Energy Act changes to transportation benefits, travel expenses, and backup withholding.

The Comprehensive National Energy Policy Act (Public Law No. 102-486), which was signed by President Bush on October 24, includes among its revenue-raising provisions several changes to the tax treatment of transportation benefits, expenses for extended travel away from home, and the backup withholding rate. All these changes are effective for benefits provided and amounts paid on and after January 1, 1993.

Many of these changes could be described as "tax increases," but President Bush nevertheless signed the legislation, because these revenue-raisers are combined both with certain tax decreases, and with many other non-tax energy provisions supported by the Administration. Also, it can be argued that the tax provisions affecting employer-provided commuting benefits may encourage commuters to take mass transit instead of driving alone in cars, thus promoting energy conservation (which is one of the goals of Public Law No. 102-486).[1](*)

1. Qualified Transportation Benefits

The several changes in Public Law No. 102-486 affecting the tax treatment of employer-provided mass transit, van pooling, and parking generally will expand, but in some respects will limit, the existing exclusions for these transportation benefits, effective for benefits provided on and after January 1, 1993.[2] The revised exclusions are contained in new section 132(f) of the Internal Revenue Code, and are referred to as "qualified transportation fringes."

a. Mass Transit Subsidy

The existing exclusion for employer-provided mass transit benefits will be increased to $60 per month (from $21 per month). This $60 monthly exclusion in 1993 will apply even if the employer pays for the entire cost of an employee's commuting by mass transit. (The $60 limitation will be indexed for inflation after 1993, so that it increases in $5.00 increments.) In contrast to this new exclusion, the current exclusion under Treas. Reg. [section] 1.132-6(d)(1) provides a de minimis exclusion only if the employer's subsidy of an employee's mass transit commuting expenses is strictly limited to $21 per month. Under the more generous new rules, if an employer provides, for example, $65 per month in transit benefits in 1993, the employee will be taxed only on $5 of such monthly benefits. (This excess must be taxed to the employee, because new section 132(f)(7) prevents any "qualified transportation benefits" in excess of the specified dollar limits from qualifying as either a de minimis fringe or a working condition fringe.)

In one respect, the $60 per month exclusion is more limited than the current $21 per month exclusion, because it prevents cash reimbursements for mass transit passes from qualifying for any exclusion, unless transportation vouchers or similar employer-purchased passes, tokens, or farecards are not "readily available." By contrast, under current law bona fide cash reimbursements for transit expenses qualify for the exclusion.[3] Although an attempt was made during the legislative process to add a reference to "cash reimbursements" in the bill, several transit voucher companies reportedly lobbied to require the use of vouchers whenever possible; this would induce employers to use their administrative services instead of merely reimbursing employees directly in cash for all (or part) of the employees' substantiated public transit expenses. To avoid having to use the services of such voucher companies, many large employers will presumably establish their own voucher programs by negotiating directly with mass transit authorities.

b. New Subsidy for Van Pools

This new $60 per month exclusion will also be extended to van pools in certain "commuter highway vehicles" that must seat at least six passengers and that are reasonably expected to be used 80 percent of the time to transport at least three employees at once (plus the driver) between their residences and place of employment. Because under current law most van pool rides by employees other than "control employees" may be valued at $1.50 each way,[4] if an employee commutes round trip between home and work 20 times each month, this expanded statute will exclude the entire value of all 20 commutes starting in 1993. (The 20 round trips would be valued at $60.) More frequent users of the van and "control employees" must be taxed on the value of commutes in excess of $60 per month, if the "$1.50 each way" valuation rule is elected.

If employees take more than 20 trips per month, or if "control employees" commute, it may still be possible to exclude the value of all these trips, if the employer elects to apply the "shared vehicle use" valuation rules of existing law, which permit the Annual Lease Value or cents-per-mile value of the vehicle to be allocated among all employees, based on all the facts and circumstances.[5] The "control employees" who are not eligible for the special $1.50 each way valuation rule include employees earning over $124,670, officers earning over $62,345, directors, and one-percent owners. The "shared vehicle use" valuation rules may provide values close to $1.50 per trip even for these individuals, however, depending upon the cost of the van, length of the trip, and number of riders. In summary, for most employees, this new $60 per month statutory change in 1993 will effectively restore the van pool exclusion which expired in 1986.[6]

c. Parking Exclusion

The statute also provides an exclusion of up to $155 per month for "qualified parking" provided to an employee either on or near the business premises of the employer or on or near a location from which the employee commutes to work by either mass transit, vanpool, or carpool. The $155 limit (which represents a compromise between limits of $145 proposed in the Senate version of H.R. 776, and $160 proposed in the House version of the bill[7]) Will be indexed for inflation in $5.00 increments after 1993. This exclusion is provided under new statutory provisions that replace the existing unlimited exclusion for parking on or near an employer's business premises.[8]

This revised exclusion for "qualified parking" allows employers to provide a new tax-excludable benefit to employees worth up to $155 per month, in the form of parking at a mass transit or carpool stop, if the employee commutes by mass transit, vanpool, or carpool. As under current law, the parking exclusion does not apply to parking at the employee's home, even if that home is on or near an employer's business premises.[9]

This new rule also limits the existing parking exclusion, by placing a cap of $155 per month on the value of any parking (including parking on employer-owned facilities or in employer-rented parking lots) provided on or near the employer's business premises. If parking with a higher value is provided, it will be taxable, starting in 1993, to the extent the value exceeds $155 per month.

This $155 cap on "parking on or near the employer's business premises" was designed in part to raise tax revenues to pay for the other liberalizing changes affecting transportation fringe benefits and also in part to encourage employees to use mass transit in any cities where parking costs more than $155 per month. This limit is not likely to apply in many locations, but in certain major metropolitan areas (including Chicago, New York City, Philadelphia, Los Angeles, and Washington, D.C.[10]), this revised parking exclusion will require valuation of all employer-provided parking in-kind (including employer-owned facilities), and the taxation of this benefit to the extent the value of the parking exceeds the maximum excludable amount. (Interestingly, since the ceiling on the exclusion is less than the fair market value of certain parking lots in Washington, D.C., it is possible that the tax-writers did not realize that this legislation may require the taxation of part of the value of their parking places on Capitol Hill.)

d. Application to Partners and Independent Contractors

The new statutory exclusion for "qualified transportation fringes" specifically prevents partners or independent contractors from benefitting from the exclusion.[11] This provision represents a significant change from existing law, which permits partners (but not independent contractors) to exclude unlimited amounts of parking benefits as a working condition fringe[12] and permits both partners and independent contractors to exclude up to $21 per month in mass transit subsidies as a "de minimis fringe.[13]

Any partners or independent contractors who receive parking, mass transit, or van pooling benefits after 1992 may try to argue that their benefits are "de minimis fringes" or "working condition fringes" if the benefits cannot be excluded as "qualified transportation fringes." Any de minimis exclusion will be difficult to sustain, however, if the benefits have a significant fair market value. A working condition exclusion would be hard to prove, for any persons working as partners or independent contractors who routinely park at their regular places of business. There is also a possibility that the IRS may argue that none of these benefits can be excluded as de minimis fringes or as working condition fringes, because of a separate new statutory provision (in new section 132(f)(7), which provides, as follows:

COORDINATION WITH OTHER PROVISIONS --

For purposes of [section 1321, the terms "working

condition fringe" and "de minimis fringe" shall not

include any qualified transportation fringe (determined

without regard to [the $60 and $155 monthly

dollar caps in paragraph 132(f)(2)]).

This "coordination" rule may be interpreted by the IRS merely as a rule designed to ensure that any common law employees who receive $61 or $151 in mass transit or parking benefits, respectively, are taxed on the $1.00 in excess of the dollar caps. Alternatively, the IRS may interpret the quoted rule more broadly to require the taxation of all mass transit, van pooling, and parking benefits provided to all partners and independent contractors.

Any such broad interpretation of these new statutory rules to prohibit any exclusion of parking provided to partners and independent contractors would yield absurd results. For example, repairmen who park their repair trucks in a company lot while on a job at that company would have to have the value of their parking reported on the Form 1099 provided for their temporary services. A lawyer who drives to his office and later uses his car to visit various clients would have to be taxed by his partnership on the value of the parking provided to him, and clients would have to report the value of the parking provided to the lawyer on Forms 1099 to the partnership. All the companies in America would have to expend ridiculous amounts of time determining the value of parking in all company lots.

Such unnecessary overreporting of parking benefits was never contemplated by the drafters of this provision, according to one Treasury Department staff attorney familiar with the new rules. It is possible (but not certain) that the Treasury Department may propose a technical correction to change this unintended result and provide that partners and independent contractors are entitled to receive the same tax exclusion for all transportation benefits that is provided to common law employees.

e. No Paying for New Transportation Benefits by Salary Reduction

The increase from $21 to $60 per month in excludable mass transit and van pooling benefits will no doubt lead many employees to ask their employers to provide this increasingly attractive tax-exempt transportation benefit. many employers are unwilling to offer the benefit (just as they have always been unwilling to pay employees' parking costs), simply because the aggregate cost of any new fringe benefit program can be very large. An employer could budget for a new transportation benefit program by offering it instead of a salary increase to its workforce in 1993. The benefits cannot be offered to individual employees, however, on a "salary reduction" basis, because section 125(f) prohibits any benefits excludable under section 132 from being offered as an alternative to cash. This statutory prohibition is restated in Treas. Reg. [section] 1.132-5(p)(2)), relating to the parking exclusion, and will undoubtably be repeated in any new IRS guidance on qualified transportation fringes.

2. Deduction Denial For Travel More Than One Year Away From Home

a. Current Law Travel Expense Deductions

Under current law, taxpayers employed away from home for more than one year can deduct their meal, lodging, and incidental living expenses at the temporary location and the expenses of commuting to and from such locations (subject to the two percent of AGI floor). They can also exclude any employer-provided reimbursements for such expenses if the taxpayer (1) realistically expected the job to last less than two years, and (2) realistically expected to return to the prior regular place of business. Under Rev. Rul. 83-82, 1983-1 C.B. 45, three criteria must be used in determining whether the prior regular place of business in fact remains the taxpayer's tax home during any stay lasting longer than one year. These criteria include whether the taxpayer's living expenses are duplicated, and the extent of the taxpayer's continuing work and family contacts in the tax home.

b. Post-1992 Deductions Disallowed for Jobs of More than One Year

Under Public Law No. 102-486, all deductions for away-from-home travel expenses paid or incurred after December 31, 1992, are disallowed, if the temporary period of employment exceeds one year.[14] As under current law, if a taxpayer's employment lasts for less than one year, whether the employment is temporary or indefinite must be determined based on all the facts and circumstances.

Unlike current law, the basis for disallowing the deduction is the actual length of the period of employment at the temporary location, not the taxpayer's "realistic assessment" of how long the job will last. Thus, under the new statute, if the taxpayer's job at the temporary location actually lasts 366 days, all the expenses incurred during the prior twelve months become retroactively nondeductible.

The prior law "realistic expectation" test may continue to apply, however, in the case of certain employer reimbursements of temporary living expenses. Under the wage reporting and employment tax withholding rules, if a company has reimbursed a taxpayer's temporary living expenses, or paid a per diem allowance during a period of temporary employment, these reimbursements or per diem allowances are excludable from the worker's income if the company has a "reasonable belief" that the expenses will be deductible under section 162 (and thus excludable under section 132).[15]

Thus, if a company reasonably believes that a taxpayer's temporary employment will last less than one year, any travel expenses reimbursed during the first calendar year of the job should be excludable from the worker's income, even if the job in fact lasts longer than one year, because at the time the expenses were paid, the company "reasonably believed" that the expenses would be deductible. Any travel expenses reimbursed after the first calendar year of a temporary job, however, are subject to information reporting for that year and also potentially subject to retroactive withholding, effective for all reimbursements paid during that calendar year, if the period of employment that started in the prior calendar year in fact continues for more than twelve months.

Taxpayers and employers may seek to preserve deductions for at least twelve full months of temporary living and transportation expenses by making sure than all employment contracts for temporary jobs away from home last less than one year. If the original employment contract may be extended beyond twelve months, however, expenses reimbursed under the original contract may be retroactively affected, unless the employee returns to his prior tax home for at least some period of time (such as a month) before entering into any new contract for an additional period of temporary employment.

3. Increase in Backup Withholding Rate

Under section 3406, payments of interest, dividends, compensation paid to independent contractors, and other reportable payments made in the course of a trade or business are subject to backup withholding under certain circumstances. For example, backup withholding applies if the payee has failed to furnish a taxpayer identification number (TIN), or if the payor has been notified that the payee has furnished an incorrect TIN to the payor in two of the preceding three years.

Public Law No. 102-486 increases the backup withholding rate to 31 percent (from 20 percent), effective for all amounts paid after December 31, 1992.[16] This rate increase obviously affects only payees in any cases where backup withholding has been timely applied, and the increased withholding taxes can be claimed by payees as credit against the federal taxes owed with respect to the payment. In cases where a payor has inadvertently failed to withhold, however, the increased rate will be used by the IRS in calculating the penalty on the payor for its failure to backup withhold. As imposed on payors, this penalty seems particularly harsh in any cases where it is likely that the payee was only in a 15 percent federal income tax bracket, because the payor will be required to pay in penalties more than the payee would ever have owed in income taxes. (*) Footnotes are printed on page 466.

--Notes--

(1) See U.S. General Accounting Office, Mass Transit: Effects of Tax Changes on Commuter Behavior, RCED-92-243 (Sept. 1992) (analysis of proposed legislation). This GAO study concludes that the effect of the new tax provisions on commuter behavior is "uncertain," because it is not clear how many employers will offer increased mass transit benefits, or how many employees will accept the benefits if they are offered. (2) See [section] 1911 of H.R. 776, "The Comprehensive National Energy Policy Act" (Public Law No. 102-486, 106 Stat. 2776), as reported at BNA Daily Tax Report: No. 194, at L-1 (Oct. 6, 1992). The Conference Report on the bill is reproduced at BNA Daily Tax Report, No, 195, at L-16 to L-17 (Oct. 7,1992). See also H.R. Rep. No. 102-474, Part 6, at 34 for a description of the original House version of this provision (which was identical to the Senate version, except as to the treatment of cash reimbursements for transit subsidies and the amount of the cap on excludable parking). Substantially similar provisions were contained in the tax bill that was passed by Congreas but vetoed by the President on March 20, 1992. See [section] 1006 of H.R. 4210, as reported out of Conference and vetoed by the President. See also WMCP 102-35 (House Report), at 12-13 (1992), and S. Print No. 102-77 (Senate Report), at 82-83 (1992). (3) This result was made dear under a technical correction made to the de minimis exclusion rules in 1986. For the legislative history of this 1986 technical correction, see S. Rep. No. 99-313, at 1026 (1986); H.R. Rep. No. 99-841 (Conference Report), at II-852; Staff of Joint Committee on Taxation, General Explanation of the Technical Corrections to the Tax Reform Act of 1984 and Other Recent Tax Legislation 147 (1987). This technical correction was reflected in the fringe benefit regulations by issuance of Notice 89-110, 1989-2 C.B. 447, and Treas. Reg. [section]1.132-6(d)(1), published at 57 Fed. Reg. 1868 (Jan. 16, 1992). (4) Treas. Reg. [section] 1.61-21(f) provides the rules for valuing certain commutes in employer-provided ride-sharing vehicles at $1.50 each way. To qualify to use this rule, the vehicle must be covered by a written and enforced policy prohibiting personal use of the vehicle other than for commuting. For the definition of "control employees" (who are not eligible to use this valuation rule) for both private sector and government employers, see Treas. Reg. [subsection] 1.61-21(f)(1)(v), (f)(5) and (f)(6). (5) As an alternative to applying the $1.50 each way rule to all employees in the vehicle, an employer can elect to value the vehicle using the Annual Lease Value method (or the cents-per-mile method, for any vehicles costing less than approximately $13,800 in 1992), and allocate that value among all the employees using the vehicle, based on all the facts and circumstances. See Treas. Reg. [subsection] 1.61-21(c)(2)(ii)(B), (e)(1)(v), and (f)(3)(ii). (The cross-references in Treas. Reg. [section] 1.61-21(f)(3)(ii) are inaccurate.) For a discussion of these rules, and considerations in choosing among them, see Hevener and Guarisco, Fringe Benefit Regulations: New Details on Benefit Exclusions and Valuation Rules, Tax Notes, Nov. 6, 1989, at 743, 746-52. (6) See I.R.C. [section] 124 (applicable prior to 1987). (7) The dollar limits on the parking exclusion were adjusted to affect the net revenue gain from this provision. Even though the improvements in the mass transit exclusion lose revenue, the final provision -- in the aggregate -- was estimated to raise $70 million over fiscal years 1993 through 1997. (8) New I.R.C. [subsection] 132(a)(5), 132(f)(1)(C), and (f)(2)(B) replace I.R.C. [section] 132(h)(4) (and Treas. Reg. [section] 1.132-5(p)). As enacted, this change will reletter sections 132(f) through (k) as sections 132(g) through (l) and renumber the relettered sections 132(i)(5) through (9) an sections 132(i)(4) through (8). The statutory drafters rejected comments requesting that these proposed statutory changes be made without relettering most of the section 132 exclusions. (9) See New I.R.C. [subsection] 132(f)(5)(C) (last sentence). See also Treas. Reg. [section] 1.132-5(p)(3). (10) According to the GAO study cited note 1, the provision is likely to affect "only [parking in]) the most costly downtown areas of a few cities." That study surveyed monthly and daily parking rates, based on 1989 data (and 1985 data for New York City), in eight selected cities, reported as follows:

  City                  Cost of Parking
  Chicago               $40-350
  Denver                $55-110(a)
  Los Angeles           $140(b)
  New York              $27-386
  Philadelphia          $113-244(a)
  Sacramento            $22-92
  Seattle               $46-120
  Washington, D.C.      $97-165(a)
(a) Costs based on daily rates. Monthly contracts
could be lower.
(b) Average parking rate.

(11) See New I.R.C. [section] 132(f)(5)(E). This provision was not included in the prior version of this exclusion, which was included in H.R. 4210, the tax bill vetoed by President Bush in March 1992, nor was it discussed in any committee reports accompanying the bill. (12) See Treas. Reg. [section] 1.132-1(b)(2)(ii) and the final sentence of Treas. Reg. [section] 1.132-1(b)(2). (13) See Treas. Reg. [section] 1.132-1(b)(4). (14) See [section] 1938 of H.R. 776, as reported at BNA Daily Tax Report, No. 194, at L-1 (Oct. 6, 1992). The Conference Report is reproduced at BNA Daily Tax Report, No. 195, at L-16 and L-37 (Oct. 7, 1992). See also 138 Cong. Rec. S14820 and S14770 (Sept. 23, 1992) (floor statements accompanying the addition of this provision to H.R. 11). The provision, which was estimated to raise $131 million over fiscal years 1993 through 1997, was moved to H.R. 776 from H.R. 11 during conference on these two tax bills. (15) See I.R.C. [subsection] 3401(a)(18), 3121(a)(20), and 3306(b)(16). (16) See [section] 1935 of H.R. 776, as reported at BNA Daily Tax Reporter, No. 194, at L-1 (Oct. 6, 1992). The Conference Report is reproduced at BNA Daily Tax Report, No. 195, at L-16 and L-35 (Oct. 7, 1992). The provision was estimated to raise $353 million over fiscal years 1993 through 1997.

MARY B. HEVENER is a partner in the Washington, D.C., law firm of Lee, Toomey & Kent, where her primary areas of practice include employee benefits, employment taxes, information reporting, and corporate and individual minimum taxes. She is a graduate of Wellesley College and the University of Virginia School of Law. From 1981-1984, Ms. Hevener was an Attorney-Advisor in the Treasury Department Office of Tax Legislative Counsel. She has published widely on topics of employee fringe benefits and alternative minimum taxes.