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

• Author: Shirley Dennis‐Escoffier
• Date: 01 July 2017
• Published date: 01 July 2017
• DOI: http://doi.org/10.1002/jcaf.22284

69

© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22284

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IRS

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.

ALL-EVENTS TEST

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

occurred.

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