In a recent decision, the Tax Court held that discounts redeemable only against future purchases were deductible when redeemed rather than when earned by the taxpayer's customers.

In Giant Eagle Inc. v. Commissioner, T.C. Memo 2014-146 (July 23, 2014), the taxpayer owned and operated grocery stores and gas stations, and offered a customer loyalty program in which customers making qualifying purchases at its grocery stores could earn discounts that could be used against the purchase of gas at its gas stations.

The taxpayer deducted the accrual for an estimated portion of the unexpired discounts that were earned by the end of the year, but were not yet redeemed. The IRS denied the deduction, arguing that the accrued discounts didn't meet the all-events test, because the taxpayer didn't have a fixed liability for the accrued portion of discounts by the end of the year.

The Tax Court agreed with the IRS, holding that the purchase of gas was a necessary condition preceding the redemption of the discounts, which meant the discounts weren't fixed until the customer actually redeemed them against purchased gas. Similarly, the court held that the discounts weren't a reduction of sales revenue when earned, because the discounts are more appropriately matched with the purchase of the gas when redeemed.

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