IRS finds future costs of fuel rewards are subtracted from gross receipts when earned

By Yuan Chou, J.D., LL.M., McLean, Va.

Editor: Kevin D. Anderson, CPA, J.D.
The IRS recently ruled in a Field Attorney Advice (FAA) memo that an accrual-method taxpayer could reduce its gross receipts by the estimated future cost of fuel reward redemptions in the tax year that the customer earns those rewards through the purchase of the taxpayer's products sold with the linked fuel rewards. FAA 20180101F favorably concludes that the taxpayer's fuel rewards program meets the requirements for a premium coupon eligible for the above tax treatment and is distinguishable from discount coupons used in other reward programs. Although the guidance may not be used or cited as precedent, this FAA is indicative of the IRS's view, as of the date of the issuance of that guidance, on the legal issues addressed.
Method of accounting for premium coupons and trading stamps

Under an accrual method of accounting, Sec. 461 and the regulations thereunder provide that a liability is generally taken into account in the tax 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 for the liability (the "all-events test"). Notwithstanding, Regs. Sec. 1.451-4 provides an exception to the general all-events test for accrual-basis taxpayers that sell or issue premium coupons or trading stamps with sales where such coupons or stamps are redeemable by the customer in merchandise, cash, or other property.

In computing the income from such sales, these taxpayers should subtract from gross receipts with respect to sales of premium coupons or trading stamps, or subtract from gross receipts with respect to sales with which premium coupons or trading stamps are issued, an amount equal to (1) the cost to the taxpayer of merchandise, cash, and other property used for redemptions in the tax year, plus (2) the net addition to the provision for future redemptions during the tax year.

The IRS and the courts have weighed in on whether certain coupon liabilities qualify under Regs. Sec. 1.451-4. In Rev. Rul. 78-212, the IRS concluded that Regs. Sec. 1.451-4 did not apply to discount coupon expenses because the right of redemption must be unconditional such that the coupons must be redeemable without additional consideration from the customer. In that revenue ruling, the IRS indicated that the intent of Regs. Sec. 1.451-4 is to match, in the same tax year, revenues with the expenses incurred in producing those revenues. More recently, in Giant Eagle, Inc., T.C. Memo. 2014-146, rev'd on other grounds, 822 F.3d 666 (3d Cir. 2016), the Tax Court ruled that discount coupons are not premium coupons subject to Regs. Sec. 1.451-4 and, therefore, the taxpayer in Giant Eagle could not offset current-year sales revenues by its estimated future cost of redeeming outstanding fuel discount rewards. Citing Rev. Rul. 78-212, the court stated that the exception was inapplicable to Giant Eagle's fuel rewards program because the program required a future purchase of fuel to claim the reward, and thus the program failed to comply with the requirement in Regs. Sec. 1.451-4 that the reward be "redeemable in merchandise, cash, or other property."

Further, where the redemption of the reward is conditioned on an additional purchase of the taxpayer's product by the consumer, the expense of redeeming the reward is attributable to the subsequent additional purchase and not to the original purchase that earned the reward. Therefore, in keeping with the underlying intent of Regs. Sec. 1.451-4 to match the redemption expenses with the revenue to which they relate, the redemption expenses should be deferred until the year of the subsequent purchase.

Taxpayer's rewards program

The taxpayer in FAA 20180101F is engaged in the trade or business of operating grocery stores and offers a fuel rewards program to its customers. Under this program, a customer signs up for a fuel reward card and earns fuel rewards money based on the purchase of certain products at the taxpayer's stores. At the time of purchase, the reward earned by the customer is electronically loaded onto the fuel card and can then be redeemed for gas at any participating stations owned by an unrelated third party.

Unlike other fuel rewards programs that provide a discount off the price of gas, the customers using the taxpayer's program are entitled to free fuel up to the amount of money loaded on the card. When pumping gas, the customer inserts the fuel card just like any credit card, and the pump turns off when the total amount of the card is reached. If the customer desires to purchase more gas than the amount loaded on the card, the process of purchasing gas starts over. The participating gas station provides a weekly report to the taxpayer indicating the fuel rewards redeemed, the total number of gallons purchased with fuel cards, and a fuel purchase rebate due to the taxpayer. The taxpayer will then pay the gas station company the amount billed for redeemed rewards, less the fuel purchase rebate.

For financial reporting and federal income tax purposes, the taxpayer immediately expenses the fuel rewards at the time of issuance. The issue before the IRS is whether the taxpayer can reduce from gross receipts the estimated future cost of fuel reward card redemptions under Regs. Sec. 1.451-4 in the tax year that the rewards are earned (i.e., the year that the taxpayer's products with linked fuel money are purchased).

Taxpayer's coupons distinguished from discount coupons

In its analysis, the FAA first discusses that the taxpayer's fuel rewards are not a discount but rather that the rewards are redeemable for "other property," specifically, gas purchased from the gas station company by the taxpayer. Acknowledging that neither the statute nor the regulations define "redeemable by such taxpayer in merchandise, cash, or other property," the IRS reasons that the taxpayer effectively is redeeming the coupons for other property by paying for the gas that the customers pick up at the gas stations, a transaction no different from a taxpayer's offering "other property" to customers that is purchased from a third party and picked up by the customer directly from the third party. The taxpayer in the instant case enters into a fuel agreement with the gas station company whereby the latter agrees to redeem the gas and the taxpayer agrees to pay for it, minus the rebate.

Next, the IRS distinguishes the taxpayer's fuel reward card program from the programs in Rev. Rul. 78-812 and Giant Eagle, which rewarded customers with discount coupons that could be redeemed on a future purchase by the customer. In the instant program, customers using the taxpayer's fuel rewards card do not have to make an additional purchase to redeem the amount of the fuel rewards card for gas.

The customer simply inserts the fuel card, and the pump turns off when the total amount of money loaded on the card is reached, or sooner if the customer stops pumping gas. This appears to be the main distinction from a discount coupon, which cannot qualify for treatment under Regs. Sec. 1.451-4. In its concluding discussion, the IRS mentions that applying Regs. Sec. 1.451-4 to the taxpayer's fuel rewards card program would be consistent with the section's intent to match sales revenues with expenses incurred to generate those revenues. The IRS reasons that the purpose of the taxpayer's program is to increase sales of its grocery store products, rather than to increase the gas station's sales, and therefore the matching intent of the regulation is met.

Main takeaway

Businesses that issue or sell similar rewards cards to customers that can later be redeemed for merchandise, cash, or other property should consider the rationale used in the FAA in determining whether the estimated future cost of redemptions can offset the gross receipts in the tax year that the rewards are earned. Although it may lack precedential value, the FAA reflects the IRS's current view that redemption of rewards that is conditioned on an additional purchase of product by the customer constitutes a discount coupon that does not meet the requirements of Regs. Sec. 1.451-4. Rather, eliminating the additional purchase condition enables the taxpayer to view the rewards program as a premium coupon and better meet the intent of Regs. Sec. 1.451-4 to match, in the same tax year, revenues with the expenses incurred in producing those revenues.


Kevin Anderson is a partner, National Tax Office, with BDO USA LLP in Washington.

For additional information about these items, contact Mr. Anderson at 202-644-5413 or

Unless otherwise noted, contributors are members of or associated with BDO USA LLP.

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