Originally published on Forbes.com July 30th, 2014
I’m pretty random about what gas station I use, but not my covivant. CV always has to fill up at particular stations where she can wave a card from the grocery store, that reduces the price of gas in increments of 10 cents a gallon based on what she has spent on groceries. It is wonderful how delighted she is when she sees the gas price go down, so I really hope the Tax Court decision in the case of Giant Eagle, Inc will not put programs like that in jeopardy.Here is some of the story.
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 fuel 3 acquired in one 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.
I’ve yet to see CV get a free tank of gas, but it is usually just the two of us, so our groceries do not run that high. The other thing worth noting about the program is that it seems to encourage you to coast in on fumes, since you will get more bang for you fuelperks! the more gallons you are buying.
So what is the tax issue? For 2006 Giant Eagle had booked a liability of $6,160,855 for the estimated cost of redeeming unexpired fuelperks!. As of 2007, the liability was $1,130,630. The IRS view was that Giant Eagle could deduct the cost of redeeming fuelperks! when, well, they were redeemed. After all, think about the people who stocked up on groceries so they could flee from the authorities in their RVs and would have to buy their gas wherever. Those fuelperks! will just expire.
The Tax Court didn’t mention the fugitive who would let the fuelperks! expire, but it still found that they were not a good year-end accrual.
Giant Eagle argued that “….the fuelperks! program constituted a unilateral contract under which it became legally obligated to redeem fuelperks! as they were accumulated, making its liability for the outstanding fuelperks! fixed at the end of each year at issue”.
The Court did not agree because:
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 precedent 5 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.
I suspect that the accrual is probably not what makes or breaks these programs. They are a clever marketing tool and the little bit of tax leverage was probably not that much of a consideration in setting them up. I also suspect that whatever complicated computation they did to arrive at the liability will still be required since it is probably still a GAAP liability, although I have to admit I am a little rusty on that,
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