The IRS again looked at fuel rewards in Field Attorney Advice FAA 20180101F.  The topic had come up before with a slightly different program that ended up in the court (Giant Eagle Inc. v. Commissioner, Case No. 14-3961, CA3, reversing TC Memo 2014-146, 5/6/16) with the IRS losing and formally issuing a non-acquiescence on the decision (AOD 2016-03, 10/2/16).

But in this case the IRS decided that, unlike their view with regard to Giant Eagle, that this particular fuel rewards program did allow the taxpayer to claim a current deduction for issued but not yet redeemed rewards at the end of the taxpayer’s tax year.

In Giant Eagle the taxpayer qualified for a discount on future fuel purchased, but only if the taxpayer purchased additional fuel by a particular date.  However, in this case the program was rather different and the IRS determined a different regulation applied.

The program in question worked as follows per the FAA:

Taxpayer is a * * * located in X. The company consists of A grocery stores operating under the name Y. The company offers a fuel reward program to its customers. Under the fuel reward program, the customer signs up for a free Y fuel reward card at an Y grocery store. Each week, Y will have up to B products throughout the store with fuel money linked to them. Fuel rewards will range anywhere from C to D in fuel. The reward amount will depend on the actual item purchased. The money earned (fuel reward) is electronically loaded to an enrolled customer's fuel card and can be redeemed for gas at any participating Q, an unrelated company. Unlike at some grocery stores, the customers do not earn money off a gallon of gas. Rather, Y customers are entitled to free fuel up to the amount of money loaded on the card. Basically, a customer inserts the fuel card just like any credit card, and the pump goes off when the total amount of money loaded on the card is reached, or sooner if the customer stops pumping gas. If the customer desires to purchase more gas than the amount loaded on the fuel reward card, the process of purchasing gas starts over, i.e., either cash or a credit card. Q will honor the fuel card without condition.

The taxpayer recognized the fuel rewards as an expense when they were issued for both book and tax purposes.

Reg. §1.451-4(a)(1) provides a special “trading stamps” rule for accruing expenses.[1]  The relevant portion reads:

(a)In general -

(1)Subtraction from receipts.

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 redemptions 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).

This regulation does not apply to discount coupons where a taxpayer gets a discount on the purchase of future merchandise—rather it must be able to directly obtain the merchandise without an additional purchase. (Rev. Rul. 78-212) Unlike the program in Giant Eagle, which offered fuel at a discount, this program simply allowed the customer to obtain fuel up to the amount the taxpayer had loaded on the customer’s fuel reward card.

The FAA notes:

In the subject case, the customers earned fuel rewards that were redeemable for gas. The money earned is electronically loaded to an enrolled customer's fuel card and can be redeemed for gas at any participating Q. The customer inserts the fuel card just like any credit card, and the pump goes off when the total amount of money loaded on the card is reached, or sooner if the customer stops pumping gas. We do not find this to be a discount. Rather, we believe that the rewards are redeemable for other property: specifically, gas purchased by Y from Q.

The FAA concludes allowing the deduction is consistent with the purpose of Reg. §1.451-4.  The document notes:

Moreover, in line with both Rev. Rul. 78-212 and the Tax Court in Giant Eagle, applying § 1.451-4 in this case would be consistent with the section's purpose to match sales revenues with expenses incurred to generate those revenues. Here, clearly, Taxpayer initiated the reward program to increase sales of its products; not to increase gas sales at Q, a third-party. Notable, this case is distinguishable from Giant Eagle where the Tax Court disallowed the current deduction with respect to discounts conditioned on an additional purchase of gas from the taxpayer.

Note that the author of this FAA (Mark Shapiro, Senior Attorney (Cleveland), LB&I Division) is the attorney who authored the ruling issued recently that found an educational institution did not, in his view, qualify for a current deduction for discounts given to students who had to attend two weeks in the following semester (FAA 20174901F).

[1] For those too young to remember them, some stores used to give “trading stamps” (S & H Green Stamps were the most well-known) a customer would collect, filling up books or cards.  Once enough stamps were collected, the customer could go to a third-party store where the stamp books could be exchanged for merchandise.