                             T.C. Memo. 2014-146



                        UNITED STATES TAX COURT



                  GIANT EAGLE, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 11910-12.                        Filed July 23, 2014.



      Richard I. Halpern and Robert M. Barnes, for petitioner.

      Travis Vance III and Anita Goklaney, for respondent.



           MEMORANDUM FINDINGS OF FACT AND OPINION


      HAINES, Judge: Respondent determined deficiencies in petitioner’s

Federal income tax for 2006 and 2007 (years at issue) of $3,358,226 and
                                         -2-

[*2] $313,490,1 respectively. Petitioner owned and operated supermarkets under

the name “Giant Eagle” and gas stations under the name “GetGo”. During the

years at issue petitioner offered a customer loyalty program by which customers

making qualifying purchases at Giant Eagle could earn “fuelperks!” that were

redeemable for a discount against the purchase price of gas at GetGo. Petitioner,

an accrual method taxpayer, claimed deductions for certain unredeemed fuelperks!

for each year at issue. The question before us is whether under the “all events”

test of section 4612 petitioner properly accrued and deducted expenses for the

unredeemed fuelperks! If the answer to this question is no, we are asked to decide

whether petitioner is entitled to offset certain sales revenues by the estimated costs

of future redemptions of such fuelperks! under section 1.451-4, Income Tax Regs.

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. We incorporate

the stipulation of facts and the accompanying exhibits by this reference.




      1
          Certain monetary amounts are rounded.
      2
       Unless otherwise indicated, all section references are to the Internal
Revenue Code, as amended and in effect for the taxable years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
                                          -3-

[*3] I. Petitioner

      Giant Eagle, Inc., is a Pennsylvania corporation with its principal place of

business in Pittsburgh, Pennsylvania. Giant Eagle, Inc., and its subsidiaries

(collectively, petitioner or Giant Eagle) operate, and were operating during the

years at issue, supermarkets and pharmacies under the name “Giant Eagle” and gas

stations and convenience stores under the names “GetGo” and “Giant Eagle

Express”. For each year at issue Giant Eagle filed a consolidated corporate

income tax return and used an accrual method of accounting to compute and report

its Federal income tax liability.

II. 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 fuel3 acquired in one


      3
        For convenience we refer hereinafter to diesel and gasoline fuel
collectively as gas.
                                         -4-

[*4] 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.

III. Tax Returns and Deficiency Notice

      Giant Eagle deducted the estimated costs of redeeming a certain portion of

the issued fuelperks! that were unexpired and unredeemed at the end of each year

at issue (outstanding fuelperks!), in the amounts of $6,160,855 and $1,130,630 for

2006 and 2007, respectively. Respondent issued a deficiency notice disallowing

those deductions. Petitioner timely filed a petition with this Court challenging

respondent’s determination.
                                        -5-

[*5]                                OPINION

I. Burden of Proof

       The taxpayer generally bears the burden of proving the Commissioner’s

determinations are erroneous. Rule 142(a). The burden of proof may shift to the

Commissioner if the taxpayer satisfies certain conditions. Sec. 7491(a). Our

resolution of this case is based on a preponderance of the evidence, not on an

allocation of the burden of proof. Therefore, we need not consider whether

section 7491(a) would apply. See Estate of Bongard v. Commissioner, 124 T.C.

95, 111 (2005).

II. The All Events Test

       Section 162(a) allows taxpayers to deduct all ordinary and necessary

business expenses they pay or incur during the taxable year in carrying on any

trade or business. Section 461(a) provides that a deduction must be taken for the

proper taxable year under the taxpayer’s method of accounting. An accrual

method taxpayer generally is allowed a deduction for the year in which the

taxpayer incurred the expense, regardless of the actual date of payment. Sec.

461(h)(4); sec. 1.461-1(a)(2), Income Tax Regs. Whether an accrual method

taxpayer has incurred an expense is determined under the all events test delineated

in section 1.461-1(a)(2)(i), Income Tax Regs., which provides:
                                          -6-

[*6] Under an accrual method of accounting, a liability (as defined in §
     1.446-1(c)(1)(ii)(B)) 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.
     ***

      An accrual basis taxpayer claiming that it incurred a liability for Federal

income tax purposes must satisfy each of the three requirements under the all

events test in order to deduct the liability. Petitioner contends that it meets all the

requirements of the all events test with respect to the disputed deductions for the

outstanding fuelperks! Respondent argues that petitioner fails the test because it

does not satisfy the test’s first requirement, among other reasons.4 More

specifically, respondent contends that all the events had not occurred to establish

petitioner’s liability for the outstanding fuelperks! We agree with respondent for

the reasons discussed below.

      We have generally looked to and followed two leading Supreme Court

cases, United States v. Gen. Dynamics Corp., 481 U.S. 239 (1987), and United

States v. Hughes Props., Inc., 476 U.S. 593 (1986), when interpreting the first

prong of the all events test of section 1.461-1(a)(2), Income Tax Regs. See, e.g.,


      4
       Respondent concedes that petitioner meets the second requirement, i.e., or
the reasonable accuracy prong of the all events test.
                                          -7-

[*7] Spitzer Columbus, Inc. v. Commissioner, T.C. Memo. 1995-397; Dana

Distribs., Inc. v. Commissioner, T.C. Memo. 1988-514, aff’d, 874 F.2d 120 (2d

Cir. 1989); see also Simplified Tax Records, Inc. v. Commissioner, 41 T.C. 75

(1963). While these cases are factually distinct from this case, they provide

helpful context for evaluating when a liability becomes fixed for purposes of the

all events test.

       In Gen. Dynamics Corp., an accrual basis taxpayer self-insured its

employees’ medical plan. To obtain reimbursement for medical treatment under

the plan, employees were required to submit claim forms with satisfactory proof of

their claims. The taxpayer asserted that it could deduct the estimated costs of

employees’ potential claims for reimbursement existing at the end of the tax year

but not yet paid. The Supreme Court found that the employer’s liability to make a

payment under its self-insured medical plan was not fixed until an employee filed

a properly documented claim. The Supreme Court reasoned that the filing of the

claim was not a mere technicality but, rather, was a condition precedent to the

employer’s liability. In this regard, the Supreme Court noted that, for various

reasons, covered individuals might not file claims for reimbursement to which

they are plainly entitled. Since the last event necessary to fix the liability in Gen.
                                          -8-

[*8] Dynamics Corp. had not occurred by the end of the tax year, the Supreme

Court held that the first prong of the all events test was not met.

      In Hughes Properties, the taxpayer indirectly owned and operated slot

machines that had progressive jackpots. A Nevada gaming regulation prohibited

the taxpayer from reducing the payoff without paying out the jackpot. The

taxpayer using the accrual method of accounting sought to deduct the annual

increase in the jackpot payoff amounts on the progressive slot machines not yet

won by the end of the tax year. The Supreme Court held the taxpayer’s obligation

to pay the amount of the jackpot that had already accrued was irrevocable under

State law and that the liability was thus fixed for purposes of the all events test. In

so doing, it recognized that the jackpot might continue to grow for a prolonged

period and that it was possible for the casino to go bankrupt or cease business

before the jackpot was ever won.

      Respondent contends that petitioner’s liability for fuelperks! becomes fixed

when they are redeemed. Petitioner argues that its liability for fuelperks! becomes

fixed when they are earned. We agree with respondent for the reasons explained

below.

      Petitioner argues that the fuelperks! program constituted a unilateral

contract under which it became legally obligated to redeem fuelperks! as they were
                                          -9-

[*9] accumulated, making its liability for the outstanding fuelperks! fixed at the

end of each year at issue. We disagree. 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 precedent5 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.




      5
       A condition precedent is some act or event that must occur before the duty
of immediate performance of a promise arises. 17A Am. Jur. 2d, Contracts, sec.
458 (2014).
                                         -10-

[*10] III. The Exception to the All Events Test

      An exception to the requirements of section 1.461-1(a)(2), Income Tax

Regs., is included in section 1.451-4(a)(1), Income Tax Regs., which provides:

      If an accrual method taxpayer issues trading stamps or premium
      coupons with sales, or an accrual method taxpayer is engaged in the
      business of selling trading stamps or premium coupons, and such
      stamps or coupons are redeemable by such taxpayer in merchandise,
      cash, or other property, the taxpayer should, in computing the income
      from such sales, subtract from gross receipts with respect to sales of
      such stamps or coupons (or from gross receipts with respect to sales
      with which trading stamps or coupons are issued) an amount equal
      to--
             (i) The cost to the taxpayer of merchandise, cash, and other
      property used for redemption in the taxable year,

             (ii) Plus the net addition to the provision for future redemptions
      during the taxable year (or less the net subtraction from the provision
      for future redemptions during the taxable year).

The regulation’s purpose is to match sales revenues with the expenses incurred in

generating those revenues, and taxpayers are entitled to a present deduction for

only the portion of the coupons that will eventually be redeemed. See Mooney

Aircraft, Inc. v. United States, 420 F.2d 400, 411 (5th Cir. 1969); Tex.

Instruments, Inc. v. Commissioner, T.C. Memo. 1992-306.

      Petitioner contends that section 1.451-4(a)(1), Income Tax Regs., applies

and it is thus allowed to offset certain sales revenues by its estimated future costs

of redeeming outstanding fuelperks! Respondent contends that the regulation does
                                       -11-

[*11] not apply because, among other reasons, fuelperks! were not redeemable in

“merchandise, cash, or other property”. We agree with respondent for the reasons

discussed below.

      Respondent cites Rev. Rul. 78-212, 1978-1 C.B. 139. Revenue rulings are

not substantive authority; however, we may respect the ruling in accordance with

its power to persuade. See PSB Holdings, Inc. v. Commissioner, 129 T.C. 131,

142 (2007).

      In Rev. Rul. 78-212, supra, a taxpayer using the accrual method of

accounting issued with the sale of products, coupons that could be redeemed for a

discount on the sale prices of products purchased in the future. The Commissioner

determined that those coupons were not “redeemable in merchandise, cash, or

other property” because the redemption of the coupons was conditioned on an

additional purchase of the retailer’s product by the consumer. The Commissioner

reasoned that applying the section in such circumstances would be inconsistent

with the section’s purpose--to match sales revenues with expenses incurred to

generate those revenues. According to the revenue ruling, this is because the

retailer has no obligation to redeem the coupon until the additional purchase--

making the coupon expense attributable to the additional purchase and not to the

initial purchase with which the coupon was issued.
                                         -12-

[*12] 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. Fuelperks! are stated in terms of a

discount on the purchase price of merchandise. Indeed, each fuelperk! is

redeemable for a 10-cent reduction to the purchase price per gallon of gas. As

previously mentioned, we recognize that fuelperks! discounts can be combined to

potentially offset the entire purchase price of a gallon of gas; however, this does

not cause them to lose their nature as discounts. Accordingly, as was the case with

the coupons issued with sales in the ruling, the redemption of fuelperks! is

conditioned on a subsequent purchase, making them not redeemable for

merchandise, cash, or other property. We therefore hold that petitioner is not

entitled to offset the estimated future costs of redeeming fuelperks! against sales

revenues under section 1.451-4(a)(1), Income Tax Regs.6




      6
        We note that even if sec. 1.451-4(a)(1), Income Tax Regs., applied to that
portion of the outstanding fuelperks!, if any, that would potentially be redeemed
without any additional consideration (i.e., for a free tank of gas), petitioner still
would not be entitled to offset the estimated costs of redeeming those fuelperks!
This is because petitioner has not substantiated that amount and the record does
not reflect any reasonable basis on which the Court could estimate that amount.
                                        -13-

[*13] IV. Conclusion

      Petitioner is not entitled to a deduction or gross revenue offset for the

outstanding fuelperks! Thus, we will sustain the deficiency respondent

determined for each year at issue.

      We have considered all remaining arguments the parties made and, to the

extent not addressed, we find them to be irrelevant, moot, or meritless.

      To reflect the foregoing,


                                                     Decision will be entered for

                                               respondent.
