IRS proposes easing cell phone rules.

Employer-provided cell phones have gone from an exclusive perk to common equipment in the 20 years since Congress made them subject to strict substantiation requirements for business use. Recently, the IRS proposed simplifying those rules and requested comments.

Generally, employees must include in income the fair market value of fringe benefits provided by their employer, to the extent the value of the fringe benefit exceeds the amount the employee paid for the benefit plus the amount specifically excluded from income by the Code. Under IRC [section] 132(a)(3), employees may exclude the fair market value of cell phone use from income as a "working condition" fringe benefit, but only to the extent that, if the employee had paid for the cell phone use, the payment would be deductible under section 162 (trade or business expenses) or section 167 (depreciable property).

The Code defines cell phones as "listed property" (IRC [section] 280F(d)(4)). Under section 274(d)(4), employers are not allowed a deduction for listed property expenses unless the employer can adequately substantiate the amount, use and business purpose of the expense. The same substantiation requirements apply to excluding from the employee's income the value of the phone as a working condition fringe benefit.

In Notice 2009-46 issued June 5, the Service requested comments on three new proposed methods that would simplify the substantiation requirements for employee use of employer-provided cell phones. All would require that employers maintain a written policy prohibiting more than minimal personal phone use. The methods are:

Minimal Personal Use Method. Two proposals under this method would allow an employer to deem as business use all employee use of a cell phone:

* The entire amount of an employee's use of the employer-provided cell phone would be deemed to be for business purposes if the employee also had his or her own personal cell phone and could provide records showing the personal cell phone was used for personal calls during work hours; or

* An as-yet-unspecified minimal amount of personal use would be disregarded in determining the amount of personal use of an employer-provided phone. Safe Harbor Method. The employer could treat a cell phone issued to an employee as used 75% for business and 25% for personal uses.

Statistical Sampling Method. The employer could use an approved statistical sampling method to determine the percentage of personal use,

The Service is open to other suggested methods and is requesting comments on the proposed methods, including the following particular issues:

* Provisions in an employer's written policy governing use of employer-provided cell phones.

* The types of employee records sufficient to establish that the employee maintains and uses his or her own cell phone for the first proposal of the minimal personal use method.

* How to define the amount and type of personal use that should be disregarded under the second minimal personal use method.

* Any other appropriate ratio of business use to personal use for the safe harbor method.

* Methods currently used for determining fair market value of cell phone use.

Comments should be submitted in writing by mail, hand delivery, or e-mail to [e-mail] and should refer to Notice 2009-46. The comment deadline is Sept. 4.

In a subsequent statement, IRS Commissioner Doug Shulman said the proposal had been incorrectly interpreted by some to mean the IRS was "cracking down" on employee use of employer-pro vided cell phones, and he called on Congress to "make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers." Although some of the proposed substantiation methods could clarify the law's administration, the law itself is obsolete, confusing and burdensome for both taxpayers and the IRS, he said.

Cell phones were added to listed property by the Omnibus Budget Reconciliation Act of 1989 (PL 101-239). Last year, the House passed a bill that would remove them again, but the bill, the Taxpayer Assistance and Simplification Act of 2008 (HR 5719), expired in the Senate Finance Committee. The legislation was reintroduced in the current Congress (HR 690 and S 144) but was still in committee in mid-June, when the IRS made its proposals.