PWC Third Circuit Addresses When Certain Liabilities Become Fixed
PWC Third Circuit Addresses When Certain Liabilities Become Fixed
PWC Third Circuit Addresses When Certain Liabilities Become Fixed
In brief
The U.S. Court of Appeals for the Third Circuit on May 6 held in Giant Eagle, Inc. v. Commissioner, WL
2609572 (2016), that the accrued liabilities relating to the taxpayers fuelperks! reward program were
fixed for purposes of Section 461 when earned by its customers, and not (as the IRS argued) when
redeemed. Businesses with reward programs or rebate accruals should consider whether the courts
decision could affect when their liabilities would be deemed fixed under the all-events test.
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On May 6, the Third Circuit, in a 2-1 light of Hughes Properties, the The judge who authored the
decision citing United States v. liability was fixed even though the dissenting opinion noted that he was
Hughes Properties, Inc., 476 U.S. 593 exact amount that would be ultimately troubled by the fact that fuelperks!
(1986), reversed the Tax Court, redeemed was unknown because it rewards expired after three months.
holding that the rewards were fixed was based on a legal obligation to He reasoned that the legal liability for
when earned by the customer. The perform. The IRS conceded that the fuelperks! reward program was
Third Circuit concluded that the Tax Giant Eagle met all parts of the all- not indefinite because it could be
Court had misapplied the all-events events test when applying the extinguished via the rewards
test as it pertains to recurring recurring-item exception for economic expiration provisions and therefore, in
expenses by deferring deductions for performance with respect to these his opinion, the requirements of a
rewards until customer redemption. accrued liabilities except for the fixed fixed liability established by Hughes
liability prong. Because the Third Properties were not met.
Observation: Giant Eagle may be Circuit determined that the liability
followed by courts in other Circuits, was fixed and the IRS conceded that Observation: When not bound by
but is binding only in the Third they met all other prongs of the all the Third Circuit, the IRS may choose
Circuit, which covers Delaware, New events test, Giant Eagle was allowed to to challenge positions similar to that
Jersey, Pennsylvania, and the Virgin deduct the liability in the year it taken by the taxpayer in Giant Eagle.
Islands. became fixed. Accordingly, taxpayers outside the
Third Circuit considering accounting
The decision in Hughes Properties Observation: Depending on a method opportunities based on Giant
highlighted the importance of state taxpayers facts and circumstances, Eagle should take note of the
and local law in establishing whether a Giant Eagle may be applied more dissenting opinion as well as the Tax
liability is fixed. In that case, the broadly than only to reward programs Courts decision as possible support
Supreme Court considered whether a similar to fuelperks! Taxpayers with for IRS challenges.
slot machine with progressive loyalty reward programs, such as
jackpots jackpots that increase with frequent flyer miles or credit card The takeaway
each use until the jackpot is won points, or other rebate accruals, such
resulted in a fixed liability at the end Taxpayers wishing to apply the Third
as Medicaid rebates or merchandise Circuits holding in Giant Eagle to
of the tax year. Under Nevada gaming coupons, may benefit from application
regulations, the slot machine operator their own accrued reward programs
of the definition of fixed in Giant liabilities now may be able to
could not legally reduce the jackpot Eagle.
prior to payout. Accordingly, the accelerate these accrued liabilities by
jackpot accrued at the end of the tax Observation: One key factor in the filing Form 3115, Change in Method of
year was determined to be fixed courts decision was the nature of Accounting, if their current method of
because it represented the legally Pennsylvania law. The Third Circuit accounting is to deduct such liabilities
required minimum payout. focused on how contract law supports when paid. However, before doing so,
the fact that the liability ultimately they should give careful consideration
In the instant case, the Third Circuit will be paid and therefore is fixed. to the specific terms of the reward
found that the customers had a valid Taxpayers seeking to rely on Giant programs, the impact of state and
unilateral contract with Giant Eagle. Eagle should consider whether state local law, and other relevant
Under Pennsylvania contract law, a or local law establishes a legal authorities.
unilateral contract legally would obligation for the taxpayer to pay or
obligate Giant Eagle to provide the perform.
fuel price reduction as promised. In
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