Third Circuit Reverses Tax Court on All‐Events Test for Customer Rewards

AuthorShirley Dennis‐Escoffier
Date01 July 2017
Published date01 July 2017
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22284
Third Circuit Reverses Tax Court on
All-Events Test for Customer Rewards
Shirley Dennis-Escoffier
The Third Circuit Court of
Appeals reversed the Tax Court
in Giant Eagle, Inc. (822 F.3d
666) and held that the corpora-
tion could deduct the estimated
costs of accrued customer
rewards. The Court determined
that the corporation satisfied
the all-events test because a
liability exists when the cus-
tomer earns the rewards and
the seller becomes obligated
to redeem, rather than when
the redemption occurs. This
opinion is binding on the Inter-
nal Revenue Service (IRS) for
taxpayers within the Third Cir-
cuit; however, other taxpayers
should note that the IRS issued
a nonacquiescence indicating it
will continue to fight this issue
in the future.
Many retailers offer cus-
tomer loyalty programs in
which customers can earn
some form of points on quali-
fying purchases that can be
redeemed for rewards such as
discounts when making future
purchases. The timing of when
a deduction can be taken for
these rewards depends on the
retailer’s method of account-
ing. Internal Revenue Code
(IRC) Section 461(a) states that
a deduction must be taken for
the tax year that is the proper
tax year under the accounting
method used by the taxpayer
to compute its taxable income.
Although a cash-method tax-
payer may only take a deduc-
tion in the year the rewards are
redeemed, an accrual-method
taxpayer may be able to take
a deduction in the year before
the year in which they are
redeemed if the all-events test
is met. Regulation Section 461-
1(a)(2) states that a liability
is taken into account by an
accrual-method taxpayer in
the year in which the following
requirements are met:
1. All events have occurred that
establish the fact of the liability,
2. The amount of the liability
can be determined with rea-
sonable accuracy, and
3. Economic performance has
Economic performance
generally occurs as the tax-
payer provides the goods or
services. Regulation Section
1.461-4(g)(3) states that if the
taxpayer’s liability is to pay a
rebate, refund, or similar pay-
ment (whether paid in property
or money or as a reduction in
the price of goods or services
to be provided in the future),
economic performance gener-
ally occurs as payment is made.
However, IRC Section 461(h)(3)
contains an exception for cer-
tain recurring items, even if
economic performance has not
been met. If a taxpayer can
establish the fact of the liability
and the amount of the liabil-
ity with reasonable accuracy,
an item will be considered
deductible if:
1. Economic performance
occurs within a reasonable
period after the close of
the relevant tax year or 8½
months after the close of the
tax year;
2. The item is recurring in
nature and the taxpayer con-
sistently treats the item as
incurred when all events are
otherwise satised; and
3. The item is not material, or
the accrual of the item in
the tax year results in bet-
ter matching against income

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