IRS Does Not Acquiesce to Treatment of Discounts in Giant Eagle

By Sharon A. Kay, CPA, Washington, and Brenna MacDonald, CPA, Milwaukee

Editor: Greg A. Fairbanks, J.D., LL.M.

The IRS stated it will not follow the Third Circuit's decision in Giant Eagle, Inc., No. 14-3961 (3d Cir. 5/6/16), in which the court held that the taxpayer's liability for certain unredeemed discount coupons was fixed when the coupons were issued to customers rather than when customers redeemed them on a future purchase. The IRS released Action on Decision (AOD) 2016-03 providing the nonacquiescence recommendation in October 2016. The nonacquiescence indicates that the IRS will continue to litigate the issue. Therefore, taxpayers should expect to see continued controversy regarding when a liability is fixed for customer discounts.


In Giant Eagle, the Third Circuit reversed and remanded the Tax Court's order (T.C. Memo. 2014-146), which denied the taxpayer's fuel rewards program deductions, on the grounds that the deductions were permissible under the all-events test. The Third Circuit, in a 2-1 decision, found the liability to be fixed at the time the discount was earned.

Giant Eagle operates a chain of retail supermarkets, pharmacies, gas stations, and convenience stores in the United States. The taxpayer established a fuel rewards program known as fuelperks!, in which customers earn rewards at the gas pump based on grocery purchases. For example, for every $50 of groceries purchased, a cardholder earns a 10-cents-per-gallon discount on gasoline. The brochure distributed to customers describing the program indicated that the discounts expired on the last day of the third month after they were earned, and that the promotion was valid for a limited time and could end without prior notice. Giant Eagle claimed a deduction for the discounts its customers had accumulated but, at year's end, had not yet applied to fuel purchases. The amount of the deduction was based on historical averages of the redemption of accumulated discounts, not on the number of discounts actually redeemed or the number of gallons of gasoline actually sold in the three months after the year's end.

In the Tax Court, Giant Eagle argued, in part, that the discounts that had accumulated but were not redeemed by year end satisfied the all-events test because the liability became fixed when the discounts were issued. The court rejected the taxpayer's arguments, reasoning that the deductions didn't satisfy the all-events test because the purchase of gasoline functioned as a condition precedent to customers' redemption of discounts earned at checkout, and therefore the liability was fixed only after customers redeemed the discounts on a fuel purchase.

The Third Circuit agreed with the taxpayer's characterizations of the fuelperks! rewards as a unilateral contract under state law that formed at the time the customer purchased groceries, which fixed the liability because the taxpayer was legally bound to honor the discounts. The Third Circuit considered several applicable cases, including Hughes Properties, Inc., 476 U.S. 593 (1986) (in which a casino operator was entitled to deduct the annual increase in its progressive jackpot because the anticipated liability was fixed under Nevada law, which required a payoff), and its own decision in Lukens Steel Co., 442 F.2d 1131 (3d Cir. 1971)(in which the court allowed a deduction for a contingent liability account where a collective bargaining agreement made payment certain).

The Third Circuit reasoned that it was irrelevant that Giant Eagle could not conclusively identify the total amount of the anticipated liability nor all of the customers who eventually applied discounts toward gasoline purchases. Furthermore, the court indicated that the company mitigated the risk of overstating the value of the rewards that would later be redeemed by tracking and accounting for prospective nonredeemers. The Third Circuit also found that Giant Eagle demonstrated the existence of both an absolute liability and a near certainty that the liability would soon be discharged by payment.

IRS Action on Decision

The IRS's AOD states that the Third Circuit misconstrued the cases permitting the deduction of a liability that was unconditionally fixed at a point prior to payment. The IRS stated that in these cases, the amount of the liability was unconditionally fixed. The only contingency in these cases was the identity of the individual or individuals who would receive payment from the taxpayer or the point in time when the taxpayer would make the payment. In Giant Eagle, however, the IRS's view is that the total amount of the liability is not fixed when the coupons are issued to the customer. The issuance of coupons creates a contractual obligation to pay only if and when customers redeem the coupons.

The Service believes that the Third Circuit should have followed the Supreme Court's opinion in General Dynamics Corp., 481 U.S. 239 (1987), in which the Court held that a taxpayer may not deduct a liability based on anticipated events that have not occurred by the end of the tax year. Therefore, the IRS stated, it will continue to litigate its position on this matter. The nonacquiescence recommendation clarifies, however, that the IRS will recognize the precedent of Giant Eagle for cases in the Third Circuit if the opinion cannot be meaningfully distinguished. Additionally, representatives of the IRS National Office have stated publicly that the National Office will not grant consent to change to the method of accounting used by Giant Eagle (Richman, "IRS Will Not Grant Method Changes to Follow Giant Eagle," 2016 TNT 192-11 (Oct. 4, 2016)).

Many taxpayers wondered whether the opinion in the Third Circuit would sway the IRS to loosen its position regarding when a liability is fixed for certain customer discounts. The AOD makes it clear that the IRS has not changed its position and will continue to litigate the issue. Therefore, taxpayers should expect to see continued controversy for customer discounts.


Greg Fairbanks is a tax managing director with Grant Thornton LLP in Washington.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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