Supermarket’s customer reward program liability meets all-events test exception

Authored by Kathleen Meade

In a recent ruling, the IRS held that the taxpayer, an operator of grocery stores, can treat the estimated future cost of fuel reward card redemptions as a reduction of the related sales receipts in the year that the rewards are earned, rather than when the rewards are subsequently redeemed for fuel by the customer. This ruling (Field Attorney Advice (FAA) 20180101F) contrasts with the recent unfavorable holdings of the IRS and Tax Court in the Giant Eagle case (discussed below). In that case, the taxpayer’s fuel reward program was structured differently than the program described in the FAA, resulting in a finding that the liability was not “fixed” when earned and therefore could not be deducted until the customer made an additional purchase and redeemed the reward.


Section 461(h)(4) and Treas. Reg. 1.461-1(a)(2)(i) generally provide that, under the accrual method of accounting, a liability is incurred and generally is taken into account in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.

Treas. Reg. 1.451-4 provides an exception to the “all-events” test when an accrual method taxpayer issues trading stamps or premium coupons with sales that are redeemable in merchandise, cash or other property. Specifically, Treas. Reg. 1.451-4(a)(1) requires the taxpayer to subtract the cost of merchandise, cash and other property used for redemptions during the taxable year from the sales receipts with which the trading stamps or coupons are issued.

In Rev. Rul. 78-212, 1978-1 C.B. 139, the IRS ruled that the exception in Treas. Reg. 1.451-4 for premium coupon and trading stamps did not apply to discount coupon expenses because, under the exception, the right of redemption must be unconditional (i.e., the coupons must be redeemable without additional consideration from the consumer) in order to match the timing of the sales receipts with the expenses incurred in producing those revenues.

In Giant Eagle, Inc. v. Commissioner, T.C. Memo. 2014-146, rev’d on other grounds, 822 F.3d 666 (3d Cir. 2016), the Tax Court cited Rev. Rul. 78-212 as support for its determination that the taxpayer’s coupons, which could be used for a 10-cent discount on the purchase of a gallon of gas, were discount coupons, not premium coupons. And, accordingly, they were ineligible for the exception under Treas. Reg. 1.451-4 because the coupons were conditioned on the customer purchasing additional gas and, therefore, not redeemable in merchandise, cash or other property.


Applying the foregoing legal authorities to the facts in the FAA, the IRS determined that the rewards described in the FAA are redeemable for other property (gas) and were not a discount. Specifically, the IRS noted “customers earned fuel rewards that were redeemable for gas. The money earned is electronically loaded to an enrolled customer’s fuel card and can be redeemed for gas” by the customer without making an additional purchase. Conversely, under the terms of the fuel reward program in Giant Eagle, the customers were required to make an additional purchase of gas to obtain the 10-cent per gallon discount. Significantly, the IRS also concluded the fact that the rewards were redeemed by an unrelated third party rather than directly by the taxpayer does not violate the requirement that the coupon must be “redeemable by such taxpayer” because “neither the statute nor the regulations define “redeemable by such taxpayer” and, consistent with previous IRS guidance cited in the FAA, the facts indicate that the “taxpayer effectively is redeeming the coupons for other property by paying for the gas.” Accordingly, because no additional purchase was required beyond the purchase that earned the reward, the IRS concluded that the taxpayer can treat the estimated future cost of fuel reward card redemptions as a reduction of the related sales receipts in the year the rewards are earned, rather than when the rewards are subsequently redeemed for fuel by the customer.


Given the prevalence of customer reward programs in the retail industry, this favorable guidance is welcome news to similarly situated taxpayers and provides useful insight on how taxpayers can structure their customer reward programs to accelerate the deduction of the program redemption expenses. Specifically, it is critical that the right of redemption be unconditional and not require further consideration (e.g., an additional purchase) from the customer. Affected taxpayers should familiarize themselves with the guidance and consult their tax advisor regarding potential accounting method implications related to their customer reward program liabilities.

For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.

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