United States

IRS announces it will not follow Giant Eagle decision


On Oct. 3, 2016, the IRS announced in IRB 2016-40 that it will not follow the 3rd U.S. Circuit Court of Appeals holding in Giant Eagle, Inc. v. Commissioner. The nonacquiescence of the IRS to the decision means that other taxpayers wishing to follow Giant Eagle will not have a change in method of accounting approved by the IRS National Office, barring a very similar fact pattern. (See the full IRS Action on Decision memorandum, released Oct. 5, 2016.)

In Giant Eagle, the United States Tax Court reviewed the federal tax treatment of Giant Eagle’s customer reward program, whereby a customer received a 10-cent-per-gallon discount on gas for every $50 of groceries purchased by that customer. In its memorandum decision, the Tax Court concluded that the taxpayer’s use of the recurring item exception for its year-end liability pertaining to the rewards was not permitted as the liability for the reward program did not meet the ‘all events’ test under section 461.

The three-pronged all events test of section 461 determines the timing of when an accrual based taxpayer is allowed to deduct a liability.

  1. The fact of the liability must be fixed
  2. The amount of the liability must be able to be determined with reasonable accuracy
  3. Economic performance has occurred with respect to the liability

In Giant Eagle, the Tax Court ruled the fact of the liability was not fixed as of year-end and only became fixed when the customer used the discounts on a fuel purchase. This followed the IRS argument that the purchase of gasoline was a condition precedent to the taxpayer deducting the reward liability. As such, the liability was not deductible until the year in which this event occurred.

The IRS did not dispute that the amount of the liability was determinable as of year-end or that economic performance had occurred with respect to the reward program liability, leaving the determination of whether the liability was fixed at year-end as the only item to be determined on appeal. The appeals court reviewed the terms and conditions of the reward program, along with Pennsylvania state contract law, and concluded that Giant Eagle entered into a unilateral contract with its customer at checkout, “which conferred instant liability on the supermarket chain to its customers for the rewards they accrued.” As such, the fact of the liability was fixed and Giant Eagle’s liability met the all events test of section 461.

Nonacquiescence by the IRS means that the IRS does not agree with the court’s decision and does not plan to follow the decision in other cases with taxpayers. Additionally, nonacquiescence indicates the IRS will not follow a circuit court decision on a nationwide basis.

For taxpayers with similarly designed reward programs, the decision by the IRS to not acquiescence is a detriment to a potential tax timing strategy. However, there may be alternative ways to structure the contract between the taxpayer and a customer that would allow a deferral of some income recognized at the time of grocery purchase. Taxpayers should work with their advisors to review any customer reward programs for potential tax timing opportunities.


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