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Third Circuit Allows Accelerated Deduction for Accrued Loyalty Rewards



The United States Court of Appeals for the Third Circuit reversed the Tax Court and ruled that a taxpayer could deduct liabilities related to its loyalty discount program that had accrued but were not yet redeemed. The Third Circuit Court of Appeals determined that the Tax Court had misapplied the all events test.


In Giant Eagle, Inc. v. Commissioner, the taxpayer, supermarket chain Giant Eagle had a customer loyalty program it called “fuelperks.”  Pursuant to the program, customers would present a loyalty card when purchasing groceries and, depending on how much they spent, they would get a discount on gasoline purchases.  Giant Eagle claimed a deduction on its 2006 and 2007 tax returns for the amount of discounts its customers had accumulated but had not yet used (redeemed) toward fuel purchases.  The IRS disallowed the deductions. 

The matter was litigated in the U.S. Tax Court and the Tax Court agreed with the IRS that the liability was not fixed until a customer uses the discount and was dependent upon the customer’s future purchase of gasoline. 

Giant Eagle appealed the Tax Court’s decision to the Third Circuit Court of Appeals. In a 2-1 decision, the Third Circuit reversed the Tax Court and the majority concluded that Giant Eagle’s discount liability met the “all events” test. The Third Circuit held:

For purposes of the “all events” test’s fixed liability prong, it is irrelevant that neither the total amount of Giant Eagle’s anticipated liability nor the identity of all the customers who eventually applied discounts toward gasoline purchases could be conclusively identified at year’s end…Giant Eagle amply demonstrated the existence – as of year’s end – of both an absolute liability and a near-certainty that the liability would soon be discharged by payment.  The chance of non-redemption had been calculated by Giant Eagle “with reasonable accuracy” as conceded by the Commissioner.  The “all events” test demands no more.

What Does CohnReznick Think?
Retailers with discount or customer loyalty programs may have the ability to accelerate a significant amount of deductions related to those programs.  Specifically, companies with such programs that are waiting until redemption to deduct discount/rebate liabilities should analyze their facts and determine whether an accelerated deduction is available.  In this case, the taxpayer’s ability to calculate the redemption rate with reasonable accuracy was viewed as a favorable fact making the court comfortable that no further steps were necessary to fix the liability.


To discuss this issue in more detail, please contact Richard Shevak, National Accounting Methods and Periods Director, at or 862-245-5029.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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