That’s a question that’s quite timely, considering that both the Tropicana Entertainment and Herbst Gaming chains are in bankruptcy, and Station Casinos is preparing to file bankruptcy at the time of this writing. Casinos are required to clearly post for their patrons the "progressive payoff schedule" -- the amount of money it’s possible to win -- and any limits regarding the amount of money. "As people play," adds IGT Vice President of Marketing Ed Rogich, "they put a reserve away to pay the jackpot."
However, the onus to pay is not always on the casino. "When you hit Megabucks [or] Wheel of Fortune, it’s IGT’s responsibility," says Marissa Chien, co-author (with Jean Scott) of Tax Help for Gamblers, newly available in e-book format. "The casino has no liability in the jackpot. They are basically renting floor space to IGT." If the progressive is proprietary to a casino or chain of casinos, then it is they who are on the hook
Every casino has a "reserve," or a restricted account that consists of approved funding sources used only to satisfy periodic payments of prizes. Periodic payments may be made in any of the following ways:
-- Through an irrevocable surety bond or irrevocable letter of credit with an independent financial institution. Should the casino default on paying what they owe to a patron for any reason, the financial institution provides the periodic payments or cash payment. If the latter defaults for whatever reason, the casino is liable for the money owed to patrons.
-- Through an irrevocable trust which provides periodic payments to a group of patrons, and which expressly prohibits the patron from encumbering or transferring his right to receive the deferred portion of the prizes except to his estate.
Liability is determined by assigning a present-day value to the annuity, which is managed by an outside company. As Rogich explains, "If you decide to cash your annuity in today, there’s a value to that contract in today’s money," based on the value of annuitized Treasury bonds. When IGT pays out on a progressive win, Rogich adds, "we pay the first installment" and communicate with the winner as to whether (s)he wants an annuity or a lump sum.
"With interest rates so low," Chien notes, "it would actually be in your best interest to take a lump sum," even if that means a higher tax exposure. Also, the annuity option is not available with every jackpot. Star Wars games, for instance, are always paid in lump-sum manner.
"Since money is so cheap right now, the present value of the jackpot is going to be close to fair value," Chien resumes. "But when you take the lump [sum], you’ll be paying taxes in present dollars as opposed to future dollars. But then if you take payments you are subject to inflation risk on top of stuff like institutional risk."
There’s one other factor to consider: "personality, temperament, the potential to just ‘blow’ the money as opposed to being on an ‘allowance,’" Chien says. "It really boils down to each person's individual situation."
If a licensee fails to pay a patron, or is at all found to be in noncompliance with funding requirements, the Nevada Gaming Control Board may shut down any games or promotions that involve a progressive prize. Noncompliance may also lead to disciplinary action. Should the company administering the annuity go belly-up as well, your award is insured for up to $500,000 through the end of this year, whereupon the maximum insurance recovery reverts to $100,000.
