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May 6 — An IRS victory over a prominent grocery store chain dealing with more than $3.6 million in disallowed deductions was reversed by the Third Circuit, which found that the U.S. Tax Court had “obliterated the distinction between two accounting methods” in its ruling.
U.S. Court of Appeals for the Third Circuit Judge Jane Richards Roth reversed and remanded the lower court ruling in a May 6 decision that found Giant Eagle Inc., a corporation operating a chain of retail supermarkets, gas stations and convenience stores, could claim deductions for a customer service loyalty program, even if the customers hadn't claimed the rewards yet.
In 2004, Giant Eagle revealed a new customer-loyalty program called “fuelperks!” that awarded gas discounts to customers spending certain amounts within the company's grocery stores. On its 2006 and 2007 corporate income tax returns, Giant Eagle claimed a deduction for the discounts its customers had accumulated but that, at year's end, they hadn't applied to fuel purchases.
The Internal Revenue Service disallowed the deductions, which totaled more than $3.6 million for the two years.
At the Tax Court, Giant Eagle argued that the discounts accumulated but not applied by year's end satisfied the “all events” test because Giant Eagle's liability became fixed upon issuance of the discounts. The court disagreed, finding that the company's claimed deductions didn't satisfy the test because the purchase of gasoline functioned as a condition precedent to customers' redemption of discounts earned at checkout.
“Accordingly, the court reasoned, any fuelperks!-related liability became fixed only after customers applied the accumulated discounts to a fuel purchase, which, in the case of the disallowed deductions, occurred after the end of the tax year,” the opinion said.
According to the “all events test” found in tax code Section 461(h)(4), “accrual method taxpayers are expressly permitted to deduct expenses before they are paid, so long as ‘all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.”
According to Roth, who ruled Giant Eagle was entitled to deduct the fuelperks!-related liabilities for the years at issue, the Tax Court misapplied the “all events” test as it applies to recurring expenses.
“Giant Eagle characterizes its issuance of fuelperks! rewards as a unilateral contract formed at checkout, which conferred instant liability on the supermarket chain to its customers for the rewards they accrued,” Roth said.
Roth added that it was irrelevant that neither the total amount of the company's anticipated liability nor the identity of all the customers who eventually applied for the discounts toward gasoline could be identified by year's end.
Judge Thomas M. Hardiman dissented.
Robert M. Barnes represented Giant Eagle. Julie C. Avetta represented the commissioner.
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Text of the decision is in TaxCore.
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