A recent Tax Court memorandum decision addresses when an accrual-basis business can deduct unused points earned by a customer as part of a customer reward program. In Giant Eagle, Inc. v. Commissioner of Internal Revenue, the taxpayer, a corporation, owned and operated supermarkets and gas stations. Giant Eagle awarded customers loyalty points in exchange for the purchase of merchandise at its supermarkets. The loyalty points could be used to reduce the price of fuel purchased at one of the taxpayer’s gas stations. The fuel points were not redeemable for cash or other property and expired three months from the date earned. The taxpayer claimed a deduction for the accrued expense related to the unused fuel points that remained at the end of the year in which they were awarded. The court disallowed the deduction for the value of the unused fuel points, holding that no deduction was allowed for the loyalty points until they were actually used to reduce the price of gasoline purchases.
In its decision, the court examined the applicability of the all-events test to the deduction for unused loyalty points. The all-events test is met only when all the events have occurred that establish that the fact of a liability exists, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability.
The court did not examine the other prongs of the all-events test because it held that the fact of the liability related to the fuel points was not fixed at the end of the year. In reaching its decision, the court concluded that the taxpayer was not contractually obligated to pay out fuel points to its customers unless or until they purchased fuel at a discount.
The taxpayer also argued that under the income recognition rules, it was entitled to decrease the sales price of merchandise purchased by customers for the estimated redemption value of the fuel points. The court rejected this argument stating that the redemption of the fuel points is conditioned on a subsequent purchase of fuel and the taxpayer is not entitled to reduce current sales for estimated redemption of fuel points.
Businesses that operate loyalty points programs should review the timing of their deductions for unused loyalty points in light of the Giant Eagle decision.