Judges: HAINES
Attorneys: Richard I. Halpern and Robert M. Barnes, for petitioner. Travis Vance III and Anita Goklaney , for respondent.
Filed: Jul. 23, 2014
Latest Update: Nov. 21, 2020
Summary: T.C. Memo. 2014-146 UNITED STATES TAX COURT GIANT EAGLE, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 11910-12. Filed July 23, 2014. Richard I. Halpern and Robert M. Barnes, for petitioner. Travis Vance III and Anita Goklaney, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION HAINES, Judge: Respondent determined deficiencies in petitioner’s Federal income tax for 2006 and 2007 (years at issue) of $3,358,226 and -2- [*2] $313,490,1 respectively. Petitioner o
Summary: T.C. Memo. 2014-146 UNITED STATES TAX COURT GIANT EAGLE, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 11910-12. Filed July 23, 2014. Richard I. Halpern and Robert M. Barnes, for petitioner. Travis Vance III and Anita Goklaney, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION HAINES, Judge: Respondent determined deficiencies in petitioner’s Federal income tax for 2006 and 2007 (years at issue) of $3,358,226 and -2- [*2] $313,490,1 respectively. Petitioner ow..
More
T.C. Memo. 2014-146
UNITED STATES TAX COURT
GIANT EAGLE, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11910-12. Filed July 23, 2014.
Richard I. Halpern and Robert M. Barnes, for petitioner.
Travis Vance III and Anita Goklaney, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies in petitioner’s
Federal income tax for 2006 and 2007 (years at issue) of $3,358,226 and
-2-
[*2] $313,490,1 respectively. Petitioner owned and operated supermarkets under
the name “Giant Eagle” and gas stations under the name “GetGo”. During the
years at issue petitioner offered a customer loyalty program by which customers
making qualifying purchases at Giant Eagle could earn “fuelperks!” that were
redeemable for a discount against the purchase price of gas at GetGo. Petitioner,
an accrual method taxpayer, claimed deductions for certain unredeemed fuelperks!
for each year at issue. The question before us is whether under the “all events”
test of section 4612 petitioner properly accrued and deducted expenses for the
unredeemed fuelperks! If the answer to this question is no, we are asked to decide
whether petitioner is entitled to offset certain sales revenues by the estimated costs
of future redemptions of such fuelperks! under section 1.451-4, Income Tax Regs.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. We incorporate
the stipulation of facts and the accompanying exhibits by this reference.
1
Certain monetary amounts are rounded.
2
Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended and in effect for the taxable years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
-3-
[*3] I. Petitioner
Giant Eagle, Inc., is a Pennsylvania corporation with its principal place of
business in Pittsburgh, Pennsylvania. Giant Eagle, Inc., and its subsidiaries
(collectively, petitioner or Giant Eagle) operate, and were operating during the
years at issue, supermarkets and pharmacies under the name “Giant Eagle” and gas
stations and convenience stores under the names “GetGo” and “Giant Eagle
Express”. For each year at issue Giant Eagle filed a consolidated corporate
income tax return and used an accrual method of accounting to compute and report
its Federal income tax liability.
II. The Fuelperks! Program
During the years at issue Giant Eagle invited customers to participate in a
discounted gasoline and diesel fuel promotion called the “fuelperks! program”.
Under the fuelperks! program, customers could earn fuelperks! by presenting their
Giant Eagle Advantage Card (advantage card), a customer loyalty card, when
purchasing qualifying goods or services. For every qualifying $50 spent, a
customer earned a single fuelperk! Each fuelperk! was redeemable for a 10-cent
reduction in the retail price per gallon of gasoline or diesel fuel3 acquired in one
3
For convenience we refer hereinafter to diesel and gasoline fuel
collectively as gas.
-4-
[*4] transaction of up to 30 gallons at GetGo gas stations. To redeem fuelperks!,
customers were required to swipe their advantage cards when purchasing gas and
elect, by pushing a button, to use their fuelperks! Fuelperks! could be, and were
required to be, aggregated, so that all available fuelperks! would be used to reduce
the gas price to the greatest extent possible, possibly reducing the price for a
gallon of gas to zero. Accumulated fuelperks! in excess of the then-current price
per gallon of gasoline would be saved on the customer’s advantage card.
Fuelperks! expired three months after the last day of the month in which they were
earned and could not be redeemed in cash.
III. Tax Returns and Deficiency Notice
Giant Eagle deducted the estimated costs of redeeming a certain portion of
the issued fuelperks! that were unexpired and unredeemed at the end of each year
at issue (outstanding fuelperks!), in the amounts of $6,160,855 and $1,130,630 for
2006 and 2007, respectively. Respondent issued a deficiency notice disallowing
those deductions. Petitioner timely filed a petition with this Court challenging
respondent’s determination.
-5-
[*5] OPINION
I. Burden of Proof
The taxpayer generally bears the burden of proving the Commissioner’s
determinations are erroneous. Rule 142(a). The burden of proof may shift to the
Commissioner if the taxpayer satisfies certain conditions. Sec. 7491(a). Our
resolution of this case is based on a preponderance of the evidence, not on an
allocation of the burden of proof. Therefore, we need not consider whether
section 7491(a) would apply. See Estate of Bongard v. Commissioner,
124 T.C.
95, 111 (2005).
II. The All Events Test
Section 162(a) allows taxpayers to deduct all ordinary and necessary
business expenses they pay or incur during the taxable year in carrying on any
trade or business. Section 461(a) provides that a deduction must be taken for the
proper taxable year under the taxpayer’s method of accounting. An accrual
method taxpayer generally is allowed a deduction for the year in which the
taxpayer incurred the expense, regardless of the actual date of payment. Sec.
461(h)(4); sec. 1.461-1(a)(2), Income Tax Regs. Whether an accrual method
taxpayer has incurred an expense is determined under the all events test delineated
in section 1.461-1(a)(2)(i), Income Tax Regs., which provides:
-6-
[*6] Under an accrual method of accounting, a liability (as defined in §
1.446-1(c)(1)(ii)(B)) is incurred, and generally is taken into account
for Federal income tax purposes, 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.
***
An accrual basis taxpayer claiming that it incurred a liability for Federal
income tax purposes must satisfy each of the three requirements under the all
events test in order to deduct the liability. Petitioner contends that it meets all the
requirements of the all events test with respect to the disputed deductions for the
outstanding fuelperks! Respondent argues that petitioner fails the test because it
does not satisfy the test’s first requirement, among other reasons.4 More
specifically, respondent contends that all the events had not occurred to establish
petitioner’s liability for the outstanding fuelperks! We agree with respondent for
the reasons discussed below.
We have generally looked to and followed two leading Supreme Court
cases, United States v. Gen. Dynamics Corp.,
481 U.S. 239 (1987), and United
States v. Hughes Props., Inc.,
476 U.S. 593 (1986), when interpreting the first
prong of the all events test of section 1.461-1(a)(2), Income Tax Regs. See, e.g.,
4
Respondent concedes that petitioner meets the second requirement, i.e., or
the reasonable accuracy prong of the all events test.
-7-
[*7] Spitzer Columbus, Inc. v. Commissioner, T.C. Memo. 1995-397; Dana
Distribs., Inc. v. Commissioner, T.C. Memo. 1988-514, aff’d,
874 F.2d 120 (2d
Cir. 1989); see also Simplified Tax Records, Inc. v. Commissioner,
41 T.C. 75
(1963). While these cases are factually distinct from this case, they provide
helpful context for evaluating when a liability becomes fixed for purposes of the
all events test.
In Gen. Dynamics Corp., an accrual basis taxpayer self-insured its
employees’ medical plan. To obtain reimbursement for medical treatment under
the plan, employees were required to submit claim forms with satisfactory proof of
their claims. The taxpayer asserted that it could deduct the estimated costs of
employees’ potential claims for reimbursement existing at the end of the tax year
but not yet paid. The Supreme Court found that the employer’s liability to make a
payment under its self-insured medical plan was not fixed until an employee filed
a properly documented claim. The Supreme Court reasoned that the filing of the
claim was not a mere technicality but, rather, was a condition precedent to the
employer’s liability. In this regard, the Supreme Court noted that, for various
reasons, covered individuals might not file claims for reimbursement to which
they are plainly entitled. Since the last event necessary to fix the liability in Gen.
-8-
[*8] Dynamics Corp. had not occurred by the end of the tax year, the Supreme
Court held that the first prong of the all events test was not met.
In Hughes Properties, the taxpayer indirectly owned and operated slot
machines that had progressive jackpots. A Nevada gaming regulation prohibited
the taxpayer from reducing the payoff without paying out the jackpot. The
taxpayer using the accrual method of accounting sought to deduct the annual
increase in the jackpot payoff amounts on the progressive slot machines not yet
won by the end of the tax year. The Supreme Court held the taxpayer’s obligation
to pay the amount of the jackpot that had already accrued was irrevocable under
State law and that the liability was thus fixed for purposes of the all events test. In
so doing, it recognized that the jackpot might continue to grow for a prolonged
period and that it was possible for the casino to go bankrupt or cease business
before the jackpot was ever won.
Respondent contends that petitioner’s liability for fuelperks! becomes fixed
when they are redeemed. Petitioner argues that its liability for fuelperks! becomes
fixed when they are earned. We agree with respondent for the reasons explained
below.
Petitioner argues that the fuelperks! program constituted a unilateral
contract under which it became legally obligated to redeem fuelperks! as they were
-9-
[*9] accumulated, making its liability for the outstanding fuelperks! fixed at the
end of each year at issue. We disagree. Under the fuelperks! promotion, the
redemption of fuelperks! was structured as a discount against the purchase price of
gas. Consequently, the purchase of gas was necessarily a condition precedent5 to
the redemption of fuelperks!
To be sure, the redemption of fuelperks! could conceivably discount the
purchase price to zero. But even so, the right to redeem fuelperks! without paying
to purchase gas (i.e., for a free tank of gas) would be contingent on the setting of
the retail price of gas immediately before the purchase. Accordingly, whether a
customer paid something for the purchase of gas or nothing, petitioner’s obligation
to redeem fuelperks! was subject to a condition precedent that could be satisfied
only after the close of petitioner’s tax year. We find that petitioner’s liability for
outstanding fuelperks! became fixed upon their redemption, not when the
customer earned the fuelperks! as petitioner contends. We thus hold that the
claimed deductions for the outstanding fuelperks liabilities do not satisfy section
461(h)(4) and section 1.461-1(a)(2), Income Tax Regs.
5
A condition precedent is some act or event that must occur before the duty
of immediate performance of a promise arises. 17A Am. Jur. 2d, Contracts, sec.
458 (2014).
-10-
[*10] III. The Exception to the All Events Test
An exception to the requirements of section 1.461-1(a)(2), Income Tax
Regs., is included in section 1.451-4(a)(1), Income Tax Regs., which provides:
If an accrual method taxpayer issues trading stamps or premium
coupons with sales, or an accrual method taxpayer is engaged in the
business of selling trading stamps or premium coupons, and such
stamps or coupons are redeemable by such taxpayer in merchandise,
cash, or other property, the taxpayer should, in computing the income
from such sales, subtract from gross receipts with respect to sales of
such stamps or coupons (or from gross receipts with respect to sales
with which trading stamps or coupons are issued) an amount equal
to--
(i) The cost to the taxpayer of merchandise, cash, and other
property used for redemption in the taxable year,
(ii) Plus the net addition to the provision for future redemptions
during the taxable year (or less the net subtraction from the provision
for future redemptions during the taxable year).
The regulation’s purpose is to match sales revenues with the expenses incurred in
generating those revenues, and taxpayers are entitled to a present deduction for
only the portion of the coupons that will eventually be redeemed. See Mooney
Aircraft, Inc. v. United States,
420 F.2d 400, 411 (5th Cir. 1969); Tex.
Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306.
Petitioner contends that section 1.451-4(a)(1), Income Tax Regs., applies
and it is thus allowed to offset certain sales revenues by its estimated future costs
of redeeming outstanding fuelperks! Respondent contends that the regulation does
-11-
[*11] not apply because, among other reasons, fuelperks! were not redeemable in
“merchandise, cash, or other property”. We agree with respondent for the reasons
discussed below.
Respondent cites Rev. Rul. 78-212, 1978-1 C.B. 139. Revenue rulings are
not substantive authority; however, we may respect the ruling in accordance with
its power to persuade. See PSB Holdings, Inc. v. Commissioner,
129 T.C. 131,
142 (2007).
In Rev. Rul.
78-212, supra, a taxpayer using the accrual method of
accounting issued with the sale of products, coupons that could be redeemed for a
discount on the sale prices of products purchased in the future. The Commissioner
determined that those coupons were not “redeemable in merchandise, cash, or
other property” because the redemption of the coupons was conditioned on an
additional purchase of the retailer’s product by the consumer. The Commissioner
reasoned that applying the section in such circumstances would be inconsistent
with the section’s purpose--to match sales revenues with expenses incurred to
generate those revenues. According to the revenue ruling, this is because the
retailer has no obligation to redeem the coupon until the additional purchase--
making the coupon expense attributable to the additional purchase and not to the
initial purchase with which the coupon was issued.
-12-
[*12] Allowing a present deduction with respect to redemptions conditioned on
an additional purchase can result in a mismatching of expenses and revenues,
contrary to the regulation’s primary purpose. Fuelperks! are stated in terms of a
discount on the purchase price of merchandise. Indeed, each fuelperk! is
redeemable for a 10-cent reduction to the purchase price per gallon of gas. As
previously mentioned, we recognize that fuelperks! discounts can be combined to
potentially offset the entire purchase price of a gallon of gas; however, this does
not cause them to lose their nature as discounts. Accordingly, as was the case with
the coupons issued with sales in the ruling, the redemption of fuelperks! is
conditioned on a subsequent purchase, making them not redeemable for
merchandise, cash, or other property. We therefore hold that petitioner is not
entitled to offset the estimated future costs of redeeming fuelperks! against sales
revenues under section 1.451-4(a)(1), Income Tax Regs.6
6
We note that even if sec. 1.451-4(a)(1), Income Tax Regs., applied to that
portion of the outstanding fuelperks!, if any, that would potentially be redeemed
without any additional consideration (i.e., for a free tank of gas), petitioner still
would not be entitled to offset the estimated costs of redeeming those fuelperks!
This is because petitioner has not substantiated that amount and the record does
not reflect any reasonable basis on which the Court could estimate that amount.
-13-
[*13] IV. Conclusion
Petitioner is not entitled to a deduction or gross revenue offset for the
outstanding fuelperks! Thus, we will sustain the deficiency respondent
determined for each year at issue.
We have considered all remaining arguments the parties made and, to the
extent not addressed, we find them to be irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered for
respondent.