Gaming Industry Comments on Proposed Reporting Rules

Caesars Entertainment Corporation, on behalf of itself, its subsidiaries and affiliates, (collectively, "Caesars Entertainment"), appreciates the opportunity to respond to the Internal Revenue Service's ("IRS") request for comments on the proposed regulations (REG-132253-11) concerning tax information reporting by casinos for patron winnings from slot machine play and other gaming winnings (the "Proposed Regulations"),¹ and IRS Notice 2015-21 concerning an optional safe harbor method for individual taxpayers to determine a wagering gain or loss from slot machine play (the "Proposed Revenue Procedure").² Caesars Entertainment is the most geographically diversified U.S. casino-entertainment company with entertainment facilities in more areas throughout the United States than any other participant in the gaming industry. Specifically, through Caesar Entertainment's consolidated entities, we own and operate or manage 37 casinos in 14 states and employ over 67,000 employees in the U.S.

1. Background and Summary of Comments

The Proposed Regulations would replace temporary regulation 7.6041-1, which in 1977 established reportable winnings thresholds (each a "Reporting Threshold" and collectively, the "Reporting Thresholds") triggering a casino's requirement to submit information returns (Form W-2G) for payment of winnings to patrons from bingo, keno and slot machine play. In light of changes in technology and the tax reporting regime since 1977, the IRS has stated that the Proposed Regulations are intended to update the temporary regulations, reduce taxpayer burdens and simplify reporting. The IRS is also contemplating whether the Reporting Thresholds for slot, keno and bingo jackpots should be reduced from current levels ($1,200 for slots and bingo and $1,500 for keno) to $600 for all three games. The Proposed Revenue Procedure is meant to complement the Proposed Regulations by providing taxpayers with an optional "safe harbor" method for calculating gains or losses from slot machine play through reliance upon information from the electronic player tracking systems used by casinos.

While we appreciate the IRS's desire to simplify application of the tax code, we believe that adoption of certain provisions in the Proposed Regulations and Proposed Revenue Procedure will unnecessarily cause Caesars Entertainment (and the casino industry of which we are a part) undue hardship. Specifically, in response to the IRS's requests for comments, Caesars Entertainment respectfully submits that:

• Reducing the Reporting Thresholds to $600 will result in Caesars Entertainment incurring substantially increased costs and lost revenue;

• Caesars Entertainment's electronic player tracking system and internal processes are not currently able to provide win/loss information in a manner that can be used for tax reporting purposes as contemplated by the IRS; and

• Modifying our electronic player tracking system and processes to be used for tax reporting purposes would create onerous and costly requirements for Caesars Entertainment (and likely other similarly situated businesses).

2. Proposed Changes to Reporting Thresholds

While the IRS proposes to maintain the current Reporting Thresholds, which is greatly appreciated, it has also requested comments on the feasibility of reducing those thresholds to $600 at a future time. Caesars Entertainment would not be in favor of reducing the Reporting Thresholds because of the significant negative impact such change would have on our business and patrons. The current Reporting Thresholds have been in place since 1977, and lowering them now (almost 40 years later) for slot machine play in particular would result in significantly increased costs and lost revenue for our properties, and a potentially unsatisfying entertainment experience for our patrons.³

To implement a new Reporting Threshold of $600, substantial staff time and labor would first be required to reprogram systems and adjust settings on all slot machines to lower the triggering jackpot threshold from $1,200 to $600.⁴ Once these adjustments were made, our analysis shows that the number of reportable slot jackpots at Caesars Entertainment properties would increase collectively by over 2.1 million,⁵ and our costs for processing the increased number of reportable slot jackpots would, at a minimum, double because of the need to add employees and operational controls. Processing reportable slot jackpots is a highly labor intensive process that requires one-on-one interaction between our employees and patrons. This interaction, however, provides our employees with the opportunity to provide excellent guest service and enhance our patron's experience.

When a patron hits a slot jackpot meeting or exceeding the Reporting Threshold, the machine locks up (and cannot be played further) and an employee is notified. That employee comes to the machine, provides the patron with the necessary forms (including a Form W-2G), and another employee assists with paying the jackpot to the patron. After this process is complete, an employee manually places the machine back into service. Given this labor intensive process, staffing costs alone could increase by more than $18.5 million per year throughout our organization as a result of the increased number of reportable slot jackpots.⁶

In addition to increased costs, our properties would also lose revenue due to the significantly increased number of machines that would be out of service or locked up while jackpots are paid.⁷ We are also concerned that the higher number of machines that will be unavailable for play, coupled with the increased frequency that play will stop when the lowered Reporting Threshold is hit, will have an adverse effect on our patrons' satisfaction and experience thereby further negatively impacting revenue.

3. Electronically Tracked Slot Machine Play

While the Proposed Regulations maintain many of the current rules for determining reportable gambling winnings, they also include new rules for calculating these amounts when there is electronically tracked slot machine play. The Proposed Regulations define "electronically tracked slot machine play" as "play using an electronic player system that is controlled by the gaming establishment (such as through the use of a player's card or similar system) that records the amount a specific individual won and wagered on slot machine play."⁸ The Proposed Regulations establish different reporting rules for standard slot play (non-electronically tracked) and electronically tracked slot play. Under the Proposed Regulations, for standard slot play, "reportable gambling winnings" means $1,200 or more. For electronically tracked slot play, "reportable gambling winnings" means net winnings⁹ of $1,200 or more but only if (i) the total amount of net winnings during a single session is $1,200 or more and (ii) at least one single win during the session equals or exceeds $1,200.¹⁰ The availability to a taxpayer of the optional safe harbor in the Proposed Revenue Procedure also relies on the data maintained in the casino's electronic player tracking system.¹¹ The IRS has emphasized that these new requirements are intended to simplify reporting by leveraging a casino's existing technology, processes and information. As a threshold matter, we respectfully submit, however, that having two different definitions of net winnings for the same activity, based solely on whether slot play is electronically tracked or not, may actually complicate reporting.¹²

And although we believe there are some circumstances under which either netting out wagers or aggregating wins/losses over a particular period, or session, could be helpful, we do not believe using our current electronic player tracking systems as contemplated by the Proposed Regulations or Proposed Revenue Procedure to determine a taxpayer's individual tax liability, or to otherwise facilitate the contemplated changes, is reliable or feasible. Nor do we believe that the IRS's current processes and procedures are so inadequate as to warrant the increased burdens that would be placed on Caesars Entertainment, and the significant investment that would be required, to modify our systems to be used for this purpose.

The IRS is correct in that Caesars Entertainment currently obtains certain information regarding our patrons' slot machine and other casino play through our Total Rewards® program ("Total Rewards") and the integrated casino management system ("CMS"). However, these programs were designed to enhance marketing efforts and promote customer loyalty.¹³ Similar to other rewards programs, members of Total Rewards are issued a card that can be used to award credits to a member based on gaming or other activities (such as dining, shopping or entertainment) at any Caesars Entertainment properties. Credits can then be applied toward various rewards such as meals, rooms, show tickets and merchandise at Caesars Entertainment properties (or from various rewards partners). Although the information collected by CMS/Total Rewards would at first blush appear to fall within the definition of "electronically tracked slot machine play," due to the very specific purposes of marketing and customer loyalty for which these systems were developed, current functionality does not generate the type of information contemplated by the IRS.¹⁴

In order to utilize the data captured through CMS/Total Rewards for tax reporting purposes as contemplated by the Proposed Regulations and Proposed Revenue Procedure, significant reprogramming and development of our systems across all properties would be required, as well as new data collection procedures and reports to capture daily winning information by patron and for internal audit and tax purposes.¹⁵ We estimate¹⁶ that these changes would require an initial investment for software/process development and hardware in the range of at least $400,000 to $500,000, and additional annual staffing costs for the long-term implementation of these new procedures in the range of $3.6 to $6.7 million.¹⁷

However, even if we made the significant additional investments in technology, infrastructure and staffing necessary to collect and use information in CMS/Total Rewards for tax reporting purposes, the data obtained may nonetheless be unreliable due to the fact that, at their core, these programs were designed to be used as marketing tools. As mentioned previously, Total Rewards is a voluntary program which patrons may or may not join, or even use consistently.¹⁸ In fact, approximately 20% of play at our properties is not carded play.¹⁹ Based on the forgoing, we believe that a program designed to support marketing decisions and reward customer loyalty is unlikely to also be reliable for tax reporting purposes. Hand paying jackpots that meet or exceed the Reportable Threshold to patrons and providing the required Form W-2G, in person as described in this letter, we believe avoids these kinds of issues and, as a result, is a reliable way of tracking gaming winnings.

Finally, we are concerned about the potential negative effect the IRS's use of our CMS/Total Rewards data in the manner contemplated could have on our patrons' behavior, resulting in lower business volumes. The concern is that patrons, even those with no intent to avoid their reporting obligations, may nonetheless choose not to enroll in Total Rewards or use their card, or even play at our properties, once they understand that the IRS may have access to their Total Rewards account information. If this potential "chilling" effect were to come to fruition, we would only know after the fact and it would result in, at a minimum, the loss of valuable marketing information and opportunities that are vital to our business (and for which these programs were originally designed).

Thus, we believe the requirements in the Proposed Regulations and Proposed Revenue Procedure concerning the use of "electronically tracked slot machine play" data would be ineffective/unreliable for keeping track of a patron's reportable winnings and losses and unduly burdensome to comply with, and also have the potential for various negative effects on our business. We urge the IRS to reconsider and abandon its position on tax reporting related to electronically tracked play.

4. Other Issues under the Proposed Regulations and Proposed Revenue Procedure

5. Conclusion

Once again, Caesars Entertainment is in favor of the stated goals of the IRS to simplify application of the tax code, and appreciates the opportunity to comment on the Proposed Regulations and Proposed Revenue Procedure. We support those portions of the Proposed Regulations that maintain the Reporting Thresholds at current levels, and are not in favor of any reduction. And we are generally in favor of having the ability to aggregate reportable winnings on one Form W-2G. However, Caesars Entertainment does not support, in any manner, changes that purport to rely upon information generated by our electronic player tracking systems for an individual's tax reporting purposes for the reasons stated herein, and respectfully urge the IRS to reconsider and abandon its position on these matters.

² "Safe Harbor Method for Determining a Wagering Gain or Loss from Slot Machine Play," IRS Notice 2015-21, http://www.irs.gov/pub/irs-drop/n-15-21.pdf, last visited May 28, 2015.

³ Although the IRS is contemplating changing the Reportable Thresholds for all three games, this letter focuses on the potential effects such changes would have in the context of slots only due to the significantly greater impact these changes would have on those games/operations.

⁴ Caesars Entertainment properties collectively have approximately 51,700 slot machines in service today. We estimate that over 4,000 hours of staffing would be required to reset these machines at a cost of at least $85,000.

⁵ This increase is extrapolated from our 2014 data.

⁶ For example, at our Atlantic City, New Jersey properties, one slot attendant and one cashier are needed to respond to each reportable slot jackpot up to $24,999. Assuming an average down time of 10 minutes per machine, our analysis shows that, with an increase in reportable slot jackpots by a multiple of 3.5x (our estimated increase based on 2014 data), staffing costs (including wages and benefits) for our three Atlantic City properties (Bally's, Caesars, and Harrah's) would increase by 250% at an average cost of $530,000 per property. One of our managed properties in California reported similar potential increased costs, estimating that the total annual cost of staffing (including wages and benefits) and administrative expense would increase by approximately $510,000 to respond to the increase in reportable slot jackpots. In addition to the increased staffing costs associated with processing and paying a reportable jackpot, more time and resources would also be needed to audit the daily jackpots, resulting in further increased staffing and administrative costs.

⁷ For example, in an Atlantic City property, a standard slot machine with a jackpot over $1,200 is out of service for an average of 10 minutes for verification, while a wide area progressive slot machine could be out of service for as long as 1.5 hours.

⁸ Proposed Regulations § 1.6041-10(b)(1).

⁹ Currently, the amount of the original wagers is not netted out against any jackpots when determining if there are reportable winnings from slot machine play requiring a Form W-2G.

¹⁰ Proposed Regulations § 1.6041-10(b)(2)(D).

¹¹ The Proposed Revenue Procedure generally provides that the IRS will not challenge a taxpayer's calculations of gaming winnings or losses for electronically tracked slot play if they follow the provisions thereof.

¹² In addition, we are also concerned about the potential effects resulting from the Proposed Regulations' and Proposed Revenue Procedure's differing treatment of otherwise similar businesses based on the fact that one casino has invested in marketing tools such as an electronic player tracking system and another casino has not.

¹³ A patron's Total Rewards membership number is the number used in CMS for tracking gaming activity.

¹⁴ Although information obtained through CMS/Total Rewards assists in providing a summary of a patron's wagers and winnings, Caesars Entertainment currently does not audit or otherwise validate or guarantee the accuracy of such summaries,

¹⁵ At a minimum, we would need to modify CMS, a very complex and customized program, as well as build a separate windows server database. We would also need to make the appropriate interval ratings work in our slot data system. Currently, certain internal reports are created and validated only for $1,200 and above for slot and bingo jackpots and $1,500 and above for keno jackpots. The Proposed Regulations would create new triggers for electronically tracked slot machine play that would require reprogramming to generate reports that not only validate that cumulative net winnings for a session are greater than $1,200, but also that a $1,200 reportable slot jackpot occurred during the session. In addition, interval ratings would need to be built to collect information over the appropriate "session," which by all indications (as discussed below) would be something different than the "gaming day."

¹⁶ These estimates assume that all technology development and implementation will go smoothly. However, as with any technology upgrade or installation, actual costs could substantially increase due to various unforeseen contingencies.

¹⁷ The development and hardware costs contemplate developing databases, data management systems, security and audit controls and purchasing related hardware. The staffing costs contemplate that each of our 37 U.S. properties will be required to add full-time employees to support the new technology and audit needs at a cost of approximately $100,000 to $180,000 per property. These cost calculations assume that Caesars Entertainment properties will not be required to keep detailed annual information, but rather would be required to maintain a summary of daily winnings only. If the IRS were to require more detailed tracking and recordkeeping, the costs mentioned in this letter would increase substantially. Finally, we explored whether there are any external or out-of-the-box solutions that could address these changes and minimize costs, but found none.

¹⁸ We also note that accuracy may further be affected by outages in particular machines and slot data systems.

¹⁹ Not all play is carded for multiple reasons including: (i) patrons may choose not to sign up for Total Rewards; (ii) patrons may lose their cards; and (iii) patrons can insert and remove their cards from machines at any time.

²⁰ Proposed Regulations § 1.6041-10(b)(3).

²¹ Note that we do not believe that any interruption in play (such as a 15 minute break) should affect what constitutes a session if a discrete 24-hour period has otherwise been established to be a session.

²² Proposed Regulations § 1.6041-10(h).