Professional Tax Research Solutions from the Founder of Kleinrock. tax research
Parkers Tax Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
CPA software
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

Taxpayer Can't Deduct Unredeemed Perks Associated with Loyalty Program.
(Parker Tax Publishing August 13, 2014)

A taxpayer's obligation to redeem certain perks given to customers as part of a loyalty reward program was subject to a condition precedent that was only satisfied after the close of taxpayer's tax year, and the exception to the all-events test for trading stamps or premium coupons did not apply to allow a current year deduction. Giant Eagle, Inc. v. Comm'r, T.C. Memo. 2014-146 (7/23/14).

Giant Eagle, Inc. owned and operated supermarkets under the name "Giant Eagle" and gas stations under the name "GetGo." In 2006 and 2007, Giant Eagle offered a customer loyalty program by which customers making qualifying purchases at Giant Eagle could earn "fuelperks!" that were redeemable for a discount against the purchase price of gas at GetGo. Fuelperks! expired three months after the last day of the month in which they were earned and could not be redeemed in cash.

Giant Eagle was an accrual method taxpayer and claimed deductions for unredeemed fuelperks! for 2006 and 2007. The IRS denied the deductions, claiming Giant Eagle did not meet the all events test of Code Sec. 461(h) and Reg. Sec. 1.461-1(a)(2) to currently deduct its liability for fuelperks! because the liability was not fixed until the perks were redeemed.

Giant Eagle argued that the fuelperks! program constituted a unilateral contract under which it became legally obligated to redeem fuelperks! as they were accumulated. Thus, its liability for the outstanding fuelperks! was fixed at the end of 2006 and 2007.

Under an alternative argument, Giant Eagle said an exception in Reg. Sec. 1.451-4(a)(1) to the all-events test applied. Under this exception, if an accrual method taxpayer issues trading stamps or premium coupons with sales, or an accrual method taxpayer is engaged in the business of selling trading stamps or premium coupons, and such stamps or coupons are redeemable by such taxpayer in merchandise, cash, or other property, the taxpayer should, in computing the income from such sales, subtract from gross receipts with respect to sales of such stamps or coupons (or from gross receipts with respect to sales with which trading stamps or coupons are issued) an amount equal to: (1) the cost to the taxpayer of merchandise, cash, and other property used for redemption in the tax year, (2) plus the net addition to the provision for future redemptions during the taxable year (or less the net subtraction from the provision for future redemptions during the tax year). According to Giant Eagle, Reg. Sec. 1.451-4(a)(1) applied and it was thus allowed to offset certain sales revenues by the estimated future costs of redeeming outstanding fuelperks! The IRS, citing Rev. Rul. 78-212, said the regulation did not apply because, among other reasons, fuelperks! were not redeemable in "merchandise, cash, or other property".

OBSERVATION: In Rev. Rul 78-212, the IRS held an accrual method wholesaler-manufacturer of various products distributed through retail stores that, as part of its sales promotion program, issues and redeems coupons that entitle consumers to a discount on the sales price of certain products purchased in the future may not avail itself of section 1.451-4 of the regulations to account for expenses incurred in the redemption of coupons issued with the sale of the product either in or on the package, issued as part of an advertising campaign, or inserted as a part of its retailer's advertisements.

The Tax Court agreed with the IRS and held that Giant Eagle could not deduct the unredeemed fuelperks! before they were redeemed. Under the fuelperks! promotion, the Tax Court noted, redemption of fuelperks! was structured as a discount against the purchase price of gas. Consequently, the purchase of gas was necessarily a condition precedent to the redemption of fuelperks! While the court noted that redemption of fuelperks! could conceivably discount the purchase price of gas to zero, the right to redeem fuelperks! without paying to purchase gas (i.e., for a free tank of gas) would be contingent on the setting of the retail price of gas immediately before the purchase. Accordingly, whether a customer paid something for the purchase of gas or nothing, Giant Eagle's obligation to redeem fuelperks! was subject to a condition precedent that could be satisfied only after the close of its tax year. Thus, the court concluded that Giant Eagle's liability for outstanding fuelperks! became fixed upon their redemption and not when the customer earned the fuelperks! as Giant Eagle had contended. As a result, the court rejected Giant Eagles deductions in 2006 and 2007 for the outstanding fuelperks!

The Tax Court also agreed with the IRS that the exception to the all events test in Reg. Sec. 1.451-4(a)(1) did not apply. The purpose of that regulation, the court noted, is to match sales revenues with the expenses incurred in generating those revenues. Similar to the taxpayer in Rev. Rul. 78-212, allowing Giant Eagle a present deduction with respect to redemptions conditioned on an additional purchase, the court said, would result in a mismatching of expenses and revenues, contrary to the regulation's primary purpose.

For a discussion of the all-events test, see Parker Tax ¶241,520. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker's Tax Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker's Tax Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker's Tax Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker's Tax Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2016 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance