Taxing Lessons Case Summaries

Case — The All-Events Test

Thanks for sharing!
5 minute read

TL Case Summ


When can a taxpayer take a deduction for a customer loyalty program?


Taxpayer Says: The deductions meet all the requirements of the all events test and should be allowed.

Internal Revenue Service Says: All the events required to establish liability had not occurred. The deduction should not be allowed.


From Internal Revenue Code 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.

From Internal Revenue Code Section 461(a) : Provides that a deduction must be taken for the proper taxable year under the taxpayer’s method of accounting.

From Internal Revenue Code Section 461(h)(4): 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.

From Federal tax regulation 1.461-1(a)(2)(i): Whether an accrual method taxpayer has incurred an expense is determined under the all events test, which provides: 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.


When you use the accrual method of accounting, you can deduct expenses when you meet a three part test (regardless of when you actually pay them).

First, all the events fixing your duty to pay have occurred.

Second, you must be able to determine the amount owed with reasonable accuracy.

And third, economic performance must have occurred. (When you’re providing goods and services to a customer, economic performance generally occurs as you incur costs.)

In this case, the taxpayer, a corporation that owns and operates supermarkets and gas stations, offered customers a discount at the company’s gas stations when the customers bought qualifying items from the company’s supermarkets. The discounts expired three months after the last day of the month in which they were earned and could not be redeemed in cash. Customers had to buy gas to redeem the discounts.

At the end of 2006 and 2007, the taxpayer accrued and deducted the estimated costs of a portion of the amounts that had not yet expired, and that customers had not yet redeemed. The deduction for 2006 was $6,160,855. For 2007, the taxpayer deducted $1,130,630.

The IRS agreed the deductions could be determined with reasonable accuracy. However, the IRS argued that all the events fixing the duty to pay had not occurred at the end of the tax years at issue. The IRS said the costs only became fixed when customers of the taxpayer redeemed the discounts.

The taxpayer argued that the costs became fixed when the customer earned the discounts, because the discount program constituted a unilateral contract under which the company became legally obligated to redeem the discounts as they were earned.


Make your selection, then hover your mouse
over the link beneath “The Court’s Decision”

For the or for the


For a full explanation, hover your mouse over the link

View the full case in the window below, or download a complete copy of the PDF by clicking the “Download” link.

Internet Explorer users: If you are using Internet Explorer 11, you may not be able to see the case in the window below due to an incompatibility issue between Google Reader and Microsoft Internet Explorer. To access the case, you can either change compatibility settings for this website only (Tools—Compatibility View Settings—Add this website) or download the PDF file using the link provided below and view it in your browser.

Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided to read the entire case.

Download (PDF, 68KB)


HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.


Sorry, wrong answer :(
Right answer!
For the IRS. Under the promotion, the redemption of the discounts was structured as a discount against the purchase price of gas. Consequently, the purchase of gas was necessarily a condition precedent to the redemption. (A condition precedent is some act or event that must occur before the duty of immediate performance of a promise arises.)

To be sure, the redemption could conceivably discount the purchase price to zero. But even so, the right to redeem the discounts 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, the taxpayer’s obligation to redeem the discounts was subject to a condition precedent that could be satisfied only after the close of a tax year.

We find that liability for outstanding discounts became fixed upon their redemption, not when the customer earned the discounts. We thus hold that the claimed deductions for the outstanding discounts do not satisfy section 461(h)(4) and section 1.461-1(a)(2), Income Tax Regs.

Editorial Note: The court also found that the requirement to purchase gas to redeem discounts meant the taxpayer did not qualify for the exception to the general rule because the redemption was conditioned on an additional purchase of the retailer’s product by the consumer.