Potential expiration is not an event.

• Author: Beavers, James A.
• Position: Tax deductions for discounts

The Third Circuit held that a grocery store/gasoline retailer could take a deduction in the current tax year for discounts on gasoline purchases that the store's customers had accrued but not yet taken at the end of the year.

Background

In April 2004, Giant Eagle, a grocery store chain in the Northeast and Midwest with retail gasoline outlets at its stores, reworked its existing gasoline discount card program into a new program called "fuelperks!," a reward program that linked customers' rewards at the pump to prior grocery purchases, i.e., for every $50 spent on qualifying groceries, a customer enrolled in the program earned a 10-cents-per-gallon discount on gas. Discounts earned expired three months after they were earned, and under the program terms Giant Eagle could (although it did not) end the program at any time without prior notice. The combination of gasoline discounts and advertising for fuelperks! led to a dramatic increase in Giant Eagle's supermarket sales.

For the years at issue, 2006 and 2007, Giant Eagle claimed a deduction on its corporate income tax returns for the discounts its customers had accumulated but, at year's end, had not yet applied to fuel purchases. Giant Eagle computed the deduction by a formula incorporating the gross discounts customers earned by qualifying purchases, historical discount redemption rates, and the average number of gallons purchased in a discounted fuel sale.

From the outset of the fuelperks! program, Giant Eagle tracked customers' redemption of accumulated discounts and used the historical averages to determine the amount of the claimed deductions. As a result, it did not base its computations on the number of discounts actually redeemed or the number of gallons of gasoline actually sold in the three months after year's end. The IRS disallowed the deductions Giant Eagle took for the program in 2006 and 2007.

This treatment ruffled Giant Eagle's feathers, and the company petitioned the Tax Court to redetermine its 2006 and 2007 income tax liabilities on two grounds. First, it argued that the discounts accumulated but not applied by year's end satisfied the all-events test because its liability for the discounts became fixed upon their issuance at checkout. Alternatively, Giant Eagle urged that the accrued discounts be treated as sales accompanying "trading stamps or premium coupons," enabling it to offset the estimated costs against gross receipts from grocery sales.

The Tax Court rejected...