In Uncategorized on 07/23/2014 at 16:40

Old-time followers of this my blog might just possibly recall the story of VECO Corporation and Subsidiaries, as more fully set forth in my blog post entitled “Ya Gotta Do it To Accrue It”, 11/20/13.

Well, it’s the same story for Giant Eagle, Inc., 2014 T. C. Memo. 146, filed 7/23/14, with Judge Haines taking up where Judge Marvel left off.

No, this isn’t about prohibited bird parts in Rauschenberg collages, as in my blogpost “The Eagle Sleeps Tonight – Part Deux”, 5/21/13. This is about a grocery and gas chain that gave frequent eater points to its customers, that allowed them, if they ate enough, to gas up (their vehicles) at reduced rates.

The Eagle gang wanted to accrue the expense of the earned eater points as earned, because their customers could redeem them. They argued the Section 461 accrual test, and the Reg. Sec. 1.451-4 future redemption cost offset to current revenue.

IRS concedes one prong of the three-prong accrual test; that the amounts earned can be computed with reasonable accuracy, but “all events” necessary to fix liability hadn’t happened in the year that the expense is accrued.

Before the frequent eater points could be redeemed, the frequent eater had to gas up at the Eagle gang’s pumps. Even with enough points, a frequent eater might not be a frequent gasser, and the points could expire 90 days after being earned.

And for that reason the Reg. Sec. 1.451-4 gambit fails. The frequent eater has to do more than just turn in the points to get the “merchandise, cash, or other property” which are the hooks to get the taxpayer anchored within Reg. Sec. 1.451-4(a)(1) safe harbor. The frequent eater has to buy the gas, or the frequent eater gets nothing.

“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.” 2014 T. C. Memo. 146, at p. 12.

And even though a sufficiently gluttonous frequent eater could accumulate enough points to get a tank of gas for nothing, that still depends upon the price of gas at the time the frequent eater becomes a frequent gasser. So the benefit is not fixed until the additional purchase (even for zero) is made.

  1. […] and Nick Patrick’s Current Federal Tax Developments have nice summaries of the decision.  Lew Taishoff had covered the original Tax Court decision with his usual […]


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