IRS decision overturned: Gas, Loyalty Programs and Tax Deductions
Giant Eagle is a Pittsburgh, Pennsylvania based corporation that operates a chain of supermarkets, pharmacies, gas stations, and convenience stores throughout Pennsylvania, Ohio, West Virginia and Maryland.
As one of the largest, privately owned and family-operated companies in the nation, Giant Eagle has annual sales of approximately $9.3 billion. Giant Eagle, like most major supermarket chains, offers many incentive customer loyalty programs; one of which is called “fuelperks!”. Fuelperks! is a loyalty program incentivizing customers by rewarding them with a discount of 10 cents per gallon on gas for every $50 spent on qualifying groceries using their Advantage card?
Giant Eagle claimed tax deductions totaling $6.16 million and $1.13 million for tax years 2006 and 2007, respectively, for the fuelperks! discounts its customers had accumulated but had not applied to fuel purchases by the end of the year. The IRS disallowed the deductions based on not meeting the first requirement in the all events test of Regs. Sec. 1.461-1(a)(2)(i). Under the all events test, the deduction is allowed when (1) all events have occurred that establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. Giant Eagle appealed to the U.S. Tax Court contending that it had met the requirements of the all events test. Consequently, the U.S. Tax Court found the deductions did not satisfy the all events test because the liability became fixed only when the discounts were used to buy fuel, not when the customer earned them.
But Giant Eagle did not stop here; Giant Eagle argued that Regs. Sec. 1.451-4(a)(1) provides an exception to the all events test for taxpayers that issue premium coupons redeemable by the taxpayer in merchandise, cash or other property. This exception allows a reduction in sales revenue from selling the premium coupons for the cost of redeeming the coupons. However, the Tax Court stated the provision for the exception’s purpose is to match sales revenue with the expenses incurred to create it and since these discounts were associated with the future purchase of gasoline, the credits were not redeemable in merchandise, cash, or other property. As a result, Giant Eagle appealed the decision to the 3rd Circuit Court of appeals.
The 3rd Circuit Court of appeals stated that the all events test was applicable to the case and where the IRS stated Giant Eagle did not meet the first requirement; the 3rd Circuit Court of appeals ruled that since a liability can accrue within a tax year where all events occurred, the liability had been established. The liabilities became fixed only when the discounts were used and since the total amount of the liability could be conclusively determined by the end of the tax year, the all events test provisions were satisfied. The Court also reasoned that Regs. 1.451-4(a)(1) enables taxpayers to use an accrual method of accounting to deduct costs before they occur if the all events test has occurred in the tax year and liability was established and could be reasonably identified.
The implications of this matter involve the IRS not acquiescing to the holding of the 3rd Circuit Court’s ruling and instead stating that it will only acknowledge the ruling as precedent for taxpayers with similar fact patterns within the 3rd Circuit (Delaware, New Jersey, Eastern, and Middle Pennsylvania). The ruling is significant because it provides a different interpretation of the regulations and prior legal precedents than other courts have in the past. It may provide planning opportunities for taxpayers who operate similar programs within the third circuit. It will be interesting to see the impact this ruling has on future regulations and case law.
Nina Chmura, CPA | [email protected]
The information contained herein is not necessarily all-inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriately qualified professionals for your individual facts and circumstances.