Giant Eagle, Inc. v. Comm'r

822 F.3d 666

GIANT EAGLE, INC., Appellant

v.COMMISSIONER OF INTERNAL REVENUE.

No. 14–3961.

United States Court of Appeals, Third Circuit.

Argued on April 29, 2015.

Opinion filed: May 6, 2016.

Robert M. Barnes, Esquire, (Argued), Richard I. Halpern, Esquire, Marcus & Shapira, Pittsburgh, PA, Counsel for Appellant.

Julie C. Avetta, Esquire, (Argued), Jonathan S. Cohen, Esquire, Bethany B. Hauser, Esquire, Gilbert S. Rothenberg, Esquire, United States Department of Justice, Tax Division, Washington, DC, Counsel for Appellee.

Before: FISHER, HARDIMAN and ROTH, Circuit Judges.

OPINION

ROTH, Circuit Judge:

Benjamin Franklin opined that “in this world nothing can be said to be certain, except death and taxes.”¹ But the advent of the “all events” test renders Franklin's pronouncement at best partially correct.

The Tax Code does not limit the availability of deductions to expenses for which payment is certain. Rather, accrual method taxpayers are expressly permitted to deduct expenses before they are paid, so long as “all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.”² A codified legal fiction affords taxpayers even greater flexibility in the realm of recurring expenses, for which an anticipated liability may be deemed “incurred” even if the predicate costs are not themselves incurred during the year a deduction is claimed.³

Here, by disallowing deductions claimed by a supermarket chain based on rewards shoppers had earned but not yet redeemed, the Tax Court misapplied the “all events” test as it applies to recurring expenses. For that reason, we will reverse and remand this case to the Tax Court with instructions to grant judgment in favor of Giant Eagle, Inc., and its subsidiaries (collectively, Giant Eagle) on the basis that the claimed deductions are permissible under the “all events” test.

I.

Giant Eagle operates a chain of retail supermarkets, pharmacies, gas stations, and convenience stores in the Northeastern and Midwestern United States. Giant Eagle uses the accrual method of accounting to determine and report its income tax liability.⁴

A.

Giant Eagle's fuel rewards program traces its origins to the supermarket chain's introduction in 1991 of a customer-loyalty program called Advantage Cards. Initially, customers who presented an Advantage Card at checkout received discounts on promotion items and/or entire purchases. Then, in response to skyrocketing gasoline prices in the late 1990s and early 2000s, Giant Eagle opened gasoline stations on the premises of many of its supermarkets, where Advantage Cardholders received discounts on the purchase of gasoline, ranging from three to seven cents per gallon. However, Giant Eagle incurred significant losses on its first few years of gasoline sales, and the fuel discounts failed to increase supermarket traffic.

In April 2004, Giant Eagle revised the Advantage Card program. The new program, called “fuelperks!”, linked customers' rewards at the pump to prior grocery purchases, i.e., for every $50 spent on qualifying groceries, an Advantage Cardholder earned a ten cents-per-gallon discount on gas. A brochure distributed to customers set out the program's ground rules, including that “discounts expire on the last day of the month, 3 months after they are earned,” and that “[t]he promotion is valid for a limited time only and may end at any time without prior notice.” Giant Eagle did not in fact end the promotion or revoke any accumulated discounts in 2006 or 2007, the tax years at issue. Moreover, fuelperks! led to a dramatic increase in Giant Eagle's supermarket sales.

B.

On its 2006 and 2007 corporate income tax returns, Giant Eagle claimed a deduction for the discounts its customers had accumulated but, at year's end, had not yet applied to fuel purchases. Giant Eagle computed the deduction by (1) ascertaining the total dollar amount spent at its supermarkets on discount-qualifying items, (2) dividing that figure by 50 to determine the number of outstanding accumulated discounts, and (3) multiplying the quotient by $.10 to determine the face value of the discounts. Next, Giant Eagle (4) multiplied the discounts' face value by the historical redemption rate of discounts in their expiring month, and (5) multiplied that product by the average number of gallons purchased in a discounted fuel sale.

From the outset of the fuelperks! program, Giant Eagle tracked customers' redemption of accumulated discounts and used the historical averages to determine the amount of the claimed deductions. Thus, it did not base its computations of (4) and (5) on the number of discounts actually redeemed or the number of gallons of gasoline actually sold in the three months after year's end. The Commissioner of Internal Revenue disallowed the deductions for the 2006 and 2007 tax years, which totaled $3,358,226 and $313,490, respectively.

C.

Giant Eagle petitioned the U.S. Tax Court for redetermination of its 2006 and 2007 income tax liabilities on two grounds. First, it argued that the discounts accumulated but not applied by year's end satisfied the “all events” test because Giant Eagle's liability became fixed upon issuance of the discounts. Alternatively, Giant Eagle urged that the accrued discounts be treated as sales-accompanying “trading stamps or premium coupons,” enabling it to offset the estimated costs against gross receipts from grocery sales.⁵

The Tax Court rejected both arguments. It found that Giant Eagle's claimed deductions did not satisfy the “all events” test because the purchase of gasoline functioned as a condition precedent to customers' redemption of discounts earned at checkout. Accordingly, the court reasoned, any fuelperks!-related liability became fixed only after customers applied the accumulated discounts to a fuel purchase, which, in the case of the disallowed deductions, occurred after the end of the tax year. Additionally, the Tax Court held that the Treasury Regulation governing “trading stamps” did not apply to the discounts that Giant Eagle customers accrued through fuelperks! because the gasoline discounts were not redeemable in “merchandise, cash, or other property,” as required under a 1978 revenue ruling.⁶ For these reasons, the Tax Court sustained the Commissioner's deficiency determinations for both tax years.

Giant Eagle appealed.

II.⁷

The “all events” test derives from dictum in a 1926 Supreme Court decision, explaining that a liability may accrue even “in advance of the assessment of a tax” if “all the events [ ] occur which fix the amount of the tax and determine the liability of the taxpayer to pay it.”⁸ The test has since been refined, prescribed as a Treasury Regulation, and eventually codified. Today, 26 U.S.C. § 461 and its implementing regulations limit accrual method taxpayers' deductibility of liabilities as follows:

Under an accrual method of accounting, a liability ... 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.⁹

The Treasury Secretary prescribed a supplementary regulation defining “economic performance” in the context of rebates and refunds:

If the liability of a taxpayer is to pay a rebate, refund, or similar payment to another person (whether paid in property, money, or as a reduction in the price of goods or services to be provided in the future by the taxpayer), economic performance occurs as payment is made to the person to which the liability is owed.¹⁰

Nonetheless, “certain recurring items” are subject to a more relaxed version of the “all events” test:

Notwithstanding [the general rule that “the all events test shall not be treated as met any earlier than when economic performance with respect to such item occurs”]¹¹ an item shall be treated as incurred during any taxable year if—

(i) the all events test with respect to such item is met during such taxable year (determined without regard to [26 U.S.C. § 461(h)(1) ] ),

(ii) economic performance with respect to such item occurs within the shorter of—

(I) a reasonable period after the close of such taxable year,¹² or

(II) 8 ½ months after the close of such taxable year,

(iii) such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and

(iv) either—

(I) such item is not a material item, or

(II) the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.¹³

For purposes of the “recurring item” exception, “the all events test is met with respect to any item if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy.”¹⁴

The Commissioner does not contest that fuelperks! rewards qualify as both “a rebate, refund, or similar payment” and a “recurring expense” subject to the less onerous “economic performance” requirement. Moreover, the Commissioner concedes that Giant Eagle calculated its anticipated fuelperks!-related liability “with reasonable accuracy,” and that economic performance had occurred by the time of Giant Eagle's tax filing. Thus, the only issue on appeal is whether “the fact of liability” was fixed at year's end¹⁵ —that is, before the end of the tax year, had Giant Eagle become liable to pay the fuelperks! 10–cent discount to its customers who had purchased qualifying groceries with their Advantage Cards.

A.

Two seminal Supreme Court decisions frame our discussion of the “all events” test's fixed liability requirement. In its first decision applying the “all events” test after its...