James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comFirm Insights
3rd Circuit Court Overturns Decision in Giant Eagle Inc v Commissioner
Author: James F. McDonough
Date: August 5, 2016
Key Contacts
Back
What does overturned decision in Giant Eagle Inc v Commissioner mean for future of tax deductible liability regulations?
The 3rd Circuit recently overturned an IRS decision with the assertion that Giant Eagle, a supermarket chain, was entitled to make a $3.7 million deduction on the expenses associated with loyalty discounts from its tax returns. According to a PricewaterhouseCoopers report, in its decision, the Court ruled that the IRS was incorrect in denying the deduction because the two prongs of the “all events test” were fulfilled. The first prong of the “all events test” is whether the liability is fixed. The second prong of the test is whether the amounts can be determined with reasonable accuracy.
The case background
In Giant Eagle Inc. v. Commissioner, the supermarket chain offered a “fuelperks!” program with loyalty discounts awarded for gas that expired after three months if unused. The discounts were earned by purchases and the first prong of the “all events test’ was easily determined. However, the IRS took exception to when Giant Eagle deducted the estimated expenses in 2006 and 2007 from customers redeeming a portion of the loyalty gas points – many of which were either unused or not expired. It is here that IRS claimed that the determination of the amount could not be made with reasonable accuracy.
The IRS denied the deductions, which prompted the company to appeal the decision to the U.S. Tax Court. The Tax Court subsequently upheld the IRS decision, whereupon Giant Eagle filed an appeal to the 3rd Circuit Court of appeals.
The 3rd Circuit reverses the IRS decision
The Court asserted that the all events test was applicable to the case. In its ruling, the Court stated that since a liability can accrue within a tax year where all events occurred, liability had been established.
The stated liabilities became fixed only when the discounts were used. Since the total amount of Giant Eagle’s expected liability could be conclusively determined by the end of the tax year, the all events test provisions were fulfilled. According to Judge Jane R. Roth’s opinion cited by Law 360, Giant Eagle entered a unilateral contract in its loyalty program for customers, so its liabilities were sufficiently fixed to be tax deductible.
“Giant Eagle amply demonstrated the existence — as of year’s end — of both an absolute liability and a near-certainty that the liability would soon be discharged by payment,” Roth explained.
The Court also reasoned that Regulation 1.451-4(a)(1) enables taxpayers to use an accrual method of accounting to deduct costs before they occur if the all events test has occurred in the tax year and liability was established and could be reasonably identified.
Significance of the ruling
The Court’s decision to appeal the previous decisions was important because it seemed to disagree with established legal precedents and published regulations. With the significance of the decision, it will be interesting to see the impact it will have on tax deductible liabilities regulations in the future or whether the IRS will seek a legislative remedy.
- Practices: Tax, Trusts & Estates
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Author: Jesse M. Dimitro
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Author: Jesse M. Dimitro
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Author: Scarinci Hollenbeck, LLC
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
Author: Dan Brecher
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
Author: Ronald S. Bienstock
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
Author: Patrick T. Conlon
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
3rd Circuit Court Overturns Decision in Giant Eagle Inc v Commissioner
Author: James F. McDonough
What does overturned decision in Giant Eagle Inc v Commissioner mean for future of tax deductible liability regulations?
The 3rd Circuit recently overturned an IRS decision with the assertion that Giant Eagle, a supermarket chain, was entitled to make a $3.7 million deduction on the expenses associated with loyalty discounts from its tax returns. According to a PricewaterhouseCoopers report, in its decision, the Court ruled that the IRS was incorrect in denying the deduction because the two prongs of the “all events test” were fulfilled. The first prong of the “all events test” is whether the liability is fixed. The second prong of the test is whether the amounts can be determined with reasonable accuracy.
The case background
In Giant Eagle Inc. v. Commissioner, the supermarket chain offered a “fuelperks!” program with loyalty discounts awarded for gas that expired after three months if unused. The discounts were earned by purchases and the first prong of the “all events test’ was easily determined. However, the IRS took exception to when Giant Eagle deducted the estimated expenses in 2006 and 2007 from customers redeeming a portion of the loyalty gas points – many of which were either unused or not expired. It is here that IRS claimed that the determination of the amount could not be made with reasonable accuracy.
The IRS denied the deductions, which prompted the company to appeal the decision to the U.S. Tax Court. The Tax Court subsequently upheld the IRS decision, whereupon Giant Eagle filed an appeal to the 3rd Circuit Court of appeals.
The 3rd Circuit reverses the IRS decision
The Court asserted that the all events test was applicable to the case. In its ruling, the Court stated that since a liability can accrue within a tax year where all events occurred, liability had been established.
The stated liabilities became fixed only when the discounts were used. Since the total amount of Giant Eagle’s expected liability could be conclusively determined by the end of the tax year, the all events test provisions were fulfilled. According to Judge Jane R. Roth’s opinion cited by Law 360, Giant Eagle entered a unilateral contract in its loyalty program for customers, so its liabilities were sufficiently fixed to be tax deductible.
“Giant Eagle amply demonstrated the existence — as of year’s end — of both an absolute liability and a near-certainty that the liability would soon be discharged by payment,” Roth explained.
The Court also reasoned that Regulation 1.451-4(a)(1) enables taxpayers to use an accrual method of accounting to deduct costs before they occur if the all events test has occurred in the tax year and liability was established and could be reasonably identified.
Significance of the ruling
The Court’s decision to appeal the previous decisions was important because it seemed to disagree with established legal precedents and published regulations. With the significance of the decision, it will be interesting to see the impact it will have on tax deductible liabilities regulations in the future or whether the IRS will seek a legislative remedy.