is entitled to deduct an
expense in the year in which it is "incurred," § 162(a), regardless
of when it is actually paid. Page 476 U. S. 600 For a number of years, the standard for determining when an
expense is to be regarded as "incurred" for federal income tax
purposes has been the "all events" test prescribed by the
Regulations. See Treas.Reg. § 1.446-1(c)(1)(ii) (accruals
in general); § 1.451-1(a) (accrual of income); and § 1.461-1(a)(2)
(accrual of deductions). This test appears to have had its origin
in a single phrase that appears in this Court's opinion in United States v. Anderson, 269 U.
S. 422 , 269 U. S. 441 (1926) ("[I]t is also true that, in advance of the assessment of a
tax, all the events may occur which fix the amount of the tax and
determine the liability of the taxpayer to pay it"). Since then,
the Court has described the "all events" test "established" in Anderson as "the touchstone' for determining the year
in which an item of deduction accrues," and as "a fundamental
principle of tax accounting." United States v. Consolidated
Edison Co. of New York, 366 U. S. 380 , 366 U. S. 385 (1961) (citing cases). Under the Regulations, the "all events" test has two elements,
each of which must be satisfied before accrual of an expense is
proper. First, all the events must have occurred which establish
the fact of the liability. Second, the amount must be capable of
being determined "with reasonable accuracy." Treas.Reg. §
1.446-1(c)(1)(ii). This case concerns only the first element, since
the parties agree that the second is fully satisfied. III The Court's cases have emphasized that "a liability does not
accrue as long as it remains contingent." Brown v.
Helvering, 291 U. S. 193 , 291 U. S. 200 (1934); accord, Dixie Pine Products Co. v. Commissioner, 320 U. S. 516 , 320 U. S. 519 (1944). Thus, to satisfy the all-events test, a liability must be
"fixed and definite in amount," Security Flour Mills Co. v.
Commissioner, 321 U. S. 281 , 321 U. S. 287 (1944), must be "fixed and absolute," Brown v. Helvering, 291 U.S. at 291 U. S. 201 ,
and must be "unconditional," Lucas v. North Texas Lumber
Co., 281 U. S. 11 , 281 U. S. 13 (1930). And one may say that "the tax law requires that a deduction
be deferred until all the events' have Page 476 U. S.
601 occurred that will make it fixed and certain." Thor
Power Tool Co. v. Commissioner, 439 U.
S. 522 , 439 U. S. 543 (1979). A The Government argues that respondent's liability for the
progressive jackpots was not "fixed and certain," and was not
"unconditional" or "absolute," by the end of the fiscal year, for
there existed no person who could assert any claim to those funds.
It takes the position, quoting Nightingale v. United
States, 684 F.2d at 614, that the indispensable event "is the
winning of the progressive jackpot by some fortunate gambler." It
says that, because respondent's progressive jackpots had not been
won at the close of the fiscal year, respondent had not yet
incurred liability. Nevada law places no restriction on the odds
set by the casino, as long as a possibility exists that the winning
combination can appear. Thus, according to the Government, by
setting very high odds, respondent can defer indefinitely into the
future the time when it actually will have to pay off the jackpot.
The Government argues that, if a casino were to close its doors and
go out of business, it would not owe the jackpots to anyone.
Similarly, if it were to sell its business, or cease its gaming
operations, or go into bankruptcy, or if patrons were to stop
playing its slot machines, it would have no obligation. B We agree with the Claims Court and with the Federal Circuit, and
disagree with the Government, for the following reasons:

															1. The effect of the Nevada Gaming Commission's regulations was
to fix respondent's liability. Section 5.110.2 forbade reducing the
indicated payoff without paying the jackpot, except to correct a
malfunction or to prevent exceeding the limit imposed. App. 55.
Respondent's liability, that is, its obligation to pay the
indicated amount, was not contingent. That an extremely remote and
speculative possibility Page 476 U. S. 602 existed that the jackpot might never be won [ Footnote 3 ] did not change the fact that, as a
matter of state law, respondent had a fixed liability for the
jackpot which it could not escape. The effect of Nevada's law was
equivalent to the situation where state law requires the amounts of
the jackpot indicators to be set aside in escrow pending the
ascertainment of the identity of the winners. The Government
concedes that, in the latter case, the liability has accrued, Tr.
of Oral Arg. 20-21, even though the same possibility would still
exist that the winning pull would never occur.

															2. The Government misstates the need for identification of the
winning player. That is, or should be, a matter of no relevance for
the casino operator. The obligation is there, and whether it turns
out that the winner is one patron or another makes no conceivable
difference as to basic liability.

															3. The Government's heavy reliance on Brown v.
Helvering, 291 U. S. 193 (1934), in our view, is misplaced. That case concerned an agent's
commissions on sales of insurance policies, and the agent's
obligation to return a proportionate part of the commission in case
a policy was canceled. The agent sought to deduct from gross income
an amount added during the year to his reserve for repayment of
commissions. This Court agreed with the Commissioner's disallowance
of the claimed deduction because the actual event that would create
the liability -- the cancellation of a particular policy in a later
year -- "[did] not occur during the taxable year," id. at 291 U. S. 200 ,
but rather occurred only in the later year in which the policy was
in fact canceled. Here, however, the event creating liability, as
the Claims Court recognized, was the last play of the machine
before the end of the fiscal year, Page 476 U. S. 603 since that play fixed the jackpot amount irrevocably. 5 Cl.Ct.
at 645. That event occurred during the taxable year.

															4. The Government's argument that the fact that respondent
treats unpaid jackpots as liabilities for financial accounting
purposes does not justify treating them as liabilities for tax
purposes is unpersuasive. Proper financial accounting and
acceptable tax accounting, to be sure, are not the same. Justice
Brandeis announced this fact well over 50 years ago: "The prudent
business man often sets up reserves to cover contingent
liabilities. But they are not allowable as deductions." Lucas
v. American Code Co., 280 U. S. 445 , 280 U. S. 452 (1930). See also Brown v. Helvering, 291 U.S. at 291 U. S.
201 -202, and Lucas v. Kansas City Structural Steel
Co., 281 U. S. 264 , 281 U. S. 269 (1930). The Court has long recognized "the vastly different
objectives that financial and tax accounting have." Thor Power
Tool Co. v. Commissioner, 439 U.S. at 439 U. S. 542 .
The goal of financial accounting is to provide useful and pertinent
information to management, shareholders, and creditors. On the
other hand, the major responsibility of the Internal Revenue
Service is to protect the public fisc. Ibid. Therefore,
although § 446(c)(2) permits a taxpayer to use an accrual method
for tax purposes if he uses that method to keep his books, § 446(b)
specifically provides that, if the taxpayer's method of accounting
"does not clearly reflect income," the Commissioner may impose a
method that "does clearly reflect income." Thus, the "Commissioner
has broad powers in determining whether accounting methods used by
a taxpayer clearly reflect income." Commissioner v.
Hansen, 360 U. S. 446 , 360 U. S. 467 (1959). See also Thor Power Tool Co. v. Commissioner, 439
U.S. at 439 U. S. 532 ; American Automobile Assn. v. United States, 367 U.
S. 687 , 367 U. S.
697 -698 (1961). The Regulations carry this down
specifically to "the accounting treatment of any item." Treas.Reg.
§ 1.446-1(a)(1).

															Granting all this -- that the Commissioner has broad discretion,
that financial accounting does not control for tax purposes, and
that the mere desirability of matching expenses Page 476 U. S. 604 with income will not necessarily sustain a taxpayer's deduction, see American Automobile Assn. v. United States, 367 U.S.
at 367 U. S. 690 ; Thor Power Tool Co. v. Commissioner, 439 U.S. at 439 U. S. 541 -- the Commissioner's disallowance of respondent's deductions was
not justified in this case. As stated above, these jackpot
liabilities were definitely fixed. A part of the machine's intake
was to be paid out, that amount was known, and only the exact time
of payment and the identity of the winner remained for the future.
But the accrual method itself makes irrelevant the timing factor
that controls when a taxpayer uses the cash receipts and
disbursements method. [ Footnote
4 ]

															5. The Government suggests that respondent's ability to control
the timing of payouts shows both the contingent nature of the
claimed deductions and a potential for tax avoidance. It speaks of
the time value of money, of respondent's ability to earn additional
income upon the jackpot amounts it retains until a winner comes
along, of respondent's "virtually unrestricted discretion in
setting odds," Brief for United States 31, and of its ability to
transfer amounts from one machine to another with the accompanying
capacity to defer indefinitely into the future the time at which it
must make payment to its customers. All this, the Government says,
unquestionably contains the "potential for tax avoidance." See
Thor Power Tool Co. v. Commissioner, 439 U.S. at 439 U. S. 538 .
And the Government suggests that a casino operator could put extra
machines on the floor on the last day of the tax year with whatever
initial jackpots it specifies and with whatever odds it likes, and
then, on the taxpayer's theory, Page 476 U. S. 605 could take a current deduction for the full amount, even though
payment of the jackpots might not occur for many years, citing Nightingale, 684 F.2d at 615.

															None of the components that make up this parade of horribles, of
course, took place here. Nothing in this record even intimates that
respondent used its progressive machines for tax avoidance
purposes. Its income from these machines was less than 1% of its
gross revenue during the tax years in question. See App.
35-36. Respondent's revenue from progressive slot machines depends
on inducing gamblers to play the machines, and, if it sets
unreasonably high odds, customers will refuse to play, and will
gamble elsewhere. Thus, respondent's economic self-interest will
keep it from setting odds likely to defer payoffs too far into the
future. [ Footnote 5 ] Nor, with
Nevada's strictly imposed controls, was any abuse of the kind
hypothesized by the Government likely to happen. In any event, the
Commissioner's ability, under § 446(b) of the Code, 26 U.S.C. §
446(b), to correct any such abuse is the complete practical answer
to the Government's concern. If a casino manipulates its use of
progressive slot machines to avoid taxes, the Commissioner has the
power to find that its accounting does not accurately reflect its
income, and to require it to use a more appropriate accounting
method. Finally, since the casino of course must pay taxes on the
income it earns from the use of as-yet-unwon jackpots, the
Government vastly overestimates the time value of respondent's
deductions.

															6. There is always a possibility, of course, that a casino may
go out of business, or surrender or lose its license, or go Page 476 U. S. 606 into bankruptcy, with the result that the amounts shown on the
jackpot indicators would never be won by playing patrons. But this
potential nonpayment of an incurred liability exists for every
business that uses an accrual method, and it does not prevent
accrual. See, e.g., Wien Consolidated Airlines, Inc. v.
Commissioner, 528 F.2d 735 (CA9 1976). "The existence of an
absolute liability is necessary; absolute certainty that it will be
discharged by payment is not." Helvering v. Russian Finance
& Constr. Corp., 77 F.2d 324, 327 (CA2 1935). And if any
of the events hypothesized by the Government should occur, the
deducted amounts would qualify as recaptured income subject to tax.
Treas.Reg. § 1.461-1(a)(2).

															7. Finally, the result in United States v. Anderson, 269 U. S. 422 (1926), a case to which the Government makes repeated reference, is
itself instructive. The issue there was the propriety of the
accrual of a federal munitions tax prior to its actual assessment.
The assessment was required before the tax became due. The
Government's position, in contrast to its position in the present
case, was that the tax liability accrued before assessment. The
Court held that the absence of the assessment did not prevent
accrual of the tax. It recognized that the taxpayer's

															"true income for the year . . . could not have been determined
without deducting . . . the . . . expenses attributable to the
production of that income during the year." Id. at 269 U. S. 440 .
One of the expenses that necessarily attended the production of
munitions income was the commitment of a particular portion of the
revenue generated to a "reserve for munitions taxes." Ibid. Similarly, one of the expenses that necessarily
attends the production of income from a progressive slot machine is
the commitment of a particular portion of the revenue generated to
an irrevocable jackpot. Respondent's true income from its
progressive slot machines is only that portion of the money gambled
which it is entitled to keep.

															The judgment of the Court of Appeals is affirmed. It is so ordered. Page 476 U. S. 607 [ Footnote 1 ]

															A 1976 study of the 24 four-reel progressive machines then in
operation at respondent's casino revealed that the average period
between payoffs was approximately 4 1/2 months, although one
machine had been in operation for 13 months, and another for 35
months, without a payoff as of September 1, 1976. The payoff
frequency of the other 22 machines ranged from a high of 14.3
months to a low of 1.9 months.

															[ Footnote 2 ]

															No deduction was asserted for fiscal 1976 because the aggregate
accrued liability at the end of fiscal 1976 was less than that at
the end of fiscal 1975.

															[ Footnote 3 ]

															An affidavit of the president of respondent's Harolds Club
Division, submitted in the Claims Court in support of respondent's
motion for summary judgment, states that all the progressive
machine jackpots unpaid as of June 30, 1977, "were subsequently won
and paid to customers." App. 62.

															[ Footnote 4 ]

															The fact that Congress once briefly adopted statutory provisions
that specifically would have permitted a taxpayer to deduct
anticipated expenses by a reserve mechanism is hardly significant. See §§ 462(a) and (d)(1)(B) of the 1954 Code as originally
adopted, 68A Stat. 158-159, repealed retroactively by the Act of
June 15, 1955, ch. 143, §§ 1 and 3, 69 Stat. 134, 135. But see
Deficit Reduction Act of 1984, § 91(a), 98 Stat. 598.

															[ Footnote 5 ]

															Respondent also is unlikely to set extremely high initial
jackpots on its machines, since that practice would increase the
casino's risk. The initial progressive jackpot amount is the
casino's money. If a patron gets the winning combination soon after
the machine goes into service, the casino will not have time to
recoup the initial jackpot from money gambled by the public. Thus,
casinos will tend to set rather low initial jackpots, relying on a
percentage of the funds gambled by previous players to contribute
the bulk of the progressive jackpot.

															JUSTICE STEVENS, with whom THE CHIEF JUSTICE joins,
dissenting.

															Unlike the Court, see ante at 476 U. S.
605 -606, I believe that the distinction between the
nonpayment of an existing obligation and the nonexistence of an
obligation is of controlling importance in this case.

															It is common ground that the taxpayer can accrue as a deduction
the jackpots in its progressive slot machines only if "all the
events have . . . occurred which fix the liability." Treas.Reg. §
1.461-1(a)(2), 26 CFR § 1.461-1(a)(2) (1985). See, e.g.,
Security Flour Mills Co. v. Commissioner, 321 U.
S. 281 , 321 U. S. 284 , 321 U. S. 287 (1944); Dixie Pine Products Co. v. Commissioner, 320 U. S. 516 , 320 U. S. 519 (1944); Brown v. Helvering, 291 U.
S. 193 , 291 U. S.
200 -201 (1934). See generally United States v.
Consolidated Edison Co. of New York, 366 U.
S. 380 , 366 U. S.
385 -386 (1961). The question is whether an "obligation"
created by the rules of a state gaming commission and defeasible at
the election of the taxpayer is "fixed" within the meaning of the
Treasury Regulation. To me, the answer is clearly "no."

															"Under Nevada law," if the taxpayer in this case

															"were to surrender its gaming license, it would no longer be
subject to the gaming laws and regulations, and could thus avoid
the payment of the liability."

															App. 23. Thus, "the bankruptcy of the [taxpayer], or the
surrender of its gaming license could relieve it of its
obligation." Id. at 44.

															On these facts, the taxpayer has no present liability to accrue.
Rather, the taxpayer's obligation to pay the jackpots in this case
resembles the taxpayer's obligation to pay the cost of overhauling
its aircraft engines and airframes in World Airways, Inc. v.
Commissioner, 62 T.C. 786 (1974), aff'd, 564 F.2d 886
(CA9 1977). In that case, the Tax Court held that the taxpayer, an
airline, did not satisfy the "all events" test, and hence could not
accrue and deduct any portion of these costs, 62 T.C. at 802, 805
-- despite the existence of contracts obligating the taxpayer to
pay, upon the completion of an overhaul, an amount for each hour
of Page 476 U. S. 608 flight time since the previous overhaul, id. at
791-793, and a statutory obligation to overhaul its engines and
airframes after a specified number of flight hours, id. at
803. Of critical importance to the decision before us today, the
court distinguished between the nonpayment of a legal
obligation and the nonexistence of an obligation by
considering the taxpayer's liability in the event of a
bankruptcy:

															"The bankruptcy of petitioner [the taxpayer] or the crash or
permanent grounding of an aircraft might conceivably relieve
petitioner of the payment of overhaul costs. The occurrences of any
of these contingencies, however, would not relieve petitioner of an existing obligation to pay any overhaul costs. Rather, the
occurrence would mean that no obligation to pay would ever come
into existence. Petitioner has not shown that its liability for the
accrued overhaul costs was absolutely fixed in the year of accrual.
The contingencies referred to would act to prevent a potential
liability from coming into existence." Id. at 804 (emphasis in original). The court recognized
that the risk of bankruptcy or disaster was remote. But it added
that "there exists another contingency whose occurrence is not
unlikely:"

															"Petitioner has sold five piston aircraft and one jet aircraft
since 1965. The five piston aircraft owned by petitioner during
1965 and 1966 were sold prior to the time when major airframe
overhaul was required." Ibid. Here, too, the taxpayer has no obligation that could be
discharged in a bankruptcy court -- a fact that confirms that it
has no present liability to pay the jackpots on its progressive
slot machines. And there likewise exists a contingency under which
it is not at all unlikely that a slot machine owner would elect to
escape its liability. If the gross amount of the accruals on these
machines should ever exceed the net value of the business --
perhaps as a result of shrewd management -- it could liquidate at a
profit without having any liability Page 476 U. S. 609 to anyone for what the Court mistakenly describes as a "fixed
liability." By simply tendering its gaming license, the taxpayer
would avoid its liability on the jackpots. This option is
exercisable in the sole discretion of the taxpayer at any point in
time. My research has revealed no other instance in which the
Commissioner has been forced to allow accrual of a deduction when
the expense deducted may be avoided entirely at the election of the
taxpayer. This feature of the deduction before us unquestionably
contains the "potential for tax avoidance," Thor Power Tool Co.
v. Commissioner, 439 U. S. 522 , 439 U. S. 538 (1979), and I think it lies well within the Commissioner's
authority to interpret the Regulation to forbid it, see Lucas
v. American Code Co., 280 U. S. 445 , 280 U. S. 449 (1930). I respectfully dissent.

Summary: The Supreme Court held that Hughes Properties, Inc. was entitled to claim deductions for the progressive jackpot liabilities on its slot machines for federal income tax purposes. The Court found that the "all events" test was satisfied, meaning that the liability was fixed and absolute, as the Nevada regulation prohibited reducing the indicated payoff without paying the jackpot. Therefore, the liability was not contingent on a patron winning the jackpot but was instead determined by the last play of each progressive slot machine before the end of the fiscal year.