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Tax Court Disallows Taxpayer’s Claimed Deductions for Unredeemed Discount Offers


9/18/14

Synopsis
 
On July 23, 2014 the Tax Court ruled against a taxpayer who was claiming a deduction for unredeemed discounts related to its customer loyalty promotion. In Giant Eagle Inc. v. Comm’r., the court ruled the taxpayer was not entitled to a deduction for unredeemed discounts because the “all-events” test was not satisfied.
 
Issue
 
The taxpayer, Giant Eagle Inc., operates supermarkets, pharmacies, gas stations, and convenience stores. The retailer invited its customers to participate in a discounted gasoline and diesel fuel promotion titled “fuelperks!”. Customers earned fuelperks! by using a loyalty card when purchasing qualifying goods or services. These fuelperks! could reduce the price of a gallon of gas to $0 but expired three months after the last day of the month in which they were earned. They could not be redeemed for cash.
 
The first issue in this case was whether the taxpayer properly accrued and deducted expenses for unredeemed fuelperks! under the all-events test.
 
Generally, taxpayers can deduct all ordinary and necessary business expenses incurred when carrying on its trade or business. An accrual method taxpayer must satisfy the all-events test before it can take a deduction for a business expense. Under the all-events test, the taxpayer may deduct an expense when the following three requirements are satisfied: (1) all events have occurred to establish the fact of the liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred.1     
 
The IRS argued that the taxpayer failed to meet the first requirement of the all-events test because all of the events establishing the taxpayer’s liability for the outstanding fuelperks! had not occurred by year end. The taxpayer argued that the liability for the fuelperks! becomes fixed when they are earned, but the IRS countered that the liability became fixed when the fuelperks! were redeemed.
 
The Tax Court agreed with the IRS. The court explained that the purchase of gas was a necessary condition precedent to the redemption of the fuelperks! Therefore, the taxpayer’s liability for outstanding fuelperks! became fixed upon their redemption, not when the customer earned them. The taxpayer’s claimed deductions for outstanding fuelperks! liabilities did not satisfy the all-events test.
 
The second issue was whether, under an exception to the all-events test2, the taxpayer was entitled to offset certain sales revenues by the estimated costs of future redemptions of fuelperks!
 
The court held that the exception did not apply because fuelperks! were not redeemable for merchandise, cash, or other property and that allowing a present deduction for redemptions based on an additional purchase could result in a mismatching of expenses and revenues. Therefore, the court held that the taxpayer did not qualify for the all-events text exception. 
 
What Does CohnReznick Think?

The IRS has become more diligent in examinations of accrued liabilities, customer reserves, and sales allowances. A careful review of each reserve or allowance program must be done to ensure an actual liability has been incurred and that liability can be determined with reasonable accuracy before the end of the tax year.

To learn more about CohnReznick’s Tax Specialty Services, please visit our webpage.

1Treas. Reg. § 1.461-1(a)(2).
2Treas. Reg. § 1.451-4(a)(1).


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