United States

Treatment of reward programs: Where there is a will there may be a way


The IRS recently issued an Action on Decision (AOD) with respect to Giant Eagle, Inc. v. Commissioner. The AOD provides that the government will not follow the decision in Giant Eagle outside of the Third Circuit (read our tax alert). This decision could strike a blow to other companies wishing to change their method of accounting to follow Giant Eagle for similar reward programs. 

The taxpayer, Giant Eagle, Inc. operates retail supermarkets, pharmacies, gas stations, and convenience stores in the U.S. In 2004, the company rolled out a new customer rewards program – fuelperks!, which linked customers’ grocery store purchases to a cents-per-gallon discount program. Giant Eagle then claimed on its tax return a deduction for accumulated, but not yet claimed discounts at year end. They used formulas to determine an estimate of the unclaimed discounts and then expensed these discounts prior to customers’ claims.

The IRS denied the expense on the basis that the discounts were not fixed until the customer actually purchased gasoline and the Tax Court agreed. The company then took its case to the Third Circuit, which overturned the Tax Court decision, allowing Giant Eagle the deduction.

In releasing an AOD, the IRS indicates it will not acquiescence to the decision in Giant Eagle and has will not grant consent to taxpayers requesting to change their method of accounting to follow Giant Eagle.

If you have a similar reward program, there may be an opportunity to defer some of the income from the sale of groceries attributable to the rewards program. It is important to fully understand your options in light of these developments.