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Assessing Internal Revenue Code section 132 after twenty years.

In 1984, Congress enacted Internal Revenue Code section 132 to bring more certainty to the taxation of employee fringe benefits. This article examines the impact of the legislation from the standpoint of administrative pronouncements and taxpayer litigation. The article concludes that section 132 has produced little litigation, but primarily because it has played the role of increasing exclusions. It remains unclear whether section 132 has also contained the growth of new forms of nonstatutory fringe benefits.


With the enactment of the Deficit Reduction Act of 1984 (DRA 1984), (1) Congress at last addressed the federal income taxation treatment of nonstatutory fringe benefits, (2) an area that had been shaped by administrative pronouncements of the Internal Revenue Service (Service) (3) punctuated by judicial oversight. (4)

The legislative history of DRA 1984 identified two competing objectives of the legislation. The first objective was to "codify the ability of employers to continue [certain fringe benefits] practices without imposition of income or payroll taxes." (5) The second objective was to "set forth clear boundaries for the provision of tax-free benefits." (6) The legislative history also expressed the concern "that without any well-defined limits on the ability of employers to compensate their employees tax-free by using a medium other than cash, new practices will emerge that could shrink the income tax base significantly, and further shift a disproportionate tax burden to those individuals whose compensation is in the form of cash." (7)

DRA 1984 aimed to achieve those objectives through three statutory changes. First, a new section 132 supplied (8) a comprehensive list of specific fringe benefits excluded from income and general authority for excluding de minimis fringe benefits. (9) Second, the inclusionary language of section 61(a)(1) was expanded by the addition of "fringe benefits" as an item of gross income. (10) However, Congress apparently recognized that the broad sweep of section 61 as interpreted by the courts did not make this addition of the term "fringe benefits" critical. (11) Third, the employment tax provisions were amended to expressly include taxable fringe benefits in the wage base. (12)

This article examines the Service pronouncements and judicial activity following the enactment of the DRA 1984 fringe benefit provisions. The legislation has produced little litigation, but it has required extensive administrative guidance. It has not significantly expanded the income tax base and has principally played the role of increasing exclusions from income and employment taxes. It is uncertain whether its existence has restrained the development of new forms of nonstatutory fringe benefits.

Part II presents a brief history of the taxation of nonstatutory fringe benefits. Part III discusses the trends demonstrated by the Service pronouncements and judicial activity in the two decades following enactment of DRA 1984. Part IV assesses the successes and failures of the legislation. In Part V the article concludes.


A. The Term "Fringe Benefit" Arrives

A leading dictionary in current use identifies the term "fringe benefit" as of U.S. origin and defines it as "a perquisite or benefit of some kind provided by an employer to supplement a money wage or salary." (13) However, the term is of relatively recent origin. It did not appear in the 1948 Webster's dictionary. (14) It was not used in a published U.S. judicial opinion until 1949. (15) Service pronouncements as of 1953 were still cautiously referring to "so-called employer-furnished fringe benefits." (16)

A 1951 edition of a treatise dealing with executive compensation referred to such benefits as "perquisites" (17) using the phrase "'fringe' increases" (18) only in reference to a limited class of benefits, such as overtime, vacations, and prizes in war bonds not exceeding $250 in face value, that could justify a salary increase under the wartime salary freeze provisions of the Stabilization Act of 1942. (19) The 1962 edition of the treatise embraced the new term, referring to "[f]ringe benefits, perquisites, health and welfare benefits" (20) as new types of compensation aimed at supplementing fixed salaries, and using the term frequently in the accompanying discussion. (21)

The apparent World War II roots of the term is confirmed by a 1962 London newspaper article reporting the research of a British economist which found that the term, "fringe benefits," "was apparently first recorded ... in an announcement by the United States War Labour Board during the Second World War." (22)

Although the wartime wage restrictions origins is now just a historical footnote, the nontaxable fringe benefit under the current federal income tax structure remains powerful because it is taxed to no one--the employer generally receives a deduction to the extent of expenditures to produce the benefit, (23) and no federal income taxes (24) or employment taxes are imposed on the employee.

B. The Taxation of Nonstatutory Fringe Benefits Prior to DRA 1984

The pre-DRA 1984 income tax treatment of nonstatutory fringe benefits was a patchwork of Service rulings, surprisingly few regulations, and a sprinkling of cases. The law reflected custom, common sense practicalities, and indirect authority by inference. (25) Professors Bittker and Lokken summed up the tax status of fringe benefits before the 1984 legislation as "veiled in uncertainty." (26) An appreciation of these historical themes is necessary to fully understand the DRA 1984 changes and other facets of the current taxation of nonstatutory fringe benefits.

1. Tax Reimbursements

Although the term "fringe benefit" may not have been used prior to the 1940s, the taxation of perquisites became a very visible issue in the early years of the modern income tax on the administrative front (27) and in the courts. For example, in 1929, the U.S. Supreme Court held that a corporation's payment of an executive's federal income tax liability constituted additional taxable income to him. (28) Tax reimbursement plans, also known as "gross-up" (29) payments, remain a current compensation technique. (30)

2. Meal Money

One of the enduring Service pronouncements dealing with fringe benefits was O.D. 514, (31) that was issued in 1920 and continued to create interpretative problems for the next sixty years. It held that occasional cash meal allowances were excluded from taxable income. In the early 1970s the Service vacillated about the position it had staked out. For example, in a 1971 general counsel memorandum the proposed action was a prospective revocation of O.D. 514 because "[t]he important objective is that something finally be done to remove this troublesome O.D. once and for all." (32) O.D. 514 remained in place, and the Service awkwardly addressed the issue by changing its litigating position in 1973 such that the exclusion applied only if the meal money was paid on account of overtime work and on an irregular basis. (33)

During the 1970s the Treasury Department was grinding out various fringe benefit regulations proposals. (34) In 1975, it issued a discussion draft of fringe benefit regulations that in part addressed the meal money issue, (35) but the proposals were withdrawn the following year. A 1976 general counsel memorandum noted that it had been decided that the 1975 proposed regulations project would be dropped, supplanted by new rulings. (36) The general counsel memorandum proposed a revenue ruling that would require a five-part test of exclusion for meal money. The meal money would be paid: (1) in connection with extra, overtime work, (2) infrequently, (3) on an occasional basis, (4) for reimbursement of actual expenses incurred, and (5) in a reasonable amount. (37) This ruling was not issued, O.D. 514 was not revoked, and the Service litigating position continued to apply the two-part test of payments for overtime work and on an irregular basis. (38) As discussed later, (39) in 1978 Congress imposed the first of a series of moratoria on the issuance of new fringe benefit regulations or rulings, and that effectively handcuffed the Service from revoking O.D. 514 until the enactment of DRA 1984. (40) The exclusion was significantly limited in the final section 132 regulations issued in 1989. (41)

3. Complimentary Services and Employee Discounts

In 1921, the Service ruled that the value of free train travel for employees and their families was excluded from income as a gift if the benefit was "not provided for in the contracts of employment." (42) That remained the Service's public guidance into the age of commercial air travel. Referring to this ruling almost sixty years later, the Tax Court observed in dicta that "[t]here would not appear to be any difference as to free airline travel, and we do not understand that any distinction has been drawn administratively as to the latter." (43) Like taxpayers, the Tax Court had to resort to analogies for authority.

The employees of railroads were fortunate to be able to rely on one of the few published rulings. In comparison, the Service's policy concerning employee discounts for both goods and services was not stated in the substantive income tax regulations, but had to be inferred from the wage withholding provisions. (44) Those regulations stated:
  Ordinarily, facilities or privileges (such as entertainment, medical
  services, or so-called "courtesy" discounts on purchases), furnished
  or offered by an employer to his employees generally, are not
  considered as wages subject to withholding if such facilities or
  privileges are of relatively small value and are offered or furnished
  by the employer merely as a means of promoting the health, good will,
  contentment, or efficiency of his employees. (45)

Considering the price of most homes, the requirement that the fringe benefit be "of relatively small value" apparently was breached by a builder's proposed five to ten percent employee discount on the retail price of homes in a 1983 technical advice memorandum. (46) Although the taxpayer asserted that "its employee discount policy is noncompensatory and is used only as a tool for inventory control" the Service noted that the company in some newspaper advertisements seeking job applicants listed the discount as an employee benefit. (47) In a similar vein, employee discount provisions enacted with DRA 1984 disallow discounts for "real property." (48)

One of the few cases that can be found dealing with no-additional-cost services was a 1985 district court case addressing tax years 1973-78. The case was presented as an employer's refund claim for employment taxes paid on the value of employee parking and recreation center memberships. (49) The court rejected the taxpayer's refund claim, implicitly holding that these benefits were taxable income to the employees. In substance, the employer permitted certain employees--full-time faculty and administrators--to elect between receiving their full cash salary, or a lesser amount plus a variety of fringe benefits to make up the difference, consisting of parking spaces, recreation center memberships, and tuition payments for the high school education of the employees' children.

With respect to the parking places and recreation center memberships, the taxpayer principally relied on the employment tax regulations discussed above. (50) The court rejected the application of this regulation on several counts. The benefits were not available to employees "generally" (51) as dictated by the regulation, and likewise they weren't of "relatively small value." The employer's recordkeeping for the benefits was also a factor. "The fact that Marquette considered the costs significant enough to deduct them from the employees' wages belies its claims that the amounts are de minimus [sic]." (52) Finally, the court reasoned that the benefits were not "furnished" by the employer, but rather that they were purchased by the employee, due to the cash or in-kind election. (53)

4. De Minimis Fringe Benefits

Administratively the Service ignored small, in-kind benefits. The "turkey and ham" pronouncement, Revenue Ruling 59-58, exempted the "value of a turkey, ham, or other items of merchandise of similar nominal value, distributed by an employer to an employee at Christmas, or a comparable holiday, as part of a general distribution ... as a means of promoting their good will." (54) The revenue ruling stated that the exemption did not apply to "cash, gift certificates, (55) and similar items of readily convertible cash value, regardless of the amount involved." (56) Noncash gifts of this type are also excluded under the current section 132 regulations. (57)

The practical administrative inclination to ignore immaterial amounts not paid in cash had broad application. Until the addition of section 79 to the Code in 1964, (58) most group-term life insurance premiums paid by an employer were not included in the employees' income. (59) Group-term life insurance that had no cash value was not considered as bestowing a taxable economic benefit on the employee, although a cash surrender value could produce taxable income to the employee. (60) A 1919 Service law opinion established this generous doctrine, reasoning that the employee benefited during life "only in the feeling of contentment that provision has been made for dependents. It is paid by the employer not as compensation to the employee, but as an investment in increased efficiency." (61) This benign treatment probably reflected the Code's general deference toward life insurance in encouragement of family protection. (62)

However, some taxpayers did test the boundaries of this largely uncharted area and did not prevail. For example, the taxpayer in Harmony Dairy Co. v. Commissioner (63) followed a practice of delivering dairy products free of charge to its officer-stockholders. Rejecting the taxpayer's "claim that these free products were in the nature of fringe benefits," (64) the court denied a deduction for the products. The troublesome issue for the court apparently was not the discriminatory aspect of the fringe benefit, (65) but rather its role as a constructive dividend distribution. (66)

5. Working Condition Fringes

Section 132 now excludes "working condition fringes" defined as "any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167." (67) Essentially, the statute dispenses with an income inclusion for the employer's payment if it could be matched by a hypothetical offsetting employee deduction for the same amount, producing a so-called "wash" for income tax purposes. (68)

A specialized application of this "working condition fringe" principle in pre-DRA 1984 law was a corporation's payment of its officers' attorney fees and fines. For example, in Central Coat, Apron & Linen Service, Inc. v. United States, (69) the court permitted a corporation to deduct legal fees for the defense of its president for alleged criminal violations of the Sherman AntiTrust Act. In dicta the court noted that the officer could have deducted the legal fees if paid by himself, "as long as they are incurred in defending activities related to the business of the corporation and not to personal frolics." (70) Although the opinion did not hold that the officer would not report income on account of the indemnity, it is arguably implied, and later Service rulings confirm that. (71)

Foreshadowing current section 132(d)'s confinement of offsetting employee expenses to those allowable under sections 162 or 167, Revenue Ruling 73-13 (72) required a corporate executive to include in gross income an amount equal to the value of personal financial advice received from professional consultants hired by his employer, even though the ruling concluded that the executive was entitled to an offsetting deduction, but under section 212. (73)

Prior to the enactment of DRA 1984, commentators generally referred to these types of noncompensatory benefits as "working conditions" (74) or "conditions of employment." (75) Some working conditions, such as the "factory roof over the industrial worker's head" (76) were, and are, not considered income, as the compensatory or employee personal benefit element is remote. However, others, such as employer-provided income tax preparation (77) or travel and entertainment, may demonstrate a mix of business and personal factors, such that a total exclusion is not allowed. The messy mixture of the employer's business purpose and the employee's personal enjoyment produce popular law school casebook examples such as Rudolph v. United States, (78) in which the government prevailed, and United States v. Gotcher, (79) in which the taxpayer prevailed, on roughly similar facts. (80)

This type of controversy has not disappeared in the post-DRA 1984 era. A 2003 case, Townsend Industries, Inc. v. United States, (81) involved an annual employee fishing trip. Although the trial court and the appellate court differed in their views of the facts, attendance at the event apparently was not required by the employer, but it was strongly urged. Spouses were not invited. The two-day event was held at a Canadian resort, at the terminus of a day-long bus ride from Iowa. It probably is fair to say that except for avid fishermen or bus travelers, this doesn't sound like a highly enjoyable time. The Service nevertheless asserted that the employees received taxable wages, and sought an employment tax deficiency against the employer.

The District Court judge applied section 132's required analysis of whether the trip would have been an ordinary and necessary business expense if it had been paid for by the employees. (82) The trial court concluded that the "lax attendance policy" (83) and the lack of organized business meetings for most employees failed the test, so the benefit was taxable to the employees. However, the appellate court accepted the taxpayer's account of assorted business discussions conducted at the retreat, finding for the taxpayer.

6. The Special Case of Shareholder Loans

Below-market loans to employees and shareholders were a significant tax-free nonstatutory fringe benefit that produced no imputed income to the borrower. (84) A part of DRA 1984 beyond the scope of this article, current section 7872, (85) answers most of the income tax issues. Also, the Sarbanes-Oxley Act of 2002 corporate reform legislation placed additional limits on most loans from publicly traded corporations to officers and directors. (86)

7. Use of Employer Automobiles, Airplanes, Yachts ...

Although the Service was unsuccessful in convincing the courts that a broad reading of section 61 should produce income to a borrower in a below-market loan arrangement, the Service was much more successful in taxing the use of tangible assets. Employee or shareholder use of employer or corporate-owned assets for personal purposes was generally found to produce compensation income or constructive dividend treatment, depending upon the context. Inadequate entertainment logs or other recordkeeping to establish business use is a common feature. (87) As discussed in the next section, recordkeeping and other issues surrounding the use of employer-provided vehicles dominate the current fringe benefit taxation landscape. (88)

8. Employment Taxes

The withholding rules for fringe benefits that applied to employers did not neatly correspond to the employee's income tax treatment of the items. For example, in 1978, the Supreme Court held in Central Illinois Public Service Co. v. United States (89) that although the employee cash meal allowances in question were properly included in the employees' income, (90) the employer was not sufficiently on notice to be required to withhold income taxes. (91)

The withholding rules for fringe benefits were not otherwise internally consistent. In 1981, the Supreme Court held a regulation requiring Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) withholding for meals and lodging, but excluding those amounts from income tax withholding, invalid in Rowan Cos, v. United States. (92) As discussed in the next section, the employer's liability for employment taxes, rather than the employees' direct income tax liability, remains the dominant issue in the reported cases and administrative pronouncements. (93)

9. The Regulations Projects and the Moratorium

In 1975, the Treasury issued proposed regulations dealing with nonstatutory fringe benefits. (94) Encountering widespread criticism, (95) it withdrew the proposed regulations the next year. (96) In 1978, Congress responded with a moratorium until December 31, 1979 on the issuance of regulations, rulings, or procedures (97) that would significantly alter the historic treatment of fringe benefits. (98) In the interim a special task force conducted hearings and produced a draft bill. (99) The legislation did not move forward, and Congress extended the moratorium until May 31, 1981. (100) In January 1981, during the second moratorium, the Service issued a "discussion draft" for new proposed regulations. (101) Congress responded by again extending the moratorium through December 31, 1983. (102) When the moratorium expired, the Service announced that it would refrain from issuing any rulings or determination letters until after January 1, 1985. (103) The area of nonstatutory fringe benefits was ripe for some solution, (104) and Congress introduced a comprehensive treatment with DRA 1984 that was signed by President Reagan on July 18, 1984.


This section will discuss the administrative and judicial activity following the amendment to section 61(a)(1) and the enactment of section 132 as part of DRA 1984. Although the treasury regulations will be addressed only as necessary for the discussion, the detail-oriented nature of the regulations (105) will nevertheless emerge.

A. Employment Taxes Remain the Most Important Issue

There are few reported cases in which the Service asserted an income tax deficiency against the employee. (106) Most fringe benefits are apparently spread over a number of employees and that dilutes Service enforcement efforts against the recipients. Instead, the Service focuses on the collection of employment taxes from the employer. (107) That is probably a more efficient enforcement approach, (108) and it does indirectly shape the structure and employee treatment of the fringe benefits. (109) On the other hand, it has less force for highly paid employees due to the wage ceilings placed on the imposition of most employment taxes. (110) A notable exception to this trend is the treatment of shareholders of closely held corporations, where the claimed fringe benefit can trigger a constructive dividend (111) or fringe benefit income (112) to the shareholder employee.

DRA 1984 sought to clarify some of the inconsistencies between the income tax inclusion rules, on the one hand, and the income and employment tax withholding rules, on the other hand, as applied to nonstatutory fringe benefits. (113) It added language expressly including noncash fringe benefits, not otherwise excluded by section 132, in the definition of taxable wages for purposes of federal income tax withholding, FUTA and FICA withholding, and Railroad Retirement Act withholding. (114) It was the expectation of Congress that the withholding rules for nonstatutory fringe benefits reflect a simple rule of symmetry. (115)

Nevertheless, fringe benefits have continued to present withholding and employment tax issues. For example, the Court of Appeals for the Federal Circuit's opinion in Anderson v. United States, (116) rejected the application of FICA taxes to cash housing allowances otherwise excluded from gross income, (117) according little effect to DRA 1984's language that apparently included all but section 132 excluded fringe benefits in both the FICA and income tax withholding wage bases. The court instead argued that "[i]n context the phrase merely clarifies, as it did in the income tax withholding provision, that fringe benefits not paid in cash should be treated the same as fringe benefits paid in cash." (118) But, the court did allow that "the government's position that 'fringe benefits' are taxable under FICA unless they fall under section 132 may well have validity in the context of considering other fringe benefits." (119)

Likewise, in H B & R, Inc. v. United States (120) the employer-provided round-trip commercial airline tickets from the employees' homes to the North Slope of Alaska on three-week rotations at an average cost of $1,000 to $1,200 per trip. The court agreed with the Service that the ticket expense was a nondeductible commuting expense and therefore taxable income to the employees. However, the court concluded that the language of a withholding regulation that exempted "'[a]mounts paid specifically--either as advances or reimbursements--for traveling ... expenses incurred ... in the business of the employer'" (121) was equivocal enough to preclude liability by the employer for failure to withhold employment taxes. (122)

One might dismiss these cases as dealing only tangentially with the scope of section 132 fringe benefits. However, one should expect employment tax cases to arise even after DRA 1984, because the employment tax exemption involves the interpretation of whether section 132 excludes the item. (123)

B. Transportation Issues Predominate

Section 132 and the regulations under section 61 provide comprehensive rules for the income tax treatment of employee use of transportation-related fringes. This area is detail-oriented, and it has generated the greatest amount of administrative guidance. Most of the revenue rulings issued with respect to nonstatutory fringe benefits pertain to transportation. (124) As demonstrated in the following paragraphs, taxpayers have become very active in requesting private letter ruling guidance. The details are not pleasant reading, but one needs to be immersed in them a bit to appreciate the level of nitpicking dictated by the regulations.

The section 132 regulations provide detailed guidance concerning the determination of employee personal usage of employer-provided vehicles. All of the value of the use of a "qualified nonpersonal use vehicle" is excluded from gross income as a working condition fringe. (125) That status is important because if it is achieved, income inclusions from possible personal use, including commuting, are ignored. (126) The definition of such vehicles is supplied by the section 274 regulations, and many of the categories are practical and almost humorously free of question--e.g., ambulances, cement mixers, combines, cranes and derricks, forklifts, and school buses. (127)

An exception for unmarked law enforcement vehicles (128) has produced questions about the definition of a law enforcement officer. (129) Criminal investigators for a state commission (130) qualified for the exception. On the other hand, special investigators dealing with state cigarette tax laws were denied the exemption because they failed to carry firearms. (131) A county coroner was denied exemption because the coroner was not authorized to make arrests, execute search warrants, or carry a firearm. (132) Likewise, the Director of the Security Division of a county's public works department was also denied exemption because, although he regularly carried a firearm and was considered a "Peace Officer" under state law, he did not have the authority to execute search warrants. (133)

A seemingly routine exception for "clearly marked police and fire vehicles" (134) has generated requests for guidance. Vehicles used by the forestry employees of a state agency did not qualify because, although the employees engaged in some fire fighting, they also spent a substantial amount of time in other activities. (135) Clearly marked automobiles driven by deputy sheriffs of a combined city and county were considered exempt. (136)

The regulations state that trucks and vans can be exempted if they are modified so that it is not likely that personal use will exceed a de minimis amount. A van with only a front bench for seating, with permanent shelving filling most of the cargo area, and specially painted with advertising or the company's name can qualify. (137) A taxpayer proposed that its station wagons be modified, principally by affixing company logos to the front doors, by removing the second seat, and by installing a steel mesh barrier between the front seats and the rest of the interior. The Service ruled that the exception applies only to pickup trucks or vans, and the design of a station wagon, even as modified, is not such that it is likely to be used for personal purposes only in a de minimis amount. The exemption was therefore denied. (138)

Generally speaking, to qualify for exemption, pickups must be clearly marked or painted with the employer's markings and must be equipped with industrial furnishings such as hydraulic lift gates, permanent tanks or drums, permanent side boards or panels that raise the level of the sides of the bed of the truck, or heavy equipment such as an electric generator, welder, boom, or crane. (139) According to a 2002 private letter ruling, a state highway department's one-half ton pickups painted white or bright orange, marked by department insignia, and equipped with flashing lights and toolboxes did not qualify as the modifications were "not significant when compared to the examples listed in Rev. Rul. 86-97." (140) Sixteen years had passed since the enactment of DRA 1984, and the Service and taxpayers were still plowing through these types of administrative line drawing. (141)

If the vehicle is not exempted from recordkeeping as a qualified nonpersonal use vehicle, the employee will need to substantiate the business use to support a working condition fringe exclusion, and a lack of good taxpayer recordkeeping is reflected in reported cases. (142) In 1985 the Service Commissioner summarized the product of Service audits of automobile expenses as "big adjustments." (143)

Shifting to other forms of transportation, the personal use of employers' aircraft has been an area of much activity. Shortly after section 132 was enacted, the Service was asked to rule whether employees recognized income for the value of hitching a ride on the aircraft when it was flown to and from a locale where scheduled maintenance was performed. The sole purpose of the flight was to complete the maintenance. The Service ruled that the employees could not exclude the value of the trip as a fringe benefit under section 132, (144) nor under the section 61 valuation rules. (145)

A 1991 nondocketed service advisory review (146) addressed the income tax consequences of a governor's travel on a helicopter owned by the state. The facts were not well developed, but the document follows a predictable pattern for analyses of this nature. If the governor is involved in strictly personal travel, he or she will be required to include the value of the transportation as income. (147) If the governor is involved in travel strictly for the state's business, the value of the transportation is excluded as a working condition fringe. If the governor is involved in travel that is of mixed nature, the primary purpose of the travel will dictate the income tax result. The review notes that the President of the United States is probably considered available for work at any time, so no primarily personal trips would ever exist. The governor was out of luck on this point--"there is no presumption that all travel by a governor is always business in nature." (148)

The valuation of personal use miles on employer-owned aircraft can be computed using "general valuation rules" which look to what the employee would have had to pay in an arm's length transaction to charter the same or a comparable aircraft for the same or a comparable flight. (149) Alternatively, the value of the personal flight can be computed with reference to a safe harbor "Standard Industry Fare Level" formula (SIFL), multiples of which are used to calculate estimated airfares. (150) The cents per mile SIFL formula is based on operating cost amounts reported by the major commercial airlines. (151)

The use of SIFL valuation guidelines was announced in some detail in a Senate Finance Committee report (152) accompanying 1985 legislation principally concerned with eliminating a requirement of contemporaneous recordkeeping of business automobile usage. (153) The Senate committee stated that it "believes that these substitute safe-harbor rules reflect the intent of the Congress concerning the valuation of personal use of noncommercial aircraft under the fringe benefit rules in the Tax Reform Act of 1984." (154) No statutory guidance of that nature was included in the 1985 legislation itself, and none of the Senate's language is found in the conference agreement report. (155) The SIFL tables have been criticized as too lenient in their valuation of executive travel. (156) On the other hand, Assistant Treasury Secretary Ronald A. Pearlman defended the tables as "more certain and administrable" (157) than a facts and circumstances valuation, and the tables would encourage reporting by taxpayers. Mr. Pearlman defended the bargain element implicit in the calculations:
  For the safe harbors to be effective, the values should not exceed a
  value perceived as fair by taxpayers. If the safe harbor values are
  set too high, the safe harbors will not be used and thus will not
  accomplish the purpose for which they were established, namely,
  reduction of the administrative burden. (158)

For example, a CEO and spouse flying 7,240 miles, round trip, from New York City to Paris, France during the first half of 2005 on a corporate jet with a maximum certified takeoff weight in excess of 25,001 pounds, would report $8,890.44 income under the current regulations. (159) Assuming a simple blended federal, state, and local marginal income tax rate of forty-five percent and no other adjustments, this trip cost the CEO $4,000. That may, or may not, offend an observer. (160) However, the costs of operating the plane would probably far exceed the CEO's "cost" for a transatlantic trip of this nature, and the Service asserted that the employer's deduction should be limited to the amount of income reported by the employee. The Service lost several of these cases, (161) but Congress amended the statute to provide for such limits in the American Jobs Creation Act of 2004. (162)

Section 132 provides for a "qualified transportation fringe" that excludes from income the value of transportation in a commuter highway vehicle (essentially a van), transit passes, (163) and parking. (164) Based on recent tax expenditure estimates, the 2005 revenue losses for these seemingly mundane benefits are among the largest of the section 132 fringe benefits. The exclusion for reimbursed employee parking expenses produces an estimated $2.59 billion revenue loss, and the exclusion for employer-provided transit passes produces an estimated revenue loss of $480 million. (165) Most people commute to work in some fashion, and these revenue losses demonstrate how relatively small amounts can mount up when the affected taxpayers comprise a large group.

Finally, section 132 permits auto salesmen to use dealership-owned vehicles (so-called "demonstrators") on a tax-free basis. The exclusion requires that "such use is provided primarily to facilitate the salesman's performance of services for the employer." (166) Although one can certainly spin support for this treatment, such as encouraging a salesperson to learn about the cars to be sold, one suspects that compensatory motives are at play as well. (167) Nevertheless, if a dealer follows the rules, which are not without their pitfalls, (168) sales people can use new cars for personal roundtrip commuting from their residence to the dealership, plus an average additional ten miles per day, without recognizing any taxable income. (169) Commuting for most taxpayers is a nondeductible personal expense. (170) For auto salespeople, the value of the use of the car is deductible as a practical matter, because the receipt of the benefit is tax-free. It is one of the customary perks of the profession fossilized by DRA 1984.

C. Relatively Few Employee Discount and No-Additional-Cost Fringe Questions

Based on the body of private letter rulings and other materials, there is relatively little activity concerning employee discounts and no-additional-cost fringes. However, what activity there is tends to involve larger taxpayers such as integrated oil companies, national retailers, airlines, and automobile producers.

On several occasions, taxpayers requested rulings on the issue of whether affiliated companies constitute a single line of business for purposes of qualified employee discounts. (171) The regulations treat seemingly disparate lines of business as one "[i]f it is uncommon in the industry of the employer for any of the separate lines of business of the employer to be operated without the others." (172) The manufacturing and sale of motor vehicles, parts, and accessories were deemed to be part of the same line of business as the financing of sales and leases of motor vehicles, parts, and accessories. (173) A 1988 private letter ruling (174) approved the aggregation of seven otherwise unrelated activities of an integrated oil and gas company.

Another rule permits aggregation if the retail operations of an employer that are located on the same premises but in separate lines of business would be considered to be in one line of business if the merchandise were offered for sale in a department store. (175) The regulations offer an example of an employer selling both women's apparel and jewelry on the same premises. If sold together at a department store, the operations would be part of the same line of business, and are therefore treated as one line of business under the regulations. (176) In a 1993 private letter ruling, the Service ruled that an employer could not use this rule to aggregate its retail clothing sales line of business with its optical goods and accessories line of business. (177)

An employee of a "qualified affiliate" can receive excludable no-additional-cost services on an airline that is part of the same affiliated group. (178) A "qualified affiliate" is a corporation predominantly engaged in "airline-related services." (179) "Airline-related services" include services provided in connection with air transportation such as catering, baggage handling, ticketing and reservations, flight planning and weather analysis, restaurants, and gift shops located at an airport. (180) A 1986 private letter ruling applied this rule to an employee of a corporation that provided in-flight food and beverage services for the airline and managed airport restaurants, concessions, and gift shops. (181) Two private letter rulings issued on the following day address identical facts. (182) The three rulings are somewhat notable because they are apparently issued to the employee, not to the employer. (183) In a 1987 technical advice memorandum (184) the Service concluded that the employees of a freight transportation company could not exclude personal flights in freight aircraft jump seats as a no-additional-cost service. The employer used both aircraft and motor vehicles to transport freight, but it did not offer passenger flights to the public, and the Service concluded that the employer must offer the service for sale to customers for the exclusion to apply. (185) This distinction was eliminated, in favor of taxpayers, by an amendment included in the Tax Reform Act of 1986. (186)

The facts of two technical advice memoranda are discussed next. Technical advice memoranda are usually the product of a taxpayer audit. So, in that respect, these are exceptional cases, having been singled out for Service enforcement. The facts of the first technical advice memorandum describe a situation where the taxpayer simply did not apply the rules. It could call into question how many other taxpayers are equally unaware or dismissive of the rules of section 132. The second technical advice memorandum deals with a large, sophisticated taxpayer caught up in fine distinctions, ones that it apparently thought it had resolved when it participated in shaping the contours of the DRA 1984 provisions. (187)

The first technical advice memorandum, (188) issued in 1997, demonstrates how unextraordinary fringe benefits can nevertheless produce includable income. In the memorandum, the "Director of Golf" and the "Director of Tennis" were both part of an extensive private club, (189) and each enjoyed the free use of the facilities for themselves and their families. The Service concluded that these privileges were taxable fringe benefits. First, the exclusion for an on-premises athletic facility did not apply because access to the facility was made available to the general public through the sale of memberships. (190) Second, in light of the fees that would otherwise apply to such use (club initiation fees, monthly dues, and greens and tennis court fees), the Service asserted that the de minimis fringe benefit rule did not apply either. Finally, the no-additional-cost services exemption apparently failed because the benefit was not broadly available to other employees, such that the nondiscrimination requirement was not satisfied. (191)

The second technical advice memorandum deals with employee product testing. Employee product testing outside the employer's workplace can be excluded as a working condition fringe. This is not expressed in the statute, but was discussed in the legislative history in some detail. (192) The regulations provide guidelines for employee product testing that qualifies for the exclusion. (193) The opportunities for abuse are obvious, but so are the desirable business benefits of having interested employees thoroughly test the products, albeit through long-term personal use.

The pivotal requirements include limits placed on the employee's selection of the product, the employee's submission of detailed reports of the testing, and the products not being supplied in a discriminatory manner unless supported by a business reason. In the 1994 technical advice memorandum (194) the Service concluded that the program did not satisfy the requirements for the exclusion. Only approximately seven percent of the employees eligible to participate in the program were nonhighly-compensated employees, which raised the issue of whether the purpose of the program was primarily compensatory. The Service noted that "[t]he Company does not dispute that Program participants consider the program to be a valuable fringe benefit. Eligible employees rarely decline participation in [the] Program." (195)

The Service found that the employer did not impose a strict prohibition on the use of the product by members of the employee's family. It also found that evaluation forms were too cursory, consisting of a one-page checksheet to be completed within five days following receipt of the product, and a second one-page checksheet to be completed immediately prior to removal of the product from the Program.

As is often the case, the remainder of the technical advice memorandum addressed the issue of greatest importance to the employer--whether the employer had reasonable belief that it was not required to withhold employment taxes on the value of the fringe benefits. The employer in part argued that its reasonable belief was demonstrated by its participation in the legislative process for DRA 1984, where "its program was the model on which the legislation and the [product testing] regulations were based." (196) The Service rejected this argument because of factual inaccuracies as to employee participation (197) and because it saw the inquiry as "whether the Company had a reasonable belief based on the legislative history that was available to all taxpayers when section 132 of the Code was enacted." (198)

D. Working Condition Fringes are Pivotal

The so-called "working condition fringe" is excluded from income to the extent a deduction under sections 162 or 167 would be allowable if the employee paid for the property or services provided by the employer. (199) Essentially, the Code ignores payments received by an employee that would produce an overall "wash" for income tax purposes because the employee could claim a correlative deduction. This overlaps to a degree with the "accountable plan" rules under which "[a]mounts treated as paid under an accountable plan are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes." (200) However, the accountable plan rules generally apply to employee travel expenses, while the working condition fringe benefit exclusion can include any business expense allowable under sections 162 or 167. (201) The working condition fringe benefit regulations nevertheless, like the accountable plan rules, impose employee substantiation requirements, particularly for cash payments. (202)

The regulations maintain that the trade or business deduction that would be allowable to the employee is confined to the trade or business of the employee as an employee of the employer, and an unrelated business does not qualify. (203) This linkage of the employee's deduction to the business of the employer reflects the "working condition" relationship. (204) The Service applied this rule in a 1989 private letter ruling denying working condition fringe benefit treatment to an employee's receipt of employer-financed outplacement services. (205) Outplacement services apply to the employee's next job with another employer, not to the trade or business of the employee as an employee of the employer offering the assistance. In a 1992 revenue ruling the Service reversed its position and held that job placement assistance could qualify as a working condition fringe, based on the rationale that the current employer derives a substantial business benefit from extending such benefits. (206)

E. The De Minimis Fringe Has Not Generated Significant Activity Outside of Meal Money--Receipt of Cash is Almost Always Taxable Income

DRA 1984 created a statutory recognition of the administrative practice that had ignored fringe benefits small-in-amount or provided infrequently. (207) The de minimis fringe benefit exclusion is not subject to nondiscrimination rules, (208) so one might expect abuses in terms of highly-compensated employees, but there is no direct evidence of that.

The statute does not mention meal money, or any other specific benefit (other than eating facilities), but the legislative history of the House bill provided examples of benefits which are generally excluded as de minimis fringe benefits:
  [T]he typing of a personal letter by a company secretary, occasional
  personal use of the company copying machine, monthly transit passes
  provided at a discount not exceeding $15, occasional company cocktail
  parties or picnics for employees, occasional supper money or taxi fare
  for employees because of overtime work, and certain holiday gifts of
  property with a low fair market value. (209)

The regulations generally adopted these examples, but with some embellishments. (210)

Two reported disputes involved less grand amounts, at least taken on an individual employee basis. A 2004 technical advice memorandum (211) concluded that a $35 gift certificate redeemable at several grocery stores could not be excluded as a de minimis fringe benefit. A 1998 Claims Court decision had previously treated restaurant vouchers with a face value of $50 as taxable wages. (212) The Service fringe benefits instructions booklet reflects this position: "Cash, no matter how little, is never excludable as a de minimis benefit, except for occasional meal money or transportation fare." (213)

The Service has applied the de minimis fringe benefit rule to exclude the value of employer-provided group-term life insurance payable on the death of a spouse or dependent of an employee if the face amount does not exceed $2,000. (214) The Service has suggested that awards of tangible property with a fair market value not in excess of $35 to employees on account of contributions to a "Quality Improvement Process" would qualify as a de minimis fringe benefit. (215) The Service's position overrides section 74 that specifically addresses employee awards. (216)

In a 1991 nondocketed service advice review, (217) the Service argued that free tickets or season passes given to city council members (218) were probably not excluded as a de minimis fringe benefit. Season tickets are expressly excluded from qualifying as a de minimis fringe benefit by the regulations. (219) The Service also expressed some skepticism as to whether the council members could establish that attendance at the events qualified as ordinary and necessary business expenses, thereby permitting working condition fringe treatment.

An employer sought guidance as to the treatment of several types of income tax preparation fringe benefits in a 1994 private letter ruling. (220) The Service ruled that the value of income tax preparation services provided to employees by company employees at a Volunteer Income Tax Assistance (VITA) site sponsored by the employer qualified as a de minimis fringe benefit. Likewise, the value of compensation paid by the employer to an electronic filing intermediary for formatting and transmitting completed employee income tax returns (or if such services were provided by the employer itself) qualified as a de minimis fringe benefit. However, the value of nontransferable coupons entitling the identified holder to a single session at an income tax preparation clinic including the transmission of the completed return, distributed by the employer to employees who did not work within 100 miles of the employer's headquarters (221) was not excludable as a de minimis fringe benefit and was presumably a gross income item.

Congress included certain employee eating facilities under the de minimis fringe benefit category, and that exemption did generate significant litigation and Congressional tinkering discussed in the next section. Otherwise, administrative releases and judicial activity do not suggest a lot of nonqualifying activity, which is surprising considering the flexibility of the standard and, unlike rules for demonstrator automobiles or free airfare, its potential applicability to almost any employer. One might speculate that this is a function of the small amounts that can be in question, until the Service is faced with a widespread, routine compensation practice that attracts enforcement attention. That was apparently at issue with respect to the utility company meal allowances, also discussed in the next section. (222)

F. The De Minimis Fringe Benefit and Meals

In response to the cryptic reference to "occasional supper money" in the legislative history of DRA 1984, (223) the regulations mightily attempt to extinguish any smoldering embers of O.D. 214 (224) by imposing several conditions. Meal money "provided to an employee on a regular or routine basis is not provided on an occasional basis." (225) Meal money must be provided because overtime work "necessitates an extension of the employee's normal work schedule." (226) Finally, the meal or meal money must be "provided to enable the employee to work overtime." (227) That requirement is followed by an example of meals provided on the employer's premises during the overtime period.

A question unanswered by the regulations is whether an allowance that could be used to purchase a meal after the overtime period is excludable. The author of a 2002 field service advisory strictly interpreted this requirement:
  This exception does not permit the Company's employees to exclude cash
  payments for overtime meals from income unless the money is
  attributable to meals consumed during the overtime period. Under the
  facts, the "employees are not obligated to purchase meals, but are
  free to use the cash for any other purpose." This suggests that the
  Company's cash payments do not enable ... its employees to work
  overtime. (228)

This Service position would dramatically curtail tax-free meal allowances.

The "occasional" aspect of the regulations is an uncertain concept. In a 1991 technical advice memorandum (229) the Service addressed a utility company's meal allowance policy that was dictated by its collective bargaining agreement. The employees were eligible for a meal reimbursement or a cash meal allowance for every four-hour interval of emergency work on a nonwork day or outside regular work hours on a work day. In addition, the employees received a meal reimbursement or a cash meal allowance for working more than one hour beyond regular work hours and for emergency work performed on work days starting two or more hours before regular work hours. The linkage of the meal allowances to deviations from the regular work-day period apparently satisfied the requirement of an extension of the normal work schedule. Consequently, the focus was on the "occasional" quality of the payments. The regulations for the year in issue, 1985, permitted frequency to be judged in the aggregate, rather than on an employee-by-employee basis, if it would be administratively difficult to determine frequency with respect to individual employees. (230) The employer paid the allowances from petty cash and did not maintain individual employee records of payments. The Service rejected this claim of the aggregate method, asserting that it would permit employers to create the exception through poor recordkeeping. (231)

The employer then demonstrated that the amount of meal allowances divided by the entire workforce would generate a monthly average meal allowance of $10 and, if averaged only with union employees, would generate a monthly average meal allowance of $14. (232) The employer argued that both of these amounts were small and demonstrated that benefits were provided only occasionally, but the Service rejected this interpretation based on averages. The Service also rejected a de minimis test of comparing the amount of meal allowances to the employer's total payroll. (233) The employer also argued that the meal allowances were paid on an "irregular" basis and were therefore occasional. The Service responded that overtime work and emergencies were a routine part of the business, and the company had an established practice of providing meals allowances in these events. Indeed, it was incorporated in the union agreements. Of course, it seems one would expect that a presumably large business organization would need established policies for something like this, and would not leave it to ad hoc practices. In reading this technical advice memorandum, one arrives at an overall conclusion that there is something to the Service's argument that the routine nature of these allowances is more than occasional--a routine and expected salary supplement is masquerading as a tax-free, occasional item. The regulation and the Service's arguments do little, however, to produce a firm analytical support for that largely intuitive conclusion. (234)

The Service resisted finding a de minimis fringe with reference to overall averages, which otherwise could influence someone weary of the fine lines in this area, to "just not bother" with trifling amounts. In the absence of nondiscrimination rules, however, the use of overall averages as a guide would invite abuses. The regulations are clear that averages are potentially misleading:
  For example, if an employer provides a free meal in kind to one
  employee on a daily basis, but not to any other employee, the value of
  the meals is not de minimis with respect to that one employee even
  though with respect to the employer's entire workforce the meals are
  provided "infrequently." (235)

A de minimis fringe benefit includes the employer's operation of an employee eating facility, and the principal qualification is that the revenue from the facility normally equals or exceeds the direct operating costs. (236) Because only direct operating costs are considered, the facility usually will be subsidized by the employer. (237)

A 1996 field service advisory (238) addressed the seemingly unusual issue of whether an employer could aggregate vending machine banks with hot meal cafeterias in an attempt to make the latter qualify as a de minimis fringe benefit. The higher profit margin vending machine income would have helped the hot meal cafeterias meet the requirement that revenue normally equals or exceeds the direct operating costs of the facility. This issue is raised in the regulations, which permit the employer to include "vending machines that are provided by the employer and located on the same premises as the other eating facilities operated by the employer" (239) in determining the direct operating costs of a facility. Still, the Service concluded that it is not the intent of the regulations to treat "eating areas consisting solely of vending machines, seating, related equipment, utensils and condiments ... [as] 'eating facilities.'" (240)

The exclusion for employer-provided meals and lodging (excluding the military) represents one of the more significant tax revenue losses, $850 million. (241) The most significant litigation in the meals area, however, involved the employer's income tax deduction for the expense of employee dining rooms at casinos. (242) Although section 119 was at the center of the litigation, section 132 played an important supporting role. During the applicable time period, section 274 generally limited a deduction for meal expenses to eighty percent of the costs, (243) but all of the costs were allowed if the meals qualified as a de minimis fringe benefit under the section 132 employee eating facility exemption. (244) In computing the revenues and direct operating costs of such a facility, employees entitled to exclude the value of a meal under section 119 are treated as having paid an amount for the meal equal to the direct operating costs of the facility attributable to the meal. This requirement focused the litigation on the degree to which the taxpayers' employees qualified for the section 119 exclusion.

The taxpayer, Boyd Gaming Corp., lost in the Tax Court on the section 119 issue, but Congress quickly responded by amending section 119 in the Internal Revenue Service Restructuring and Reform Act of 1998 (245) to include a rule that all employees would qualify under section 119 if more than half of the employees otherwise qualified. (246) This amendment was effective retroactively, (247) but the Service's concessions on appeal still placed the percentages of employees covered by section 119 at forty-one to forty-eight percent, short of the required greater than fifty percent. (248) All of this proved to be largely irrelevant, as the Ninth Circuit Court of Appeals reversed the Tax Court on the fundamental convenience of the employer factor, ruling that the taxpayer's "stay-on-premises" policy for employees (249) made most of the workforce eligible for section 119 treatment of the employer-provided meals. (250)

G. Slim Athletic Facility Activity

The exclusion for on-premises athletic facilities (251) has generated little administrative activity. In a 1990 private letter ruling, the Service ruled that an athletic facility operated by a wholly-owned subsidiary of the employer and offering services to the employer's employees plus employees of other tenants of the employer's headquarters building qualified for exclusion. (252) The apparent concern was the impact of the use by the employees of the unrelated tenants, but the Service found that the other employers were considered to be joint owners of the facility. (253) Although private letter rulings have no precedential value, (254) another taxpayer attempted to use this private letter ruling to bolster its argument that continuing to offer memberships to the general public, albeit in a dwindling percentage as compared to the employee users, did not violate the terms of the statute which requires that "substantially all the use" (255) of the facility be by employees. (256) The Service rejected the taxpayer argument that the regulation barring all sales of memberships to the general public (257) was invalid. The regulations otherwise encourage exclusive arrangements, by declining to apply nondiscrimination rules to on-premises athletic facilities. (258)


At the time of the enactment of DRA 1984's fringe benefit provisions, the stated expectations of the leaders of the Senate and House tax legislation committees differed. Chairman of the House Ways & Means Committee, Dan Rostenkowski, emphasized both the exclusionary and inclusionary aspects:
  [T]he conference agreement sets forth statutory provisions under which
  certain employer-provided fringe benefits are excluded from the
  employee's gross taxable income and the wage base for withholding
  purposes, while fringe benefits not so excluded or otherwise excluded
  by other fringe benefit provisions in the Internal Revenue Code
  generally would be included at the excess of fair market value over
  amounts paid by the employee. (259)

Senator Robert Dole, Chairman of the Senate Finance Committee, focused only on the exclusions: "The conference agreement provides an exclusion from income and social security taxes for certain employer-provided goods, and services, such as no-additional cost services, employee discounts, and de minimis fringe benefits." (260)

Service Commissioner Roscoe L. Egger, Jr. provided an upbeat assessment shortly following the enactment of DRA 1984:
  For the first time in history, Congress made clear distinctions
  between taxable and nontaxable fringe benefits with the passage of the
  new tax law. You may not agree on every issue with congressional
  interpretation but you must agree that this first codification effort
  is a step in the right direction. (261)

Commentators have expressed differing views of the legislation. Professor Abreu has offered what might be the popular wisdom, that "section 132 of the Code has made life easier for many tax advisors because it has provided answers to many frequently asked questions." (262) On the other hand, Professor Blasi characterized the provisions as "a problematic statute ... [that] will make it difficult for practitioners to provide clear and reliable guidance to their clients." (263) Professor Simon observed that "[a]ll of these [exclusions] are defined in careful and elaborate detail, raising the question of whether these new provisions are administrable." (264)

To evaluate the successes or failures of the DRA 1984 fringe benefit provisions, one might apply a list of desired outcomes--some of which conflict with one another. The discussion that follows will evaluate the accomplishment of the following objectives in light of the administrative and judicial experience of the past twenty years: (a) reducing overall complexity and taxpayer costs of compliance, (b) improving taxpayer compliance, (c) increasing the efficiency of the income tax system, (d) reducing the income tax regulation of customary business practices, and (e) expanding the tax base for salary compensation.

A. Reducing Overall Complexity and Taxpayer Costs of Compliance

It is probably a common assumption that, all other factors being equal, simplicity is a desirable goal of a taxation system for a number of obvious reasons such as encouraging self-compliance, supporting transparency of application, aiding enforcement, and minimizing compliance and other transaction costs. (265) A stated objective of the DRA 1984 fringe benefits legislation was to introduce more certainty to the taxation of fringe benefits. (266) Certainty of result can play a role in reducing the overall complexity of the legal framework to all affected parties in terms of complying with or enforcing the law. (267) Complicated rules may be necessary to achieve certainty, but at a price of less simplification. Simple but possibly arbitrary rules can also improve certainty while reducing complexity, but other principles, such as fairness, (268) may be sacrificed.

One commentator identified three types of complexity. A system may be considered "complicated" if it "consist[s] of numerous and detailed authorities." (269) A system may be complex as "intractable" if it "rel[ies] on concepts that are difficult to apply." (270) Finally, a system may be complex as "incoherent" if it "embod[ies] purposes that are inconsistent with one another." (271)

The nonstatutory fringe benefit rules produced by DRA 1984 are probably most complex in the first way--i.e., complicated. The roughly fifty pages of intricate regulations support this conclusion (272) as do the swell of administrative guidance noted earlier in this article, particularly in the transportation context. (273) As far as the second parameter of complexity, the rules require careful attention but are probably not intractable. The rules are clearly complex in the third way, because they are arbitrary in many respects. The principle of the working condition fringe, that we ignore "wash" amounts, is easy to express and understand. The de minimis fringe benefit, although difficult to quantify, also makes practical sense. The special rules, however, for employee discounts and no-additional-cost services, for "demonstrator" automobiles, for employer-provided cafeterias and athletic facilities, and for employee product testing convey the impression that the taxability of one's total compensation package is in large part a function of whether one works in an environment that offers these particular types of tax-free fringes. Professor Shaller, for example, has argued that several of the provisions, principally those dealing with no-additional-cost services and tuition reductions, (274) are arbitrary and conflict with the tax code's treatment of similar benefits. (275)

The cost of complying with the fringe benefit provisions is apparently significant. In a 2003 projection of taxpayer compliance burdens under the fringe benefit regulations and the substantiation of business travel, entertainment, and gifts, the Service estimated that there were 28,582,150 respondents or record-keepers under those provisions, and the estimated total reporting or recordkeeping burden was a stunning 37,922,688 hours. (276) We do not have estimates of these costs prior to DRA 1984 to make comparisons, and some of these substantiation tasks probably existed prior to DRA 1984.

As compared with the previous seventy years, the overall post-DRA 1984 fringe benefits taxation environment is more certain. We have specific rules. Yes, it is probably more complicated, if measured by the volume of Treasury regulations. In comparison, as discussed earlier in this article, the body of administrative pronouncements prior to DRA 1984 consisted of a handful of very old revenue rulings and several regulations, (277) one of which was directed at the employment tax consequences rather than the direct income tax consequences to the employee. (278) The transportation area has generated a significant number of private letter rulings, revenue rulings, and technical advice memoranda. (279) The other areas combined have generated fewer items of guidance. Judicial opinions thoroughly examining the operation of the fringe benefits rules are rare. The principal exceptions are the casino cafeteria meals cases (280) and the airline travel allowance cases (281)--all of which shared the common thread of being focused on the employer in terms of assessing additional employment taxes or denying a business deduction for the benefit.

In the absence of an in-depth empirical study of actual income tax disputes, not limited to those that are reported, one can only offer reasonable speculations about the underlying reasons for the apparent dearth of cases. There are several possible explanations.

First, the reported cases are only a small slice of the overall enforcement activity. There are audits that are settled without judicial action being initiated. (282) Although aggregate statistics are available from the Service concerning the number and types of returns audited, the claimed additional tax, and so forth, those statistics are not broken down by the issue in question. (283)

Second, the Service may not be vigorously enforcing this area. That aspect is discussed in the next section. (284)

Third, because the focus of the reported decisions and private letter rulings is the employer's employment tax liability or the employer's income tax deduction, that could decrease the pool of potential litigants, as compared with questions arising from individual taxpayers. For example, for calendar year 2003, 130,134,277 individual income tax returns were filed, as compared with 2,394,271 corporate returns and 30,121,088 employment tax returns. (285) One commentator has observed that the amount of tax litigation should increase along with the amount of tax revenue involved. It should also increase with fewer taxpayers affected by the tax, as that increases their stake in the matter. (286) Both of these propositions would be consistent with the relative lack of litigation. The amount of foregone tax revenue lost through nonstatutory fringe benefit exclusions is relatively minor. (287) Also, although the number of employers and employment tax returns is smaller than the number of individual taxpayers, the issue of nonstatutory fringe benefits potentially impacts all employers, of course to varying degrees, so the affected taxpayers are probably not a select class.

Finally, litigation can decrease if there is nothing in controversy, because the law is so clear or it creates such broad exclusions that there are few points of dispute between taxpayers and the Service. The significant number of administrative pronouncements in the area of transportation belies the argument of great clarity, but those pronouncements largely deal with the highly factual applied issues of vehicle types and driver responsibilities in the qualified nonpersonal use vehicle area. (288) Particularly with personal usage of employer-provided vehicles, one would expect continuing compliance issues due to the recordkeeping that is involved. However, beyond that, as discussed later, it could indeed be argued that section 132 leaves little in contention. (289)

B. Improving Taxpayer Compliance

As discussed earlier in this article, the focus of cases and private letter ruling requests strongly emphasizes the employer's tax liability. (290) For calendar year 2003, 30,121,088 employment tax returns were filed, and 17,698, or 0.06%, were audited. (291)

An October 1993 Service study of employment tax compliance does not suggest that the Service views the fringe benefit issue as a major factor in taxpayer noncompliance. (292) In the study, the "gross employment tax gap ... is the aggregate amount of that year's tax liability that is not paid voluntarily." (293) That gap is comprised of a "reporting gap" ("the amount of tax liability that taxpayers do not voluntarily report" (294)) and a "remittance gap" ("the amount that taxpayers report on their returns as due, but which is not voluntarily paid" (295)). The reporting gap is in turn divided into underreported or misreported earnings and math errors. The study focused on 1987, and found that the noncompliance rate for employment taxes was 11%, as compared with 18.6% and 18.9% for individual and corporate taxes, respectively. (296) Of the gross employment tax gap for that year, 78% was due to a reporting gap and 22% was attributable to a remittance gap. (297) However, the overall noncompliance percentages were much higher for self-employment taxes, and the noncompliance percentages for employer taxes, such as FICA and FUTA, were much smaller, 4.5% and 7.6%, respectively. (298)

Focusing on FICA, the underreporting of wages and salaries (other than tip income) accounted for thirty percent of the FICA gross employment tax gap. (299) In turn, ninty-four percent of the underreported wage and salary portion of the FICA tax gap was attributable to classification of employees, leaving only six percent, $200 million, attributable to underreporting of wages of employees for whom employment status is not an issue. (300)

The 1993 Service study provides estimates for tax year 1984 as well as post-DRA 1984 years. The noncompliance rate was projected as decreasing slightly, from 11.5% in 1984 to 10.2% by 1997. (301) However, the gross tax gap was projected to increase from $18.9 billion in 1984 to $50.2 billion in 1997. (302) The study explains that "[t]hese projections reflect estimated changes in the tax base and tax rates over time rather than changes in taxpayer behavior because in developing the estimates the voluntary reporting rates were assumed to remain constant." (303) The changes in the tax base described in an appendix to the study do not include any reference to a different treatment of fringe benefits. Indeed, the study does not anywhere mention fringe benefits. Perhaps this expects too much of the employment tax as a proxy for fringe benefit reporting compliance.

In 1985 Roscoe L. Egger, Jr., the Service Commissioner, observed:
  [A]s a tax administrator, let me just say this: I can walk you through
  just about any district's examination of personal or corporate cases
  where auto expenses are at issue and the result will be the same--big
  adjustments. In most cases, records simply don't exist and taxpayers
  must reconstruct information about their use of autos, aircraft, etc.
  for tax purposes. This procedure is time-consuming and, only in rare
  cases, verifies the amount claimed on the tax return. (304)

As discussed earlier, transportation issues occupy a significant part of the post-DRA 1984 regulatory environment, (305) so these compliance issues may be continuing.

The income tax treatment of executive perks and fringe benefits is a special aspect of the compliance picture. The author of a book that criticized the lenient tax treatment of executive perks wrote as of 2003 that "[t]he IRS says it has no policy on whether to examine such executive [travel] expenses at large companies. However, in dozens of interviews over the past six years not one IRS auditor who examines corporate tax returns could recall examining the expense accounts of a chief executive." (306)

Reportedly, a Service spokesman indicated in March 2005 that the Service is reviewing the personal income tax returns of executives when their company is audited, and fringe benefits is one area of potential abuse that is to be scrutinized. (307) Further, in spring 2005 the Service issued an "Executive Compensation-Fringe Benefits Audit Techniques Guide (02-2005)." (308) The guide is significant in several respects.

First, it might suggest an increased enforcement effort by the Service in the overall area of executive compensation. At roughly the same time, the Service issued separate audit guides for stock-based compensation arrangements, (309) excess compensation under section 162(m), (310) golden parachute payments, (311) nonqualified deferred compensation plans, (312) split dollar life insurance, (313) and transfers of compensatory stock options. (314)

Second, while much of the guide is a fundamental exposition of the applicable law, in places it offers examples of taxpayer situations that have arisen, providing a clue as to the type of compliance issues that are being encountered. "Although many corporations are aware of the law regarding the deductibility of club dues and membership fees, they will often make such expenditures and disguise the deduction." (315) "Top level executives are permitted to use the [corporate credit] card at will. A monthly statement may be mailed directly to the corporation and the account may be paid in full without the submission of a business expense report." (316) "Upon examination it has been found that homes of executives have been fortified with special rooms or other security devises [sic]. It is important to evaluate the level of security afforded top executives and their families to determine that security studies (317) are being followed." (318) "Executives generally maintain a home office that may be furnished by the corporation. Sometimes upon termination of employment the furnishings and equipment are transferred to the executive as part of their severance package." (319) Regarding SIFL (320) calculations for the personal use of employer aircraft, "these amounts are often computed incorrectly." (321)

The Service anecdotes suggest a mixture of outright intentional avoidance, inattention to substantiation requirements, and simple errors in calculating the fringe benefits. The issues appear to involve routine compliance and enforcement, rather than issues that stretch the applicable exclusions or demand statutory revision. (322)

Federal security law disclosures (323) provide some sense of the types of common executive perks. A review of the proxy statements filed in 2005 by the 100 largest U.S. public companies found that personal use of company aircraft was the most frequently disclosed perk, followed by financial planning, and tax or other professional services. (324) Personal use of a company car and driver, a leased car or car allowance, club membership, personal use of company apartment or housing assistance, and home security systems were of roughly equal frequency. Although the aggregate list omits a lot of details, the nature of the perks suggests rather routine income tax issues consistent with those appearing in the Service anecdotes discussed earlier.

C. Increasing the Efficiency of the Income Tax System

Tax-free fringe benefits offer the powerful combination of a tax deduction at the employer's level, coupled with an exclusion from taxable gross income at the employee's level. An employer can receive an income tax deduction for other compensation, such as cash wages, so the income tax deduction for fringe benefits is not unique in that respect. However, all other things being equal, if an employee places the same value on a tax-free benefit as a taxable benefit after tax, the employer should be able to pay a lesser amount of overall benefits using a package of nontaxable and taxable compensation as compared with a package comprised solely of taxable compensation. If that is the case, the employer might "capture" the implicit income tax subsidy, rather than the employee. (325)

This assumes that the employee places a greater value on the tax-free benefit, than the taxable benefit, after-tax. It could be that the employee would rather have the taxable compensation (usually cash) that can be spent anywhere, rather than the usually in-kind tax-free fringe benefit, if it were not for the added incentive of the income tax exclusion.

Accordingly, the argument is often made that tax-free fringe benefits can be inefficient because they encourage the over-consumption of the fringe benefit in question because the price is subsidized. (326) If one accepts the premise that the efficiency of the income tax system can, in part, be judged by this standard, then efficiency would be increased if section 132 had the impact of limiting exclusions, so that taxable compensation and otherwise tax-free fringe benefits would be placed on the same comparative basis when employers and employees bargain over compensation packages.

This article later discusses whether DRA 1984 did expand the taxable base in terms of fringe benefit compensation. (327) If it did not accomplish that to any significant degree, then improved efficiency would not be achieved.

D. Reducing the Income Tax Regulation of Customary Business Practices

The focus of fringe benefit reform proposals is often on the income tax treatment of employees, rather than employers. However, one must be mindful that the employer may benefit from the tax exemption for fringe benefits if it permits the employer to reduce the amount of the overall compensation package. (328) If a tax were imposed on the recipient of otherwise nontaxable fringe benefits, it might follow that the employers' overall compensation costs would rise.

Those compensation costs could be increased in a more direct fashion by limiting the employer's deduction, (329) as an application of the "surrogate taxation" principle. (330) Alternatively, some countries have imposed a separate fringe benefits tax on the employer. (331) From an administrability standpoint, there is some benefit from imposing a tax on fringe benefits on the employer, as a single payer and reporting person, as an alternative to taxing the employee. That might already be the practical result in some respect, with the focus of Service oversight tending to be on the employer in terms of employment tax liability on account of fringe benefits. (332) Implementation of such limits would involve the employer's compliance, either in preparation of its income tax return, preparation of information returns for employees (such as the well-known Form W-2), or both. The employer is an unavoidable part of the tax administration structure.

There should be a common sense quality to the rules, so that the tax code does not hinder common workplace interactions that do not have a compensatory role. For example, with respect to carpools, the Service very early ruled that the participants did not recognize income from reimbursements, nor could they claim deductions. (333) There should be a practical quality to the rules, to minimize employer recordkeeping and reporting where the amounts in question are not significant.

The exemptions for de minimis fringes and working condition fringes are both responses to employer recordkeeping concerns. The de minimis fringe regulations speak to this directly. "The term 'de minimis fringe' means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable." (334) The working condition fringe benefit, by assuming a hypothetical offsetting deduction by the employee, permits the employer to simply deduct the amount without reporting it as income to the employee. (335) The employee benefits in both situations, because the de minimis fringe benefit is tax free absolutely, and the working condition fringe benefit is as well, even though the employee could not have actually claimed the hypothetical offsetting deduction in full. (336) Even Professor Shaller's critical assessment of section 132 still finds some justification for exclusions for working condition fringe benefits and de minimis fringe benefits. (337) Professor Simon's proposal for including most fringe benefits in income also would permit exclusions for working conditions (338) and de minimis fringe benefits. (339)

However, recordkeeping cannot be eliminated even in these situations. Cash payments to an employee generally do not qualify for exclusion unless the employee verifies that the cash was used for qualifying expenses, and the employee returns any unused funds. (340) Flat allowances based on hours worked have generally not been accepted by the Service, probably due to their potential for abuse as a simple cash salary supplement. (341) The Service, however, has accepted flat dollar allowances in limited amounts as satisfying the substantiation requirement if special circumstances make substantiation impractical. (342)

Other deductions, such as employee use of motor vehicles or aircraft, probably defy a bright-line rule which would deny all employer deductions, on the one hand, or ignore all employee use, on the other hand. This takes us back to requirements that separate "pure" business use from personal use, such as the current system of "qualified nonpersonal use vehicles" (343) and the SIFL regulations discussed earlier. (344)

Dissatisfaction with the complexities of such line drawing can produce calls for simplification, often utilizing a different tax base. To accomplish simplification that tax base will need to be different from that of the current system. For example, the single tax rate aspect of most so-called "flat tax" proposals is a small part of a larger proposal that usually includes a different tax base. (345) The issue of the role of fringe benefits within that structure would not be eliminated, however. (346) A very explicit consumption-based tax such as a national sales tax could skirt many of these issues, but it would still need to grapple with the role of fringe benefits that are a substitute for personal consumption. (347)

Indeed, after summarizing the taxation of employee fringe benefits in the United States, Germany, Sweden, The Netherlands, France, Canada, Japan, and the United Kingdom, the authors of a comparative taxation treatise observed that "[w]hile the contours of the rules differ, most of the systems ... allow substantial amounts of employment income in the form of fringe benefits to escape tax because of the administrative and valuation problems which are involved in taxing such benefits." (348)

E. Expanding the Tax Base for Salary Compensation

Achieving a so-called "comprehensive tax base" has been a recurring theme in academic discussion. (349) A comprehensive tax base can produce an assortment of results, including a reduction in nominal rates, (350) increased horizontal equity, (351) increased economic efficiency, (352) and a more progressive taxation structure. (353) Some commentators conclude that a comprehensive inclusionary treatment of fringe benefits, including many statutory benefits, is appropriate. (354)

DRA 1984 added "fringe benefits" to the examples of types of income included by section 61. It was acknowledged by Congress that section 61 did not require this change to increase its breadth of application. (355) With the uncertainty concerning the taxation of fringe benefits lifted by adoption of the specific exclusions of section 132, however, one might have expected some expansion of the gross income tax base with respect to fringe benefits.

Except with respect to routine payments of meal allowances for which the exclusion is now narrower, (356) there is no discernible increase in the breadth of taxable gross income. A widespread employee fringe benefit, frequent flyer awards retained for personal use, has remained untouched. (357) Cash rewards from the use of personal credit cards for business purchases also appear untouched. (358) Judging by the cases and administrative pronouncements that have been a focus of Service enforcement measures, the meal allowances are most important to union workers employed by utilities and airlines. While this base broadening does achieve a measure of horizontal equity and an increase in tax revenues (including Social Security and Medicare taxes), it would seem to have a negative impact on vertical equity if it tends to impact lower to middle income taxpayers.

Another reason for the absence of an expansion is Congress's penchant for adding to the exclusions. Since the enactment of section 132 in 1984, it has been amended on eleven occasions. (359) Although the amendments run the gamut, from expansions of the exclusions to fine, technical tinkering, at least seven (360) of the amendments could be considered as broadening the exclusions.

For example, the Consolidated Omnibus Budget Reconciliation Act of 1985, expanded the no-additional-cost service exclusion as applied to airlines by adding what is currently section 132(h)(3), permitting parents of an airline employee to use free tickets without generating taxable gross income to the employee or the parent. (361) The Tax Reform Act of 1986, in addition to making other technical changes, further enlarged the air transportation exclusion. (362) The Energy Policy Act of 1992 made significant changes with respect to transportation fringes, elevating them from part of the de minimis fringe benefit, (363) and a working condition fringe for employer-provided parking, (364) to a separate comprehensive subsection. (365) The Taxpayer Relief Act of 1997 modified the de minimis fringe benefit for employee eating facilities by adding a sentence that an employee entitled to exclude the meal under section 119 is considered as having paid an amount for such meal equal to the meal's attributable share of the facility's direct operating costs. (366) The Transportation Equity Act for the 21st Century significantly revisited the qualified transportation fringe. Most notably, an amendment permitted employees to make a cash or in-kind election with respect to transportation fringes, yet not be considered in constructive receipt of income. (367) This was the impetus for later rulings permitting employees to set aside pre-tax amounts for parking. (368) The legislation also increased the dollar caps on the amount of excludable benefits. (369) Based on tax expenditures estimates, the qualified transportation fringes are the most costly provisions under section 132. (370) The Economic Growth and Tax Relief Reconciliation Act of 2001 added a new exclusion for retirement planning advice or information provided to employees. (371)

As judged by the experience with section 132, it is probably a fair statement that Congress has not yet demonstrated much enthusiasm for broader inclusion of nonstatutory fringe benefits. Because any inclusions would fall on wage earners, adherents to vertical equity principles might demand the traditional prescription of phase-outs of exclusions based on income caps. (372) The fiscal reality is that the nonstatutory fringes that could be taxed as a practical matter probably don't represent much in terms of foregone tax revenues. The projected loss of revenues produced by the enactment of section 132, which in large part continued the status quo, was less than $5 million. (373) Based on recent tax expenditures estimates, the 2005 revenue losses for selected exclusions were modest: the exclusion for reimbursed employee parking expenses cost $2.59 billion; the exclusion for employer-provided transit passes cost $480 million; and, the exclusion of employee meals and lodging (other than military) cost $850 million. (374) The significant tax expenditures are elsewhere if one focuses on compensation. The 2005 estimated revenue loss from the exclusion for employer-provided health insurance is, for example, $112.6 billion. (375) Politically speaking, attempting to increase the "wage tax" on nonstatutory benefits is aggravating taxpayers for little gain in fiscal terms, while impairing simplicity, administrability, or vertical equity.

In fairness to DRA 1984, while it might not have expanded the taxable compensation base, it might have contained the development of further exclusions that would have pushed the boundaries of the pre-DRA 1984 doctrine. One of the stated objectives of DRA 1984 was to limit the erosion of the income tax base by the emergence of "new practices." (376) While the reported cases and administrative pronouncements demonstrate little in the way of new innovations, DRA 1984 might have nevertheless played a role in curbing their growth.

It is difficult to anticipate changes in the workplace and how the new developments fit into the regulatory picture. For example, due to a competitive market for accountants, Ernst & Young reportedly offers "a concierge service for employees too busy to run errands." (377) This is a new development for rank and file workers, but it would seem that the de minimis fringe benefit exclusion is the closest fit. It has been reported that more employers are offering lifestyle benefits to attract and retain employees (378) that can include weight-loss classes, flexible schedule work hours, education opportunities, (379) paid sabbaticals, pet-friendly offices, telecommuting, on-site childcare, (380) on-site ATMs, (381) take-home meals from the company cafeteria, (382) stress management courses, (383) parenting and child-care seminars, (384) on-site visits from auto mechanics, (385) reduced fees for gyms, athletic teams, on-site flu shots and blood pressure checks, (386) on-site concierge services, weekly visits by chaplains, (387) and casual dress. The taxation of most, if not all, of those benefits can be resolved under section 132 or other sections of the Code, assuming that the employer demonstrates the compliance tenacity necessary to sort through the details.

Moving from the mundane office setting to more highly-compensated and visible employees, professional athletes are reportedly courted by teams with an array of perks, some of which are surely taxable, some of which are not. For example, one team purchased a special $85,000 training machine for a player. (388) That is a clearly excludable working condition fringe benefit. A $250,000 annual reimbursement of a spouse's equestrian expenses was offered another player. (389) That would clearly be taxable. Round trip airfare tickets between a player's hometown and the city in which the team is based are offered. (390) That too should be considered a personal expense and a taxable fringe. (391) For athletes, the housing perks start with a private room for road trips, escalating to private suites on road trips, as compared with having roommates. (392) It sounds like a working condition fringe, even though it is a negotiated term, and even though it discriminates among players. (393) The list is seemingly endless, yet manageable under established doctrine, including benefits such as season tickets to athletic events and use of a particular uniform number. (394)

What is striking about most, if not all, of these examples of nonstatutory fringe benefits and perks is that none are particularly surprising, or new. Moreover, most of them can be addressed through applying established rules. Simple compliance with the rules is the greater concern, not pushing the boundaries of what is or is not income. (395)


A review of the sparse guidance that was available to taxpayers with respect to the income taxation treatment of nonstatutory fringe benefits prior to the enactment of DRA 1984 demonstrates that uncertainty was the state of affairs. Accordingly, DRA 1984 had a low standard to surpass. While the 1984 legislation adopted rules for the treatment of many fringe benefits, it did so largely by replicating, albeit with more complexity, the de facto exclusions that had existed prior to the legislation.

There has not been significant or particularly interesting litigation of nonstatutory fringe benefit issues during the first two decades of the post-DRA 1984 regime. The primary focus of the cases and administrative pronouncements is on the employer's employment tax liability, rather than directly on the employees' income tax treatment. Taxpayers have been particularly active in requesting, and the Service has been active in providing, guidance in the general area of transportation, such as employer-provided vehicles and transportation fringe benefits.

It is unclear whether the DRA 1984 provisions have achieved other effects such as reduced overall complexity or increased taxpayer compliance. Although there might have been an expectation that the enactment of the DRA 1984 guidelines would focus Service scrutiny on other nonstatutory fringe benefits outside the statutory exclusions, that appears not to be the case. The case law and administrative pronouncements do not demonstrate any new conceptions of taxable fringe benefits or base broadening. However, the dearth of cases and administrative pronouncements addressing new types of nonstatutory fringe benefit compensation might suggest that section 132 has been effective to some degree in controlling the expansion of such fringe benefits. Nevertheless, the challenge to the Service appears to be in assuring taxpayer compliance with the law as developed by DRA 1984.

Wayne M. Gazur*

* Professor of Law, University of Colorado School of Law. The author gratefully acknowledges the helpful comments of Robert M. Phillips, Esq. in reviewing an early draft of this article and the research assistance of Sarah Croog.

(1) Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494 [hereinafter DRA 1984] (codified as amended in 26 U.S.C.).

(2) In this context "nonstatutory fringe benefits" exclude compensation items for which the income tax treatment is governed by specific sections of the Internal Revenue Code (Code) other than section 132, the focus of this article. The "statutory" fringe benefits include employer-provided health care benefits, see I.R.C. [section][section] 105, 106, qualified retirement plans, see I.R.C. [section] 401, meals or housing provided for the convenience of the employer, see I.R.C. [section] 119, education assistance, see I.R.C. [section][section] 117(d), 127, and group-term life insurance, see I.R.C. [section] 79.

(3) The Internal Revenue Service (Service) is one of eleven bureaus in the Department of the Treasury. Although the Secretary of the Treasury delegates most revenue functions to the Commissioner of Internal Revenue, some matters, principally the promulgation of regulations, are retained by the Department of the Treasury but with the active participation of the Service. See generally MICHAEL I. SALTZMAN, IRS PRACTICE AND PROCEDURE [section][section] 1.02[2], 3.01, 3.02[2] (rev. 2d ed. 2004) (describing role of Service within the Department of the Treasury and the joint process for development of regulations). This article accordingly uses "Service" in referring to most matters of tax administration, with the "Treasury Department" being referred to principally in connection with the promulgation of regulations.

(4) See infra notes 25-104 and accompanying text (describing some of the administrative pronouncements of the Service and pre-DRA 1984 case law).

(5) H.R. REP. NO. 98-432, at 1591-92 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 1215-16.

(6) Id.

(7) Id. If one employee receives taxable compensation while another receives a comparable package that is partially tax-free, the principle of horizontal equity is violated. If higher income employees receive proportionately greater amounts of tax-free fringe benefit income, the principle of vertical equity could also suffer. See infra notes 351-53 and accompanying text.

(8) Existing section 132 (dealing with statutory cross-references) became section 134 in two steps. See DRA 1984 [section][section] 531(a)(1) (redesignating section 132 as section 133), 543(a) (redesignating section 133, as newly redesignated by DRA 1984 [section] 531(a)(1), as section 134).

(9) See I.R.C. [section] 132(e).

(10) DRA 1984 [section] 531(c). The statute had previously included "commissions, and similar items" and with the addition included "commissions, fringe benefits, and similar items."

(11) The House Report observed: "Further, the U.S. Supreme Court has stated that Code section 61 'is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected.'" 1984 HOUSE WAYS AND MEANS COMMITTEE REPORT, at 1590, reprinted in 1984 U.S.C.C.A.N. 697, 1214 (quoting Commissioner v. Smith, 324 U.S. 177, 181 (1945)). Footnote one of the House Report embellishes this point:
  Similarly, the Court has stated: "Congress applied no limitations as
  to the source of taxable receipts, nor restrictive labels as to their
  nature. And the Court has given a liberal construction to this broad
  phraseology in recognition of the intention of Congress to tax all
  gains except those specifically exempted."

Id. at 1590 n.1 (quoting Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-30 (1955)).

(12) See infra notes 113-15 and accompanying text.

(13) 8 THE OXFORD ENGLISH DICTIONARY 200 (2d ed. 1989).

(14) See WEBSTER'S NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE--UNABRIDGED (2d ed. 1948). In comparison, the term does appear in Webster's Third New International Dictionary, where it is defined as "an employment benefit (as a pension, a paid holiday, or health insurance) granted by an employer that involves a money cost without affecting basic wage rates." WEBSTER'S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE--UNABRIDGED (3rd ed. 1961).

(15) See Publishers' Ass'n of N.Y. City v. Simons, 93 N.Y.S.2d 782 (N.Y. Sup. Ct. 1949).

(16) See I.R.S. Priv. Ltr. Rul. 5404026170A (Apr. 2, 1954); I.R.S. Priv. Ltr. Rul. 5401273580A (Jan. 27, 1954); I.R.S. Priv. Ltr. Rul. 5307154520A (Mar. 23, 1953).


(18) Id. at 304.

(19) Id. at 296-311. The Stabilization Act of 1942 applied from October 2, 1942 until its repeal on November 9, 1946. The definition of "salary" subject to the freeze excluded reasonable allowances for pension or insurance benefits. Id. at 301 n.101.


(21) Id. at 192-99. The authors divided benefits into "perquisites" as those "incidental to an executive position and ... unavailable to employees generally" versus "fringe benefits" that are "available to an executive only as one of a group of employees." Id. at 192-93.

(22) Fringe Benefits, TIMES (London), Nov. 12, 1962, at 11.

(23) This would not be the case with some benefits, such as an employee discount, for which the employer may deduct only the cost of the goods or service.

(24) States may use the federal income tax base, albeit with modifications, for the computation of state levies, so a federal fringe benefit exclusion can provide income tax benefits at the state level as well.

(25) For example, the primary authority for the employee's income tax treatment of fringe benefits was found in treasury regulations addressing the employer's withholding duties. See infra notes 44-53 and accompanying text.


(27) The Service was quite active in issuing rulings addressing nonstatutory fringe benefits, including: a 1920 ruling concerning meal money, see infra notes 31-33 and accompanying text; a 1921 ruling concerning free employee train travel, see infra notes 42-43 and accompanying text; a 1919 law opinion concerning employer-provided term life insurance, see infra notes 58-62 and accompanying text; and a 1919 revenue ruling concerning employer-provided meals and lodging, see O.D. 265, 1 C.B. 71 (1919).

(28) Old Colony Trust Co. v. Commissioner, 279 U.S. 716 (1929).

(29) "Lest he have to pay income tax on this largess himself, Home Depot will cover the bill with what's called a gross-up payment." Jerry Useem, Have They No Shame?, FORTUNE, Apr. 28, 2003, at 56, 60 (describing potential severance package if the Home Depot CEO is terminated).

(30) A 1991 treatise referred to Coca-Cola's then-CEO, Roberto Goizueta, as "an unsung executive compensation frontiersman" for insisting on a full tax reimbursement for any taxes incurred on restricted stock grants. See GRAEF S. CRYSTAL, IN SEARCH OF EXCESS 153 (1991). That was simply a variation on the old tax reimbursement theme from Old Colony Trust, supra note 28, that periodically surfaced in subsequent Service pronouncements. See, e.g., Rev. Rul. 86-14, 1986-1 C.B. 304 (treating employer's payment of the employee's share of FICA tax as additional wage income); Rev. Rul. 68-507, 1968-2 C.B. 485 (treating taxes paid by church for minister other than from salary as additional income). For a contemporary account of gross-up payment practices, see Mark Maremont, Latest Twist in Corporate Pay: Tax-Free Income for Executives, WALL ST. J., Dec. 22, 2005, at A1.

(31) O.D. 514, 2 C.B. 90 (1920).

(32) I.R.S. Gen. Couns. Mem. 34,596 (Aug. 30, 1971).

(33) See I.R.S. Gen. Couns. Mem. 35,320 (Apr. 27, 1973).

(34) See infra notes 94-104 and accompanying text.

(35) See 40 Fed. Reg. 41,118 (Sept. 5, 1975).

(36) It was apparently part of the so-called "Eleven Rulings" considered by the Service at that time, which would have significantly pared back the exclusions for fringe benefits. See Susan R. Finneran, Fringe Benefit or "Condition of Employment": Uniformity, Certainty, and Compliance, 78 NW. U. L. REV. 198, 235 n.213 (1983) (referring generally to the eleven proposed rulings).

(37) I.R.S. Gen. Couns. Mem. 36,850 (Sept. 15, 1976).

(38) See I.R.S. Gen. Couns. Mem. 36,622 (Mar. 11, 1976).

(39) See infra notes 94-104 and accompanying text.

(40) See I.R.S. Gen. Couns. Mem. 38,780 (July 17, 1981) (recounting the change of position concerning O.D. 514). Also, the general counsel memorandum concluded that due to the moratorium "revocation of O.D. 514 is precluded at this time." Id.

(41) Treas. Reg. [section] 1.132-6(d)(2) (1989).

(42) O.D. 946, 4 C.B. 110 (1921). The travel fringe failed several of the indicia of an excludable gift subsequently identified in Commissioner v. Duberstein, 363 U.S. 278 (1960). The Tax Court observed that "[t]he notion expressed in O.D. 946 ... that the free railroad travel for employees and their families represents a corporate 'gift' seems hardly realistic." Zager v. Commissioner, 72 T.C. 1009, 1014 n.3 (1979), aff'd sub nom. Martin v. Commissioner, 649 F.2d 1133 (5th Cir. Unit A July 1981). The Service ruled that an employer's cash awards for job performance were includible in the employee's income and could not be excluded as a gift under section 102 or a prize or award under section 74. I.R.S. Priv. Ltr. Rul. 85-20-014 (Feb. 11, 1985). That would still be the case today, as cash awards of this nature would not qualify as an "employee achievement award" under I.R.C. [section] 74(c). See infra note 216.

(43) Zager, 72 T.C. at 1013 n.2.

(44) The taxpayer in Rudolph v. United States, 370 U.S. 269 (1962), argued that the withholding regulations supported his claim of an income tax exclusion. Justice Harlan wrote:
  The Government admits that not all "fringe benefits" have been taxed
  as income, but it is enough to point out here that the withholding tax
  analogy is not perfect, for payments to laid-off employees from
  company-financed supplemental unemployment benefit plans are "taxable
  income" to the employees although not "wages" subject to withholding.

Id. at 274 n.7. Justice Douglas in his dissenting opinion also pointed to the income tax withholding regulation, but as support for the proposition that "[e]mployees may receive from their employers many fringe benefits that are not income." Id. at 280 (Douglas, J., dissenting). For a discussion of the pre-DRA 1984 withholding rules applicable to fringe benefits, see infra notes 89-93 and accompanying text.

(45) Treas. Reg. [section] 31.3401(a)-1(b)(10) (2003) (the applicable part of the regulations remains unchanged to the current day). The Tax Court referred to this policy in a 1979 opinion, stating: "[C]ourtesy discounts for employees of retail establishments, etc.--have traditionally been treated as nontaxable, notwithstanding the familiar and oft-repeated statement that in considering what is to be included in gross income Congress intended to use its power to the full extent." Zager, 72 T.C. at 1013-14.

(46) I.R.S. Tech. Adv. Mem. 83-37-012 (May 25, 1983). In the last paragraph prior to the conclusion the Service states that "because these amounts are not a relatively small value, the employee discounts in question do not fall within the courtesy discounts discussed in the regulations which are not wages for the employment taxes." Id.

(47) Id.

(48) See I.R.C. [section] 132(c)(4).

(49) See Marquette Univ. v. United States, 645 F. Supp. 1007 (E.D. Wis. 1985).

(50) See supra note 45 and accompanying text.

(51) Discrimination for the benefit of corporate officers did not concern the District Court judge in an earlier case involving preferential free dairy products to corporate officers, but the taxpayer lost on other grounds. See infra notes 63-66 and accompanying text. Current section 132 generally does not require nondiscrimination in connection with working condition and general de minimis fringe benefit fringes. However, no-additional-cost service fringes, employee discounts, employer-provided eating facilities, and retirement planning services generally include a nondiscrimination requirement. See Treas. Reg. [section] 1.132-8 (1989).

(52) Marquette Univ., 645 F. Supp. at 1011.

(53) Id. Under current I.R.C. [section] 132(f)(4) an employee is not considered to be in constructive receipt of a parking benefit even if the employee can choose between taxable compensation or a tax-free qualified transportation fringe.

(54) Rev. Rul. 59-58, 1959-1 C.B. 17.

(55) A 1961 district court case ignored the limitations expressed in Revenue Ruling 59-58, finding that gift certificates of $15 or $25 were not taxable wages for employer wage withholding purposes. See Hallmark Cards, Inc. v. United States, 200 F. Supp. 847 (W.D. Mo. 1961).

(56) Rev. Rul. 59-58, 1959-1 C.B. 17, 18.

(57) "Examples of de minimis fringe benefits are ... traditional birthday or holiday gifts of property (not cash) with a low fair market value." Treas. Reg. [section] 1.132-6(e)(1) (1992). The Service has continued to assert that cash or cash equivalents, including gift certificates, cannot be excluded as a de minimis fringe benefit. See infra notes 211-13 and accompanying text.

(58) See Revenue Act of 1964, Pub. L. No. 88-272, [section] 204(a)(1), 78 Stat. 19, 36 (1964) (adding section 79).

(59) See, e.g., I.R.S. Priv. Ltr. Rul. 5404026170A (Apr. 2, 1954) (applying this doctrine).

(60) The rationale for this treatment was explained in Mimeo. 6477, 1950-1 C.B. 16, which limited the exclusion if a current cash value was present.

(61) O. 1014, 2 C.B. 88, 89 (1920).

(62) See, e.g., Wayne M. Gazur, Death and Taxes: The Taxation of Accelerated Death Benefits for the Terminally Ill, 11 VA. TAX REV. 263, 299-326 (1991) (discussing policies underlying the taxation of life insurance).

(63) 19 T.C.M. (CCH) 582 (1960).

(64) Id. at 588.

(65) In Marquette University v. United States, 645 F. Supp. 1007 (E.D. Wis. 1985), discussed supra notes 49-53 and accompanying text, the court found that the discriminatory application of the benefit violated the language of the withholding tax regulation.

(66) "[O]ur immediate concern is whether the products were received free-of-charge because of the recipient's executive position, or because of his status of stockholder. In case of the latter, respondent well may be correct in contending the value of these products constituted a distribution of earnings and profits." Harmony Dairy Co., 19 T.C.M. (CCH) at 589.

(67) I.R.C. [section] 132(d).

(68) In describing instances of judicial recognition of nonstatutory exclusions from gross income the Service referred to several cases that "illustrate the 'wash' result type of nonstatutory exclusions." I.R.S. Gen. Couns. Mem. 34,456 (Mar. 15, 1971); see also I.R.S. Gen. Couns. Mem. 37,278 (Sept. 30, 1977) ("[T]he company need not withhold taxes on these payments because the company could reasonably expect that the Code [section] 162 deductions would wash out the effect of including the payments in the employees' gross incomes.").

(69) 298 F. Supp. 1201 (S.D.N.Y. 1969); see also BORIS I. BITTKER & JAMES S. EUSTICE, FEDERAL INCOME TAXATION OF CORPORATIONS AND SHAREHOLDERS [paragraph] 5.04[5] (7th ed. 2000) (discussing the income tax treatment of the corporation, directors, officers, and shareholders with respect to indemnity agreements).

(70) Central Coat, 298 F. Supp. at 1203.

(71) See, e.g., Rev. Rul. 69-491, 1969-2 C.B. 22 (corporation can deduct premiums for officer errors and omissions insurance and the officers recognize no income on account of the payments). Professors Bittker and Eustice refer to I.R.C. section 132(d) as support for an exclusion from income for the corporate officer. See BITTKER & EUSTICE, supra note 69, at [paragraph] 5.04[5] n.115.

(72) 1973-1 C.B. 42.

(73) I.R.C. section 132 was amended in 2001 by the addition of subsection 132(m) that provides an exclusion for retirement planning advice or information provided to an employee and his spouse by any employer maintaining a qualified retirement plan. See Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, [section] 665(b), 115 Stat. 38, 143 (2001). The Service fringe benefits publication states that "the exclusion does not apply to services for tax preparation, accounting, legal, or brokerage services." INTERNAL REVENUE SERV., PUB. NO. 15-B, EMPLOYER'S TAX GUIDE TO FRINGE BENEFITS 14 (2005), available at [hereinafter EMPLOYER'S TAX GUIDE].

(74) See, e.g., JOSEPH T. SNEED, THE CONFIGURATIONS OF GROSS INCOME 101-06 (1967). In 1919, the Service allowed an exclusion for meals and lodging provided to seamen, because the meals and lodging was provided "for the convenience of the employer." O.D. 265, 1 C.B. 71 (1919). That doctrine shares some common ground with the "working condition" doctrine.

(75) See, e.g., Finneran, supra note 36, at 225 (providing examples of "conditions of employment" such as water coolers, air conditioners, office furnishings, and parking).

(76) SNEED, supra note 74, at 101.

(77) See, e.g., I.R.S. Tech. Adv. Mem. 85-47-003 (July 31, 1985) (employer-provided income tax preparation service was taxable income to the employee, even though employer required the employee's income tax return to compute an overseas tax reimbursement but the employee could decline the employer-provided preparation). I.R.S. Field Serv. Advisory (Sept. 14, 2001), available at 2001 WL 1077144, addresses a similar factual situation, except that the expatriate employees had to agree to have their host country and U.S. income tax returns prepared by the professional services company. The Service still considered this as income to the employee:
  [E]very individual is required to file an individual federal income
  tax return yearly.... The primary benefit of the tax preparation
  services thus inures to the expatriate employees, not to the
  Company.... The Company could inspect the expatriate employees' filed
  returns in order to determine the appropriate cost equalization
  adjustment without paying for tax return preparation.

Id. The facts of this Field Service Advisory are very similar to an earlier nondocketed service advice review. See I.R.S. Non Docketed Serv. Advice Review 10,795 (July 1, 1999), available at 1999 WL 33910796.

(78) 370 U.S. 269 (1962). The U.S. Supreme Court dismissed a writ of certiorari, preserving the holdings of the lower courts that a week-long gathering of life insurance salesmen and their spouses was provided by the employer for the "primary purpose of affording a pleasure trip ... in the nature of a bonus reward, and compensation for a job well done ... primarily a pleasure trip in the nature of a vacation." Id. at 270 (quoting the language of the district court in Rudolph v. United States, 189 F. Supp. 2, 4-5 (N.D. Tex. 1960)). In a separate opinion, Mr. Justice Harlan explained that the taxpayer sought to "characterize the amount as a 'fringe benefit' not specifically excluded from [section] 61 by other sections of the statute, yet not intended to be encompassed by its reach." Id. at 273-74 (Harlan, J., separate op.). While Justice Harlan would "[c]onced[e] that the statutory exclusions from 'gross income' are not exhaustive ... it is not now necessary to explore the extent of any such nonstatutory exclusions. For it was surely within the Commissioner's competence to consider as 'gross income' a 'reward, or a bonus given to ... employees for excellence in service,' which the District Court found was the employer's primary purpose in arranging this trip." Id. at 274. Justice Harlan's opinion also explained that an offsetting business deduction could not be claimed by the taxpayer because the trip was primarily personal.

(79) 401 F.2d 118 (5th Cir. 1968). The Fifth Circuit Court of Appeals reinstated a jury verdict in favor of the taxpayer that had been vacated by the presiding judge. Mr. Gotcher, an employee of an automobile dealership, and his wife enjoyed a trip to Germany, the cost of which was shared by Gotcher's employer and Volkswagen. The court concluded that existing doctrine would exclude the value of such a trip from Mr. Gotcher's income (but not that portion applicable to Mrs. Gotcher) as it was primarily for the employer's benefit. Id.

(80) In a 1977 general counsel memorandum dealing with a life insurance company convention and facts remarkably similar to those in Rudolph, the Service treated the convention expenses paid by the employer as nontaxable to the employees because it could be reasonably expected by the employer that the employees could claim an offsetting business expense deduction. See I.R.S. Gen. Couns. Mem. 37,278 (Sept. 30, 1977).

(81) 342 F.3d 890 (8th Cir. 2003), rev'g No. Civ. 4-01-CV-10176, 2002 WL 31367977 (S.D. Iowa Aug. 21, 2002).

(82) As a matter of doctrine, Professor Sneed's industrial worker noted in the text accompanying supra note 76 now may need to claim a hypothetical deduction for the roof over his or her head, even though it is so clearly offered solely for the employer's business purposes, without any compensatory purpose.

(83) Townsend Indus., Inc. v. United States, No. Civ. 4-01-CV-10176, 2002 WL 31367977 (S.D. Iowa Aug. 21, 2002).

(84) The Tax Court made the fringe benefit analogy. "It may be noted that the economic benefits accruing to the stockholder-officer-employee by reason of an interest-free loan are somewhat akin to many fringe benefits that have been enjoyed without tax incidence since 1913." Zager v. Commissioner, 72 T.C. 1009, 1013 (1979), aff'd sub nom. Martin v. Commissioner, 649 F.2d 1133 (5th Cir. Unit A July 1981).

(85) See DRA 1984 [section] 172(a) (codified as I.R.C. [section] 7872).

(86) See generally Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, [section] 402(a), 116 Stat. 745, 787-88 (2002).

(87) See, e.g., Gardner v. Commissioner, 613 F.2d 160 (6th Cir. 1980) (constructive dividend for use of corporate-owned automobile); United Aniline Co. v. Commissioner, 316 F.2d 701 (1st Cir. 1963) (constructive dividend for use of corporate yacht); Beckley v. Commissioner, 34 T.C.M. (CCH) 235 (1975) (constructive dividend for use of corporate-owned airplane); Int'l Artists, Ltd. v. Commissioner, 55 T.C. 94 (1970), acq., 1971-2 C.B. 1 (constructive dividend for entertainer Liberace's use of corporate-owned home). A statutory exception beyond the scope of this article is section 119, which can be applied to exclude the value of employer-provided meals or lodging. See Karla W. Simon, Fringe Benefits and Tax Reform Historical Blunders and a Proposal for Structural Change, 36 U. FLA. L. REV. 871, 896-903 (1984) (in-depth discussion of the history of section 119).

(88) See infra notes 124-45 and accompanying text.

(89) 435 U.S. 21 (1978).

(90) The taxpayer paid certain employees $1.40 for each noon lunch consumed away from normal duty stations on nonovernight trips. Some salaried employees were reimbursed for actual lunch expenses up to a specified maximum. Id. at 22. The case was decided in the same term in which the Court ruled that lunch reimbursements to highway patrol officers were included in income. See Commissioner v. Kowalski, 434 U.S. 77 (1977).

(91) "To require the employee to carry the risk of his own tax liability is not the same as to require the employer to carry the risk of the tax liability of its employee. Required withholding, therefore, is rightly much narrower than subjectability to income taxation." Central Illinois, 435 U.S. at 29.

(92) 452 U.S. 247 (1981).

(93) See infra notes 106-23 and accompanying text.

(94) See Prop. Treas. Reg. [section] 1.61-16(a), 40 Fed. Reg. 41,118,41,119 (Sept. 5, 1975).

(95) "Caught in a heated cross fire between critics who found the proposed regulations too lenient and those who thought they were too severe, the Treasury withdrew its draft in 1976." 3 BITTKER & LOKKEN, supra note 26, at [paragraph] 63.1.1.

(96) See 41 Fed. Reg. 56,334 (Dec. 28, 1976).

(97) The statute referred only to regulations, but the legislative history indicates that it was the intent of Congress "that the Treasury Department will not alter, or deviate from, in any significant way the historical treatment of fringe benefits through the issuance of revenue rulings or revenue procedures, etc." H.R. REP. NO. 95-1232, at 5 (1978), reprinted in 1978 U.S.C.C.A.N. 2508, 2510. This language was interpreted by the U.S. Court of Appeals for the Second Circuit as simply cautionary to the Service beyond the issuance of regulations and did not restrain judicial action with respect to fringe benefit questions. See Knapp v. Commissioner, 870 F.2d 93 (2d Cir. 1989). In the same litigation, the Tax Court had held that the moratorium did not bind the court, and the court, in turn, had no authority to enjoin the Service. See Knapp v. Commissioner, 90 T.C. 430 (1988).

(98) See Act of Oct. 7, 1978, Pub. L. No. 95-427, [section] 1, 92 Stat. 996, 996 (1978).


(100) See Act of Dec. 29, 1979, Pub. L. No. 96-167, [section] 1, 93 Stat. 1275, 1275 (1979).

(101) The discussion draft was not formally proposed as regulations, so it cannot be found in the Federal Register. It was reprinted in secondary authorities. See, e.g., Fringe Benefits: Treasury Sends Draft Proposals on Fringe Benefits to Rostenkowski, Daily Exec. Rep. (BNA) No. 11, at G-7, J-14 (Jan. 16, 1981).

(102) See Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, [section] 801, 95 Stat. 172, 349 (1981) (extending the moratorium through December 31, 1983).

(103) See I.R.S. Announcement 84-5, 1984-4 I.R.B. 31; Rev. Proc. 84-14, 1984-1 C.B. 431 (effective January 1, 1984, the Service was no longer prohibited by statute from issuing rulings or determination letters in the fringe benefits area, but it would refrain from issuing rulings or determination letters until after January 1, 1985). Section 132 as enacted by DRA 1984 was not effective until January 1, 1985. At the time of the enactment of DRA 1984, the Service had already issued Announcement 84-5. To be certain, however, Dan Rostenkowski, Chairman of the House Committee on Ways and Means, stated: "The conferees intend, however, that the Treasury will follow present practice in this area until the new provisions become effective on January 1, 1985." 130 CONG. REC. H 7085, 7112 (1984), reprinted in 1984 U.S.C.C.A.N. 2140, 2143.

(104) The history of the various fringe benefit proposals is much more detailed than suggested by this abbreviated account. For a detailed description of the various Service proposals in the years leading up to DRA 1984, see Finneran, supra note 36.

(105) The roughly fifty pages of the section 132 regulations supply the primary substance of the rules for the taxation of nonstatutory fringe benefits. See Treas. Reg. [section][section] 1.132-0 (as amended in 2001); 1.132-1 (as amended in 1993); 1.132-2 (1989); 1.132-3 (1989); 1.132-4 (1989); 1.132-5 (as amended in 2001); 1.132-6 (as amended in 1992); 1.132-7 (1989); 1.132-8(1989); 1.132-9 (2001). However, resolution of the full treatment of items often requires reference to other regulations, notably Treas. Reg. [section] 1.61-21 (as amended in 1992) (taxation of fringe benefits); [section] 1.62-2 (as amended in 2003) (accountable plans); [section] 1.119-1 (as amended in 1985) (meals and lodging for the convenience of the employer); [section] 1.274-5T (as amended in 2002) (business expense substantiation rules).

(106) There are some exceptions, particularly where the amounts give rise to a claimed business expense deduction on the employee's income tax return. See, e.g., Edmands v. Commissioner, 58 T.C.M. (CCH) 167 (1989) (Alaskan oil field worker could not deduct commercial air fares to job sites, which were not reimbursed by the employer). The Service has announced that it will review executives' income tax returns when conducting an audit of the corporation. See infra notes 306-07 and accompanying text.

(107) See, e.g., Townsend Indus., Inc. v. United States, 342 F.3d 890 (8th Cir. 2003) (asserted employment tax deficiency on account of four-day employee fishing trip); BMW of N. Am., Inc. v. United States, 39 F. Supp. 2d 445 (D.N.J. 1998) (employment tax deficiency on account of incorrect computation of value of automobile fringe benefits). Two of the largest fringe benefit cases involved United Airlines and American Airlines. In UAL Corp. v. Commissioner, 117 T.C. 7 (2001), the Service unsuccessfully tried to bar the airline's deduction of an hourly cash per diem allowance paid to flight attendants and pilots on day trips as well as overnight trips, claiming that the employees had not satisfied travel substantiation requirements. In a related case, United Air Lines, Inc. v. United States, 51 Fed. Cl. 722 (2001), the taxpayer won a refund claim for payroll taxes paid on per diem amounts computed on the basis of $1.50 per on-duty hour, paid to pilots and flight attendants for both day and overnight travel. See also I.R.S. Tech. Adv. Mem. 91-12-001 (Dec. 13, 1990) (apparently relating to the United Air Lines litigation). The Service also litigated the treatment of per diems computed at a dollar rate per duty hour in American Airlines, Inc. v. United States, 40 Fed. Cl. 712 (1998), aff'd in part, rev'd in part, 204 F.3d 1103 (Fed. Cir. 2000), where again the issue was an employment tax deficiency.

(108) The Service offers an "early referral to appeals" procedure for many tax issues, specifically including employment tax issues and "whether certain payments are excepted from the definition of 'wages' (e.g., a fringe benefit that would be excludable from the employee's gross income under [section] 132)." Rev. Proc. 99-28, 1999-2 C.B. 109, [section] 4.03(3). Generally speaking, this procedure permits the taxpayer to request that selected issues raised in an audit be referred to the Office of Appeals within the Service before the audit is otherwise complete with respect to the remaining issues.

(109) If the employer determines that a fringe benefit is taxable, the employer will generally report the amount on Form W-2 (or Form 1099-MISC if the amount is self-employment income or otherwise not considered "wages").

(110) In 2005, the wages ceiling for the imposition of federal unemployment taxes on a single employee was $7,000 (paid only by the employer), $90,000 for old-age, survivors, and disability insurance (paid by both the employer and employee), and unlimited for the 1.45% Medicare tax (paid by both employer and employee). See INTERNAL REVENUE SERV., PUB NO. 15 (CIRCULAR E), EMPLOYER'S TAX GUIDE (2006), available at In a field service advisory apparently stemming from the audit of an automobile manufacturer's product testing program, the taxpayer proposed that it would agree it did not have reasonable cause for failure to withhold employment taxes "in return for a commitment from the Service to drop audits of the individual employees' income tax returns." I.R.S. Field Serv. Advisory (Nov. 21, 1995), available at 1995 WL 1918543. The Service has recently issued audit guides for executive fringe benefits and has indicated that it will review executives' income tax returns when it is conducting an audit of the corporation. See infra notes 306-24 and accompanying text.

(111) See, e.g., Delaware Corp. v. Commissioner, T.C.M. (RIA) 2004-280 (2004), available at 2004 WL 2904445 (payments by corporation for the child care expenses of the shareholder's grandchildren constituted a constructive dividend to him); I.R.S. Non Docketed Serv. Advice Review 5430 (Feb. 17, 1995), available at 1995 WL 1922072 ("If, as appears to be the case, the three corporate aircraft were available to all corporate officers, not just the majority or controlling shareholders of the corporation, it would appear that the benefit was meant as a fringe benefit, and should not be looked upon as a constructive dividend."). The Service has expressed some resistance to importing fringe benefit doctrine into the established constructive dividend jurisprudence because exceptions such as the de minimis fringe benefit exclusion could reduce the effectiveness of the constructive dividend enforcement tool. For example, in I.R.S. Gen. Couns. Mem. 39,482 (Mar. 5, 1986), the Service declined to value a constructive dividend at the fair market value of the benefit bestowed by a corporation's payment of shareholders' brokerage commissions, content to value the dividend at a pro rata portion of the corporation's costs.

(112) See, e.g., Izzo v. Dep't of the Treasury (In re Jett), No. 97-28756-BM, 2000 WL 637322 (Bankr. W.D. Pa. Feb. 7, 2000) (use of $75,000 sports car purchased by corporation for exclusive use by shareholder held to be fringe benefit compensation income); Whitehead v. Commissioner, 82 T.C.M. (CCH) 976 (2001) (shareholder employee recognized fringe benefit income for use of corporate vehicles by himself and his wife); Cox v. Commissioner, 82 T.C.M. (CCH) 336 (2001) (failure to substantiate claimed seventy percent business use of company-owned Ford Explorer produced fringe benefit income for lease value to the shareholder employee); Badell v. Commissioner, 80 T.C.M. (CCH) 422 (2000) (taxpayers required to include fringe benefit income from personal use of corporate-owned automobiles and corporation's payment of personal life insurance premiums).

(113) See supra notes 89-94 and accompanying text for a discussion of the prior law.

(114) DRA 1984 [section] 531(d)(5) amended I.R.C. [section] 3501 by the addition of subsection 3501(b) stating that "[t]he taxes imposed by this subtitle [subtitle C of the Code dealing with employment taxes] with respect to non-cash fringe benefits shall be collected (or paid) by the employer at the time and in the manner prescribed by the Secretary by regulations." DRA 1984 then amended the various employment tax provisions to expressly address in kind fringe benefits. DRA 1984 [section] 531(d)(1)(A) amended I.R.C. [section] 3121(a) such that wages for purposes of the Federal Insurance Contributions Act include "all remuneration (including benefits) paid in any medium." Prior to amendment the language included "all remuneration paid in any medium." DRA 1984 also included a new paragraph 3121(a)(20) that excepted "any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under section 117 or 132." DRA 1984 [section] 531(d)(3)-(4) made similar changes to I.R.C. [section][section] 3306 (dealing with employer contributions under FUTA) and 3401 (dealing with income tax withholding on wages). DRA 1984 [section] 531(d)(2) added I.R.C. [section] 3231(e)(5) (dealing with the Railroad Retirement Tax Act) stating "[t]he term 'compensation' shall not include any benefit provided to or on behalf of an employee if at the time such benefit is provided it is reasonable to believe that the employee will be able to exclude such benefit from income under section 117 or 132."

(115) "[A]ny fringe benefit that does not qualify for exclusion under the bill and that is not excluded under another statutory fringe benefit provision of the Code is includible in gross income for income tax purposes, and in wages for employment tax purposes." H.R. REP. NO. 98-861, at 1169 (1984) (Conf. Rep.), reprinted in 1984 U.S.C.C.A.N. 1445, 1857. Although beyond the scope of this article, there are other claimed inconsistencies beyond nonstatutory fringe benefits with respect to what is covered income. See, e.g., Maureen B. Cavanaugh, On the Road to Incoherence: Congress, Economics, and Taxes, 49 UCLA L. REV. 685, 693-710 (2002).

(116) 929 F.2d 648 (Fed. Cir. 1991), aff'g 16 Cl. Ct. 530 (1989).

(117) See I.R.C. [section] 912(1)(C) (excluding such allowances from gross income).

(118) Anderson, 929 F.2d at 653.

(119) Id. at 654.

(120) 229 F.3d 688 (8th Cir. 2000).

(121) Id. at 691 (citing Treas. Reg. [section] 31.3401(a)-1(b) (1990)).

(122) The court quoted the Supreme Court's language in Central Illinois Public Service Co. v. United States, 435 U.S. 21, 32 (1978): "'[n]o employer, in viewing the regulations ... could reasonably suspect that a withholding obligation existed.'" H B & R, 229 F.3d at 691. The facts of the case resemble those of a 1996 technical advice memorandum that dealt with an employer's liability for employment taxes on the fringe benefit. See I.R.S. Tech. Adv. Mem. 96-41-003 (Oct. 11, 1996); cf. Fleet Mgmt. Servs., Inc. v. United States, C-1-91-052, 1992 WL 420858 (S.D. Ohio May 28, 1992) (denying a tax refund claim by a long-haul trucking company for FICA taxes withheld on travel expense allowances).

(123) The public utility company in a 1991 technical advice memorandum argued that the treatment of meal allowances still remained uncertain enough to avoid employment tax liability. See infra notes 229-35 and accompanying text.

(124) See, e.g., Rev. Rul. 86-97, 1986-2 C.B. 42 (interpreting qualified nonpersonal use vehicle test for pickup trucks and vans); Rev. Rul. 2004-98, 2004-2 C.B. 664 (rejecting a parking reimbursement arrangement); see also I.R.S. Notice 2004-46, 2004-2 C.B. 46 (request for comments on use of debit cards to provide qualified transportation fringes); I.R.S. Notice 94-3, 1994-1 C.B. 327 (guidance on parking and transit passes); I.R.S. Notice 89-110, 1989-2 C.B. 447 (guidance on assorted fringe benefit issues, but principal focus on employer-provided vehicles and transit passes). In 1991, the Treasury twice proposed amendments to the section 132 regulations to address transportation issues. The first set of proposed regulations dealt with the valuation of transportation furnished by an employer to or from an employee's workplace due to unsafe conditions surrounding the employee's workplace or residence and to increase the dollar amount of the de minimis fringe benefit amount for transit passes. See Taxation of Fringe Benefits and Exclusions from Gross Income of Certain Fringe Benefits, 56 Fed. Reg. 23,038 (May 20, 1991). A second set of proposals addressed an exclusion for transportation furnished to government employees on account of security concerns and clarified the treatment of volunteers who perform services for exempt organizations. See Taxation of Fringe Benefits and Exclusions from Gross Income of Certain Fringe Benefits, 56 Fed. Reg. 48,465 (Sept. 25, 1991).

(125) See Treas. Reg. [section] 1.132-5(h) (2001).

(126) The qualified nonpersonal use vehicle exemption is quite broad if it applies, because 100 percent of the use of the vehicle is excluded as a working condition fringe, without requiring specific application of the commuting expense rules as announced in Rev. Rul. 99-7, 1999-1 C.B. 361, and Rev. Rul. 55-109, 1955-1 C.B. 261. See I.R.S. Chief Couns. Advisory 2000-51-041 (Dec. 22, 2000), available at 2000 WL 33126620 (explaining this rule).

(127) See Treas. Reg. [section] 1.274-5T(k)(2)(ii) (2002). The categories of exempted vehicles were enlarged by very specific directions contained in the legislative history of Pub. L. No. 99-44, 99 Stat. 77 (1985), a three-page statute primarily dealing with the elimination of a "contemporaneous" recordkeeping requirement of business vehicle mileage. See H.R. REP. NO. 99-34, at 10-11 (1985), reprinted in 1985 U.S.C.C.A.N. 30, 39-41.

(128) See I.R.S. Chief Couns. Advisory 2000-51-041 (Dec. 22, 2000), available at 2000 WL 33126620 (the full value of an unmarked law enforcement vehicle that satisfies the qualified nonpersonal use vehicle standard is excluded from the employee's gross income as a working condition fringe).

(129) See Treas. Reg. [section] 1.274-5T(k)(6)(ii) (2002). Requirements include authorization by law to carry firearms, execute search warrants, and to make arrests, and the regular carrying of firearms.

(130) See I.R.S. Priv. Ltr. Rul. 88-40-010 (July 5, 1988).

(131) See I.R.S. Priv. Ltr. Rul. 87-38-011 (June 11, 1987).

(132) See I.R.S. Priv. Ltr. Rul. 87-32-008 (May 4, 1987).

(133) See I.R.S. Priv. Ltr. Rul. 87-06-032 (Nov. 10, 1986).

(134) See Treas. Reg. [section] 1.274-5T(k)(2)(ii)(A), (k)(3) (2002).

(135) See I.R.S. Priv. Ltr. Rul. 87-48-009 (Aug. 27, 1987).

(136) See I.R.S. Priv. Ltr. Rul. 87-25-053 (Mar. 24, 1987).

(137) See Treas. Reg. [section] 1.274-5T(k)(7) (2002).

(138) See I.R.S. Priv. Ltr. Rul. 87-30-062 (Apr. 29, 1987).

(139) See Rev. Rul. 86-97, 1986-2 C.B. 42, 43.

(140) I.R.S. Priv. Ltr. Rul. 2002-36-022 (June 3, 2002).

(141) Being on the list of qualified nonpersonal use vehicles is obviously desirable. See, e.g., I.R.S. Information Ltr. 2004-0122 (Sept. 30, 2004), available at 2004 WL 2201320 (question as to whether a "Highway Commissions and Patrol Superintendent vehicle used for highway purposes" qualifies). The Service recommended requesting an amendment to the regulations or a private letter ruling.

(142) See supra notes 87, 112. In Zand v. Commissioner, 71 T.C.M. (CCH) 1758 (1996), aff'd, 143 F.3d 1393 (11th Cir. 1998), a sole proprietor attempted unsuccessfully to overcome his apparent lack of records of business use of automobiles by claiming that the automobiles were instead fringe benefits taxable as compensation to his employees. This was inconsistent with the taxpayer's prior treatment of these transactions, and none of the employees who testified claimed that any usage was to be treated as compensation to them.

(143) See infra note 304 and accompanying text.

(144) The employer was not in the business of furnishing air transportation, so the no-additional-cost service or qualified employee discount did not apply. Because the employees were not otherwise on business, the working condition fringe exclusion did not apply. The ruling did not discuss why the de minimis fringe benefit rule does not apply.

(145) See I.R.S. Priv. Ltr. Rul. 87-12-021 (Dec. 18, 1986). The Service narrowly construed the valuation rules in Treas. Reg. [section] 1.61-2T(g)(4) (1992) (applying to trips for personal and business purposes) and (g)(10) (ignoring the value of flights provided to employees hitching a ride if fifty percent or more of the regular passenger seating capacity is otherwise occupied by individuals whose flights are primarily for business).

(146) See I.R.S. Non Docketed Serv. Advice Review 8927 (Jan. 30, 1991), available at 1991 WL 11239353.

(147) If the governor is required to travel on the state-owned helicopter even for strictly personal travel on account of security concerns, the includible value of the transportation is reduced by a safe harbor formula contained in the regulations. See Treas. Reg. [section] 1.132-5(m)(4) (2001).

(148) I.R.S. Non Docketed Serv. Advice Review 8927, supra note 146.

(149) See Treas. Reg. [section] 1.61-21(b)(6)(ii) (1992).

(150) See Treas. Reg. [section] 1.61-2T(g)(5) (1992). The employer can choose either rule for paying employment taxes, withholding income taxes, and reporting the employee's income, but the employer must use the same rule for all eligible flights provided in the calendar year. The employee, however, may generally use the SIFL valuation only if the employer uses it, but the employee can use the general valuation rule even if the employer uses the SIFL rule. See, e.g., I.R.S. Priv. Ltr. Rul. 98-40-015 (Oct. 2, 1998) (demonstrating a situation where the employer will use SIFL valuation while one employee will use the general valuation rules).

(151) The SIFL is computed by the Department of Transportation and revised semiannually. It was first computed as of May 1979 as part of the deregulation of the U.S. commercial airline industry and it is still computed to evaluate commercial carrier pricing. The SIFL is a computed cents-per-mile cost factor based on actual costs experienced by the major commercial airlines. See U.S. Dep't of Transportation, Office of Aviation Analysis, (last visited Feb. 14, 2006). The Service issues semi-annual rulings containing the updated SIFL mileage rates and terminal charges.

(152) See S. REP. NO. 99-23 (1985). This report was not included in the 1985 United States Code Congressional and Administrative News volumes, but it is accessible on Congressional Information Service microfiche.

(153) See Pub. L. No. 99-44, [section] 1(a), 99 Stat. 77 (1985) (repealing the contemporaneous recordkeeping requirement that was found in I.R.C. [section] 274(d)).

(154) S. REP. NO. 99-23, at 5.

(155) See H.R. REP. NO. 99-67, at 5-13 (1985) (Conf. Rep.), reprinted in 1985 U.S.C.C.A.N. 44, 45-52.

(156) See, e.g., 131 CONG. REC. 12,354 (1985) (statement of Sen. Metzenbaum). "If, for example, an executive were to travel on vacation from Washington to Miami and back on a corporate Lear-35 jet, current regulations would require that $8,150, the cost of a charter for that same flight, be added to his or her taxable income." Id. at 12,355. Under the SIFL regulations, "[i]nstead of paying taxes on $8,150, he or she would pay taxes on $1,128, about one-eighth of the $8,150 figure." Id. at 12,356. The $8,150 amount differs from an amount for the same flight, $6,470, noted in a letter from Senator Metzenbaum to Ronald Pearlman, Assistant Treasury Secretary, dated May 3, 1985. See id. at 12,357; see also DAVID CAY JOHNSTON, PERFECTLY LEGAL 59-70 (2003) (criticizing the income tax treatment of executive use of corporate aircraft).

(157) See 131 CONG. REC. 12,357-58 (1985) (letter from Ronald A. Pearlman, Assistant Treasury Secretary, to Senator Howard M. Metzenbaum (May 9, 1985)).

(158) Id.

(159) For flights during the first half of 2005, the announced terminal charge is $35.49, and the mileage rate for up to 500 miles is 19.42 cents per mile, 501-1500 miles is 14.80 cents per mile, and over 1500 miles is 14.23 cents per mile. See Rev. Rul. 2005-14, 2005-12 I.R.B. 749. For a long flight such as this (3,620 miles), the regulations require the computation through each range, not just the top range. See Treas. Reg. [section] 1.61-21(g)(5) (1992). As a control employee, the multiple for a large plane such as this is 400 percent. See Treas. Reg. [section] 1.61-21(g)(7) (1992). The computation is as follows: $35.49 + (4 X ((500 X 0.1942) + (1,000 X 0.1480) + (2,120 X 0.1423))) = $2,222.61. There are two passengers, and two legs of a round trip, so the total income recognized is $8,890.44.

(160) It is difficult to document an airfare as of a certain date, but based on the author's own inquiries, first-class round-trip airfare for this couple during August or September 2005 on Air France would be approximately $10,000. A private charter flight would apparently be more expensive than that.

(161) See Midland Fin. Co. v. Commissioner, 82 T.C.M. (CCH) 371 (2001); Nat'l Bancorp of Alaska, Inc. v. Commissioner, 82 T.C.M. (CCH) 369 (2001); Sutherland Lumber-Sw., Inc. v. Commissioner, 114 T.C. 197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., 2002-1 C.B. XVII.

(162) Pub. L. No. 108-357, [section] 907(a), 118 Stat. 1418, 1654-55 (2004) (amending I.R.C. [section] 274(e)(2)); see I.R.S. Notice 2005-45, 2005-24 I.R.B. 1228 (providing interim guidance on application of the amended statute).

(163) See I.R.C. [section] 132(f)(1)(B); see, e.g., I.R.S. Priv. Ltr. Rul. 95-48-017 (Dec. 6, 1995) (addressing the federal employment tax consequences of a two voucher program in which all employees received a nontaxable Voucher A redeemable only for transit passes, while employees using alternative commute modes (carpooling, bicycling, walking, or telecommuting) also received a taxable Voucher B redeemable by selected vendors that "sell equipment, services, or materials that support alternative commute modes").

(164) See I.R.C. [section] 132(f). Several private letter rulings deal with qualified parking benefits. See, e.g., I.R.S. Priv. Ltr. Rul. 2003-47-003 (Nov. 21, 2003) (approving a salary reduction arrangement providing for a $150 monthly charge for employee parking in a lot adjacent to office space leased by the employer); see also I.R.S. Chief Couns. Advisory 2001-05-007 (Feb. 2, 2001), available at 2001 WL 89575 (reimbursements for parking costs incurred at nontemporary work locations away from the employer's place of business should qualify as an excludable parking benefit). These fringe benefits can offer some traps for the employee. An employee apparently elected a monthly salary reduction amount for transportation expenses which exceeded the monthly transportation expenditures. Citing Treas. Reg. [section] 1.132-9(b), Q & A 14(a), the Service explained that the employee could not claim a refund for the unused balance upon termination of employment. See I.R.S. Information Ltr. 2003-0244 (Dec. 31, 2003), available at 2003 WL 23194377.

(165) See infra note 374 and accompanying text.

(166) I.R.C. [section] 132(j)(3)(B)(i).

(167) Although anecdotal, an advertisement in a Denver, Colorado newspaper for car salespersons included in a list of perks "likes a 401k with profit sharing" along with "likes having a company demo." DENVER POST, June 9, 2005, at 12G. A 1994 Field Service Advisory noted that an employer's offer of cash in lieu of demonstrator automobile use "seems to be evidence that the dealer is providing the automobile as compensation rather than 'primarily to facilitate the performance of services.'" I.R.S. Field Serv. Advisory (Oct. 24, 1994), available at 1994 WL 1725360.

(168) In 2001, the Service issued a comprehensive revenue procedure in question and answer format that provides guidance for compliance with the statute. See Rev. Proc. 2001-56, 2001-2 C.B. 590. For a fourteen-page example of a taxpayer's halfhearted attempts at compliance with the automobile demonstrator regulations, coupled with the sheer volume of technical requirements, see I.R.S. Tech. Adv. Mem. 98-01-002 (Jan. 5, 1998). See also I.R.S. Field Serv. Advisory (1997), available at 1997 WL 33107176 (additional informal guidance concerning demonstrator automobiles); I.R.S. Field Serv. Advisory (Oct. 24, 1994), available at 1994 WL 1725360. If the income tax exclusion does not apply, the employee must report income for the use of the automobile derived from a hypothetical lease value tied to the fair market value of the automobile. See Treas. Reg. [section] 1.61-21(d) (1992). The valuation method prescribed by the Treasury Regulations can understate the value of the automobile usage. In BMW of North America, Inc. v. United States, 39 F. Supp. 2d 445 (D.N.J. 1998), the taxpayer used an incorrect fair market value of the automobiles in applying the valuation tables, with the upshot that the court permitted the Service to use a method of valuation outside of the tables, the result of which "was to increase annual fringe benefit values of the assigned vehicles by about 50% over the values that the IRS would have derived if it applied the Table using the IRS's own fair market value numbers." Id. at 448; see also I.R.S. Tech. Adv. Mem. 98-16-007 (Apr. 17, 1998) (addressing the same issue as in BMW of North America, Inc.).

(169) See Rev. Proc. 2001-56, Q & A 12.

(170) See Treas. Reg. [section] 1.262-1(b)(5) (1972) ("The taxpayer's costs of commuting to his place of business or employment are personal expenses and do not qualify as deductible expenses.").

(171) See I.R.C. [section] 132(a)(2); Treas. Reg. [section] 1.132-1(c) (1992).

(172) Treas. Reg. [section] 1.132-4(a)(3)(i) (1989).

(173) See I.R.S. Priv. Ltr. Rul. 90-25-068 (Mar. 27, 1990).

(174) See I.R.S. Priv. Ltr. Rul. 88-26-061 (Apr. 6, 1988). The Service approved the aggregation of: (1) oil and gas exploration and production, (2) petroleum refining, wholesaling, and retailing, (3) overwater shipping, (4) oil and gas pipeline transportation, (5) natural gas pipelines services, (6) oil and gas research and engineering, and (7) manufacture and sale of petrochemicals. The Service had already approved the aggregation of the first six activities in a 1986 private letter ruling. See I.R.S. Priv. Ltr. Rul. 87-08-048 (Nov. 26, 1986). The 1988 ruling sought aggregation of the seventh petrochemical function with the other six functions. What is at stake here, particularly with the industrial product character of many of the businesses? From the ruling, the focus was apparently on employee discounts at the retail petroleum stores, described in the ruling as a ten percent employee discount on purchases of gasoline, motor oil, grease, specialties, and other petroleum products, and a fifteen percent employee discount on tires, batteries, and accessories.

(175) See Treas. Reg. [section] 1.132-4(a)(3)(iii) (1989).

(176) Id.

(177) See I.R.S. Priv. Ltr. Rul. 93-28-016 (July 16, 1993). Two-thirds of the optical goods and accessories retail stores were located in the same malls where the retail clothing outlets were located. The employer argued that having access to the same common areas of the mall satisfied the same premises requirement. The Service rejected that, but it is unclear whether the two-thirds was insufficient or whether the common area argument was the weakness. In addition, the Service concluded that the retail clothing operations and the optical goods and accessories operations would not be one line of business if offered for sale in a department store. In a 1989 private letter ruling, another taxpayer subsequently withdrew its request for a ruling that its general merchandise stores for low- to moderately-priced merchandise be aggregated with the businesses of three subsidiaries that operated specialty stores devoted to footwear, adult clothing, and children's and infants' clothing, respectively. See I.R.S. Priv. Ltr. Rul. 89-36-041 (Sept. 8, 1989). It is difficult to find any basis in the regulations for the withdrawn request.

(178) Employees of unrelated airlines can enjoy tax-free airfare on the respective airlines if reciprocal agreements between the airlines are in place. See I.R.C. [section] 132(i). The issue addressed by the accompanying discussion is to what degree employees of affiliated services, such as gift shops, are considered part of the airline for purposes of enjoying tax-free airfare under reciprocal arrangements with other airlines.

(179) See I.R.C. [section] 132(j)(5)(B).

(180) See I.R.C. [section] 132(j)(5)(C).

(181) See I.R.S. Priv. Ltr. Rul. 86-37-129 (June 19, 1986).

(182) See I.R.S. Priv. Ltr. Rul. 86-38-030 (June 20, 1986); I.R.S. Priv. Ltr. Rul. 86-38-033 (June 20, 1986).

(183) Private letter rulings can be relied upon only by the specific addressee. See I.R.C. [section] 6110(k)(3). Employees (and employers) in identical or similar circumstances, however, can draw some comfort from a favorable ruling. It is the exceptional case in which a private letter ruling is directed to the employee rather than the employer. That is predictable in most cases, given the professional fees that most taxpayers would be required to pay for such guidance. It is speculation as to whether an employee group, union, employer, etc. provided aid to the employees to establish a precedent.

(184) See I.R.S. Tech. Adv. Mem. 87-41-007 (June 5, 1987).

(185) The technical advice memorandum does not discuss the applicability of a de minimis fringe benefit. Also, the taxable value of the flight might be minimized by the regulations found at Treas. Reg. [section] 1.61-2T(g) (1992), and considered zero if at least fifty percent of the regular passenger seating (apparently confined to the jump seats) were occupied by individuals flying for the employer's business. See Treas. Reg. [section] 1.61-2T(g)(10) (1992). In a 1997 private letter ruling, the Service limited the application of these beneficial valuation rules in a similar situation. See supra notes 144-45 and accompanying text.

(186) See infra note 362.

(187) See infra notes 192-98 and accompanying text.

(188) See I.R.S. Tech. Adv. Mem. 97-17-001 (Apr. 3, 1996).

(189) "The taxpayer owns and operates two 18-hole golf courses, a golf pro shop, indoor and outdoor tennis facilities, a tennis pro shop, an athletic facility, a yacht club, and a clubhouse containing restaurant and bar facilities, meeting rooms, a ballroom, and locker rooms." Id.

(190) See Treas. Reg. [section] 1.132-1(e)(1) (1992).

(191) See Treas. Reg. [section] 1.132-8(f)(1) (1989).

(192) See H.R. REP. NO. 98-432, at 1602-03 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 1226-27.

(193) See Treas. Reg. [section] 1.132-5(n) (2001).

(194) See I.R.S. Tech. Adv. Mem. 94-01-002 (Jan. 12, 1994).

(195) Id.

(196) Id.

(197) The employer apparently represented to Congressional staff that forty to forty-five percent of the program participants were lower-level salaried employees.

(198) Id. Based on a 1995 Field Service Advisory that seems to be consistent with this case, the employer offered to agree to liability for the employment tax liability in return for a commitment from the Service that it would drop audits of the individual employees' income tax returns, who apparently were highly-compensated individuals. See I.R.S. Field Serv. Advisory (Nov. 21, 1995), available at 1995 WL 1918543. A nondocketed service advice review issued a month earlier apparently applies to a product testing program of this or another automobile manufacturer. The facts are similar, but contain some differences that suggest another taxpayer. One notable difference is that the plan permitted use by retirees, who might not be considered "employees" for purposes of the exclusion. See I.R.S. Non Docketed Serv. Advice Review 5034 (Oct. 18, 1995), available at 1995 WL 1922017.

(199) See I.R.C. [section] 132(d). The statute identifies only sections 162 and 167. Accordingly, the regulations would not treat an employer-paid, mandatory physical examination program as a working condition fringe, because the employee's potential offsetting deduction would rest under I.R.C. [section] 213. See Treas. Reg. [section] 1.132-5(a)(1)(iv). But see I.R.S. Priv. Ltr. Rul. 90-40-051 (Oct. 5, 1990) (ruling that the employer's payment of the physician costs for a mandatory driver fitness screening program can be excluded as a medical benefit under I.R.C. [section] 105(b)).

(200) Treas. Reg. [section] 1.62-2(c)(4) (2000). Prior to 1958, employees were required to report the reimbursement as income and claim a corresponding business expense deduction. See Biehl v. Commissioner, 118 T.C. 467, 476 n.9 (2002), aff'd, 351 F.3d 982 (9th Cir. 2003).

(201) See, e.g., Namyst v. Comm'r, 435 F.3d 910 (8th Cir. 2006) (affirming a decision of the Tax Court that an employer's cash reimbursements for tools were not payments under an accountable plan); I.R.S. Priv. Ltr. Rul. 95-15-019 (Apr. 14, 1995) (treating insurance company's reimbursements to employee sales agents of advertising, automobile mileage, business insurance, professional dues, postage and photocopying expenses, legal and professional services, office supplies, rent/lease, computer terminal and/or printer rental, staffing, and utilities as working condition fringe benefits and not as an accountable plan); I.R.S. Priv. Ltr. Rul. 98-22-044 (May 29, 1998) (treating another insurer's similar reimbursement plan more precisely, as an accountable plan with respect to business mileage reimbursements, and as a working condition fringe benefit with respect to the other reimbursed amounts).

(202) See Treas. Reg. [section] 1.132-5(a)(1)(v) (2001) (employee must verify that the payment is actually used for such expenses and return to the employer any unused part of the payment). The Service typically insists on submission of receipts by employees substantiating the expenditures. Compare I.R.S. Priv. Ltr. Rul. 94-43-025 (Oct. 28, 1994) (disapproving a cash employee uniform maintenance allowance where proof of use would be an employee's statement every sixty days certifying that he or she spent an amount equal to or in excess of the uniform allowance or, alternatively, execution of a statement that specifies the amount the guard spent for uniform cleaning and maintenance coupled with a requirement of return of any unspent amount or treatment as taxable wages), with I.R.S. Priv. Ltr. Rul. 91-09-041 (Mar. 1, 1991) (approving a fixed yearly allowance for uniforms and fixed allowance for dog food for police dogs who lived with officer handlers held to be a working condition fringe upon employer's representations of intention as complying with the substantiation requirements of Treas. Reg. [section] 1.132-5(a)(1)(v)).

(203) See Treas. Reg. [section] 1.132-5(a)(2)(i) (2001).

(204) Under pre-DRA 1984 doctrine, the factory roof above the workman's head was considered a nontaxable working condition. See supra notes 74-76 and accompanying text. Under DRA 1984 the workman, as a technical matter, "claims" a hypothetical business deduction for the factory roof, producing the same result. This comparison to the underlying structure of pre-DRA 1984 doctrine would be eroded if the workman would receive a benefit from the employer, but claim an offsetting hypothetical deduction with respect to a trade or business unrelated to that of the employer who provided the benefit.

(205) See I.R.S. Priv. Ltr. Rul. 89-13-008 (Mar. 31, 1989). The employee could claim an offsetting itemized deduction for the placement service. However, to benefit, the employee's amount of placement costs plus other miscellaneous itemized deductions would need to exceed a two percent of adjusted gross income floor, see I.R.C. [section] 67, and his or her total itemized deductions would need to exceed the standard deduction, see I.R.C. [section] 63(c). The 1989 private letter ruling was withdrawn in I.R.S. Priv. Ltr. Rul. 90-40-025 (Oct. 5, 1990).

(206) See Rev. Rul. 92-69, 1992-2 C.B. 51.
  [The employer] derives a substantial business benefit from the
  outplacement services that is distinct from the benefit that it would
  derive from the payment of additional compensation, because the
  services help promote a positive corporate image, maintain employee
  morale, and decrease the likelihood of wrongful termination suits in
  connection with the reduction in force.

Id. at 53.

(207) See I.R.C. [section] 132(e).

(208) See Treas. Reg. [section] 1.132-6(f) (1992).

(209) H.R. REP. No. 98-861, at 1168 (1984) (Conf. Rep.), reprinted in 1984 U.S.C.C.A.N. 1445, 1856.

(210) See Treas. Reg. [section] 1.132-6(e)(1) (1992). The regulations, for example, state that personal use of a photocopying machine is a de minimis fringe "provided that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85 percent of the use of the machine is for business purposes." Id. This limitation was added in the conference agreement. See H.R. REP. NO. 98-861, at 1171-72, reprinted in 1984 U.S.C.C.A.N. 1445, 1859-60.

(211) I.R.S. Tech. Adv. Mem. 2004-37-030 (Sept. 10, 2004).

(212) See Am. Airlines, Inc. v. United States, 40 Fed. Cl. 712, 725 (1998), aff'd in part, rev'd in part on other grounds, 204 F.3d 1103 (Fed. Cir. 2000).

(213) EMPLOYER'S TAX GUIDE, supra note 73, at 6.

(214) See I.R.S. Notice 89-110, 1989-2 C.B. 447; I.R.S. Tech. Adv. Mem. 2005-02-040 (Jan. 14, 2005) (in part referring to this de minimis rule); I.R.S. Priv. Ltr. Rul. 2000-33-011 (Aug. 18, 2000) (in part referring to this de minimis rule).

(215) See I.R.S. Non Docketed Serv. Advice Review 8757 (Sep. 17, 1991), available at 1991 WL 11239281. The Service noted that when awards exceed $50 in value additional scrutiny would be required, and awards with a fair market value of $100 or more would not be considered de minimis.

(216) I.R.C. [section] 74(a) includes in income "amounts received as prizes and awards." I.R.C. [section] 74(c) provides an exclusion from income for certain "employee achievement award[s]." An "employee achievement award" is limited to items of tangible personal property transferred for length of service achievement or safety achievement, and the value of an excludable award cannot exceed $1,600. See I.R.C. [section] 274(j)(3)(A). The employees in the nondocketed service advice review were being recognized for contributions to quality improvement, which would not qualify. The Service relied on language from the "Blue Book" for the Tax Reform Act of 1986, in connection with the discussion of section 74, to the effect that "Congress wished to clarify that the section 132(e) exclusion for de minimis fringe benefits can apply to employee awards of low value." STAFF OF JOINT COMM. ON TAXATION, 99TH CONG., GENERAL EXPLANATION OF THE TAX REFORM ACT OF 1986, at 33 (Joint Comm. Print 1987). However, the Blue Book expands the "low value" concept, stating that:
  Congress also concluded that this exclusion should be viewed as
  applicable to traditional awards (such as a gold watch) upon
  retirement after lengthy service for an employer. For example, in the
  case of an  employee who has worked for an employer for 25 years, a
  retirement gift of a gold watch may qualify for exclusion as a de
  minimis fringe  benefit even though gold watches given throughout the
  period of employment would not so qualify for exclusion. In that case,
  the award is not made in recognition of any particular achievement,
  relates to many years of employment, and does not reflect any
  expectation of or incentive for the recipient's rendering of future

Id; see Mark W. Cochran, Cadillacs, Gold Watches, and the Tax Reform Act of 1986: The Continuing Evolution of the Tax Treatment of Gifts to Employees, 5 AKRON TAX J. 27, 62 (1988) (criticizing this position).

(217) See Non Docketed Serv. Advice Review 8743 (July 30, 1991), available at 1991 WL 11239273.

(218) Judging by contemporaneous press reports, this apparently involved the Denver Colorado City Council. See Fawn Germer, Freebies Give Council Both Fun and Trouble, ROCKY MTN. NEWS, Sept. 24, 1989, at 7, available at 1989 WLNR 339252; Fawn Germer, IRS Looking Into Denver City Council Freebies, ROCKY MTN. NEWS, July 17, 1991, at 6, available at 1991 WLNR 466885.

(219) See Treas. Reg. [section] 1.132-6(d) (1992).

(220) See I.R.S. Priv. Ltr. Rul. 94-42-003 (July 11, 2004).

(221) Coupons were also distributed to employees who worked within 100 miles of the headquarters but work constraints precluded them from using the VITA site.

(222) See infra notes 229-35 and accompanying text.

(223) See supra note 209 and accompanying text.

(224) See supra notes 31-41 and accompanying text.

(225) Treas. Reg. [section] 1.132-6(d)(2)(i)(A) (1992).

(226) Id. [section] 1.132-6(d)(2)(i)(B).

(227) Id. [section] 1.132-6(d)(2)(i)(C).

(228) See I.R.S. Field Serv. Advisory (2002), available at 2002 WL 1315665 (original paragraph structure removed).

(229) See I.R.S. Tech. Adv. Mem. 91-48-001 (Nov. 29, 1991).

(230) See Treas. Reg. [section] 1.132-6T(b) (1989). The final regulations applicable to post-1988 years permit aggregate calculations, but not with respect to meal money. See Treas. Reg. [section] 1.132-6(b) (1992).

(231) To require an employer to maintain good records to qualify for an exception whose guiding principle is the avoidance of accounting which is unreasonable or administratively impracticable seems inappropriate if such records would not otherwise be required by good business practice.

(232) According to the Service, the average was probably misleading because some of the employment categories were much more likely to earn the meal allowances.

(233) The House version of DRA 1984 provided that property or services would be de minimis if their value was so small, considered in the aggregate, as to make accounting for the benefits unreasonable or administratively impracticable. The Conference Agreement stated:
  In lieu of the aggregation rule in the House bill, the conference
  agreement provides that the frequency with which similar fringe
  benefits (otherwise excludable as de minimis fringes) are provided by
  the employer to its employees is to be taken into account, among other
  relevant factors, in determining whether the fair market value of the
  property or service is so small that accounting for the property or
  service would be unreasonable or administratively impracticable.

H.R. REP. NO. 98-861, at 1171-72 (1984) (Conf. Rep.), reprinted in 1984 U.S.C.C.A.N. 1445, 1859-60.

(234) A 1994 Service memorandum on meal allowances addressed a similar situation where employees (usually production plant workers and maintenance/tradespersons) were entitled to meal allowances every time the employees worked a specified amount of overtime or performed services on a nonwork day or outside normal hours. The memorandum reached no conclusions beyond the general prescription: "Whether a benefit is provided occasionally must be determined on a case-by-case basis, taking into consideration the availability, regularity and routine with which the benefit is provided." Internal Revenue Serv., Industry Specialization Program Coordinated Issue, All Industries, Meal Allowances (Apr. 15, 1994), available at 1994 WL 150087.

(235) Treas. Reg. [section] 1.132-6(b)(1) (1992).

(236) See I.R.C. [section] 132(e)(2)(B).

(237) Direct operating costs do not include the costs of a manager whose services are not performed primarily on the premises of the eating facility, nor apparently the cost of rent, utilities, and other facilities costs. Under pre-DRA 1984 law, the Service maintained that an employee would recognize income for the bargain element of employer cafeteria meals if the employee was not required to pay for the meals whether or not he or she accepted or declined the meals such that section 119 applied. See, e.g., I.R.S. Tech. Adv. Mem. 77-40-010 (June 30, 1977).

(238) See I.R.S. Field Serv. Advisory (Nov. 18, 1996), available at 1996 WL 33321195.

(239) Treas. Reg. [section] 1.132-7(b)(1)(ii) (1989).

(240) I.R.S. Field Serv. Advisory (Nov. 18, 1996), available at 1996 WL 33321195.

(241) See infra note 374 and accompanying text. This amount apparently speaks to section 119, not to the section 132 de minimis fringe.

(242) See Boyd Gaming Corp. v. Commissioner, 74 T.C.M. (CCH) 759 (1997), rev'd, 177 F.3d 1096 (9th Cir. 1999), acq., 1999-2 C.B. XVI. In an earlier decision involving this and another taxpayer, the Tax Court decided cross-motions for partial summary judgment that refined the doctrinal basis of the later case. See Boyd Gaming Corp. v. Commissioner, 106 T.C. 343 (1996).

(243) The eighty percent limitation was added to the Code by the Tax Reform Act of 1986. See Pub. L. No. 99-514, [section] 142(b), 100 Stat. 2085, 2118 (1986). The Omnibus Budget Reconciliation Act of 1993 decreased this amount to fifty percent for taxable years beginning after December 31, 1993. See Pub. L. No. 103-66, [section] 13,209(a), 107 Stat. 312, 469 (1993).

(244) See I.R.C. [section] 274(n)(2)(B).

(245) Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in 26 U.S.C.).

(246) Id. [section] 5002(a) (adding new I.R.C. [section] 119(b)(4)).

(247) Id. [section] 5002(b) (the amendment applies to tax years beginning before, on, or after July 22, 1998).

(248) See Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096, 1100 (9th Cir. 1999).

(249) "[F]or reasons of security and logistics, [the taxpayers] require their employees to stay on the business premises throughout the work shift." Id. at 1097.

(250) This issue was probably of interest to many casino operators. A 1998 technical advice memorandum, apparently dealing with another casino (because of footnote nine referring to the Boyd Gaming Corp. litigation) involves an in-depth analysis of the section 119 issue in the context of required employment taxes. The Service concluded that the exclusion did not apply despite the casino's stay-on-premises rule as well as other claims of substantial noncompensatory business reasons. See I.R.S. Tech. Adv. Mem. 98-41-001 (Oct. 9, 1998); see also I.R.S. Tech. Adv. Mem. 98-41-002 (Oct. 9, 1998) (another casino meals case, and not Boyd Gaming Corp. due to footnote eleven); I.R.S. Tech. Adv. Mem. 98-29-001 (July 17, 1998) (another casino meals case, and not Boyd Gaming Corp. due to footnote eleven).

(251) See I.R.C. [section] 132(j)(4); Treas. Reg. [section] 1.132-1(e) (1992).

(252) See I.R.S. Priv. Ltr. Rul. 90-29-026 (July 20, 1990).

(253) The Service was construing Treas. Reg. [section] 1.132-1(e)(4) (1989). See also I.R.S. Priv. Ltr. Rul. 94-30-029 (July 29, 1994) (favorable ruling on joint employer lessees of an athletic facility).

(254) See I.R.C. [section] 6110(k)(3).

(255) I.R.C. [section] 132(j)(4)(B)(iii).

(256) See I.R.S. Field Serv. Advisory (June 23, 1994), available at 1994 WL 1866293. A subsequent field service advisory apparently pertains to this case, and it repeats the position of the regulations that access to the facility cannot be made available to the general public. See I.R.S. Field Serv. Advisory (May 27, 1997), available at 1997 WL 33314813.

(257) See Treas. Reg. [section] 1.132-1(e)(1) (1992).

(258) See Treas. Reg. [section] 1.132-1(e)(5) (1992).

(259) 130 CONG. REC. H 7085, 7112 (daily ed. June 27, 1984) (statement of Rep. Dan Rostenkowski, Chairman, House Comm. on Ways and Means), reprinted in 1984 U.S.C.C.A.N. 2140, 2143.

(260) Id. at S 8373 (statement of Sen. Robert J. Dole, Chairman, S. Comm. on Fin.), reprinted in 1984 U.S.C.C.A.N. 2140, 2168.

(261) See I.R.S. News Release IR-84-108 (Oct. 16, 1984).

(262) Alice G. Abreu, Untangling Tax Reform: Simple Taxes, Complex Choices, 33 SAN DIEGO L. REV. 1355, 1403 n.140 (1996).

(263) Ronald W. Blasi, Sweeping Changes in Tax Treatment of Fringe Benefits Create Opportunities and Problems, 13 TAX'N FOR LAW. 332, 339 (1985).

(264) See Simon, supra note 87, at 912.

(265) Sophisticated taxpayers, and their highly-compensated advisors, may prefer a complex system, as well as other parties. See, e.g., Steve R. Johnson, The E.L. Wiegand Lecture: Administrability-Based Tax Simplification, 4 NEV. L.J. 573, 579 (2004) (discussing competing interests in the search for simplification). For a typical discussion of tax policy goals such as simplicity and practicality, equality, fairness, and neutrality published shortly after the enactment of DRA 1984, see Edward Yorio, The President's Tax Proposals: A Major Step in the Right Direction, 53 FORDHAM L. REV. 1255 (1985).

(266) See supra note 6 and accompanying text.

(267) For a listing of a small slice of the voluminous scholarship identifying the nature and causes of complexity in the U.S. taxation system, see Deborah L. Paul, The Sources of Tax Complexity: How Much Simplicity Can Fundamental Tax Reform Achieve?, 76 N.C. L. REV. 151, 153 n.3 (1997).

(268) Fairness is often measured in terms of horizontal or vertical equity. See infra notes 351, 353.

(269) Paul, supra note 267, at 157.

(270) Id.

(271) Id. at 158.

(272) See supra note 105.

(273) See supra notes 124-70 and accompanying text.

(274) DRA 1984 enacted current I.R.C. [section] 117(d), which provides an exemption for tuition reductions for faculty and certain family members. That exemption is beyond the scope of this article.

(275) See Wendy Gerzog Shaller, The New Fringe Benefit Legislation: A Codification of Historical Inequities, 34 CATH. U. L. REV. 425 (1985).

(276) See Dep't of the Treasury, Notices, Submission for OMB Review, 68 Fed. Reg. 37,202 (June 23, 2003).

(277) See supra notes 25-83 and accompanying text.

(278) See supra notes 44-45 and accompanying text.

(279) See supra notes 124-70 and accompanying text.

(280) See supra notes 242-50 and accompanying text.

(281) See supra note 107.

(282) See, e.g., John R. Gardner & Benjamin R. Norman, Effects of the Shift in the Burden of Proof in the Disposition of Tax Cases, 38 WAKE FOREST L. REV. 1357, 1372-74 (2003) (discussing theory that expected outcomes of litigation impact whether a case is filed).


(284) See infra notes 290-324 and accompanying text.

(285) AUDIT STATISTICS, supra note 283.

(286) See Paul, supra note 267, at 171-76.

(287) See infra notes 373-75 and accompanying text.

(288) See supra notes 125-43 and accompanying text.

(289) See infra notes 349-95 and accompanying text.

(290) See supra notes 106-23 and accompanying text.

(291) See AUDIT STATISTICS, supra note 283.


(293) Id. at 2.

(294) Id.

(295) Id.

(296) Id. at 7.

(297) Id.

(298) Id. at 8.

(299) Id. at 9.

(300) Id. at 9-10.

(301) Id. at 11.

(302) Id.

(303) Id. at 12.

(304) See I.R.S. News Release IR-85-25 (Mar. 13, 1985).

(305) See supra notes 124-70 and accompanying text.

(306) JOHNSTON, supra note 156, at 67-68.

(307) See IRS Boosts Scrutiny of Exec Pay, L.A. TIMES, Mar. 3, 2005, at C4.

(308) See Internal Revenue Serv., Executive Compensation-Fringe Benefits Audit Techniques Guide (02-2005),,,id=134943,00.html (last visited May 31, 2005) [hereinafter Service Audit Guide].

(309) See Internal Revenue Serv., Stock Based Compensation Audit Techniques Guide (02-2005),,,id=134892,00.html (last visited July 31, 2005).

(310) See Internal Revenue Serv., Section 162(m) Audit Techniques Guide (02-2005),,,id=134874,00.html (last visited July 31, 2005).

(311) See Internal Revenue Serv., Golden Parachute Audit Techniques Guide (02-2005),,,id=134890,00.html (last visited July 31, 2005).

(312) See Internal Revenue Serv., Nonqualified Deferred Compensation Audit Techniques Guide (02-2005).,,,id=134878,00.html (last visited July 31, 2005).

(313) See Internal Revenue Serv., Split Dollar Life Insurance Audit Technique Guide (03-2005),,,id=136548,00.html (last visited July 31, 2005).

(314) See Internal Revenue Serv., Transfers of Compensatory Stock Options to Related Persons Audit Techniques Guide (02-2005),,,id=134893,00.html (last visited July 31, 2005).

(315) Service Audit Guide, supra note 308, at 2.

(316) Id.

(317) The regulations provide that the cost of security measures for transportation can be excluded if certain conditions are satisfied, including a recommendation of such measures by a security study. See Treas. Reg. [section] 1.132-5(m) (2001). It is assumed that although the regulations do not address it, this working condition fringe exclusion can be expanded to an employee's living quarters as well. See, e.g., Marianna G. Dyson, The Fringe Benefit Rules Applicable to Protecting Executives, 53 TAX EXECUTIVE 449, 452 (2001).

(318) Service Audit Guide, supra note 308, at 5.

(319) Id. at 6. Reportedly, Universal Studios spent in excess of $1.7 million to build a screening room at the CEO's home. With the CEO's departure, he was supposed to purchase it from the company or Universal would remove it. See Adam Bryant, A Little Icing on Top, NEWSWEEK, Apr. 12, 1999, at 54.

(320) See supra notes 149-162 and accompanying text.

(321) Service Audit Guide, supra note 308, at 7.

(322) The employer's deduction for employee personal use of aircraft was, however, a situation that demanded a statutory fix. See supra notes 159-62 and accompanying text.

(323) Noncash fringe benefits will generally fall into the "other compensation" category that must be disclosed in proxy materials if the aggregate amount of such "perquisites and other personal benefits" for an executive officer exceeds the lesser of $50,000 or ten percent of the cash compensation paid to such executive. If the amount of a particular fringe benefit exceeds twenty-five percent of total other compensation paid to a named executive officer the nature of the item must be disclosed in a footnote. See 17 C.F.R. [section] 229.402 (2005). On February 8, 2006, the Securities and Exchange Commission proposed extensive amendments to the disclosure requirements for executive and director compensation, including a reduction to $10,000 of the minimum amount of perquisites and other personal benefits that must be disclosed. See Proposed Rules, Securities and Exchange Commission, 71 Fed. Reg. 6542 (Feb. 8, 2006).

(324) John C. Partigan, Perks: What 2005 Proxy Statements Reveal, FIN. EXECUTIVE, July-Aug. 2005, at 22, 23. The author's table is not fully explained, but the reported percentages are apparently the percent of companies disclosing a particular item, as opposed to the percentage of total reported other compensation that such item represents. For an interesting argument that perks can discourage improper employee behavior, see M. Todd Henderson & James C. Spindler, Corporate Heroin: A Defense of Perks, Executive Loans, and Conspicuous Consumption, 93 GEO. L.J. 1835 (2005).

(325) See, e.g., Hale E. Sheppard, Perpetuation of the Foreign Earned Income Exclusion: U.S. International Tax Policy, Political Reality, and the Necessity of Understanding How the Two Intertwine, 37 VAND. J. TRANSNAT'L L. 727, 744 (2004) (arguing that the benefit of the section 911 foreign earned income exclusion is captured by corporate employers to reduce overseas wages); see also Jeffrey S. Zax, Fringe Benefits, Income Tax Exemptions, and Implicit Subsidies, 37 J. PUB. ECON. 171 (1988) (comparing models where the tax subsidy accrued entirely to the employer, or alternatively, to the employee); cf. Mary E. O'Connell, Contingent Lives: The Economic Insecurity of Contingent Workers, 52 WASH. & LEE L. REV. 889, 912 (1995) (suggesting that the subsidy is enjoyed by the employee, increasing with the worker's income tax rate).

(326) See, e.g., RICHARD SCHMALBECK & LAWRENCE ZELENAK, FEDERAL INCOME TAXATION 207-08 (2004) (summarizing the deadweight loss argument).

(327) See infra notes 349-95 and accompanying text.

(328) See supra note 325 and accompanying text.

(329) Some might argue that permitting a business deduction for any first class or business class premium airfare, for example, is excessive as a matter of policy and should be denied. The Code already includes some restrictions of this nature. See, e.g., I.R.C. [section][section] 274(a)(3) (no deduction for club dues), (k)(1) (no deduction for meals that are lavish or extravagant under the circumstances), (n) (fifty percent limit on meal and entertainment expenses); 280F (limitation on depreciation for "luxury" automobiles).

(330) See, e.g., SCHMALBECK & ZELENAK, supra note 326, at 97-99 (summarizing surrogate taxation).

(331) See, e.g., HUGH J. AULT & BRIAN J. ARNOLD, COMPARATIVE INCOME TAXATION: A STRUCTURAL ANALYSIS 174-76 (2d ed. 2004) (summarizing the Australian employer fringe benefits tax); Lee Burns, Commentary, 53 TAX L. REV. 39, 40 (1999) (an employer tax on fringe benefits was adopted in New Zealand, Australia, Malawi, Lesotho, Estonia, and the Philippines).

(332) See supra notes 106-23 and accompanying text.

(333) See Rev. Rul. 55-555, 1955-2 C.B. 20.

(334) Treas. Reg. [section] 1.132-6(a) (1992).

(335) See supra notes 67-83, 199-206 and accompanying text.

(336) See Treas. Reg. [section] 1.132-5(a)(vi) (2001) (the two percent limitation of I.R.C. [section] 67(a) is not considered for this purpose).

(337) See Shaller, supra note 275, at 426.

(338) She would include a further limitation "other than items which are lavish or extravagant under the circumstances." See Simon, supra note 87, at 949.

(339) Id. at 950-51.

(340) See Treas. Reg. [section] 1.132-5(a)(v) (2001).

(341) See, e.g., Rev. Rul. 2005-52, 2005-35 I.R.B. 423 (cash allowances to mechanics for tool costs not substantiated); Rev. Rul. 2002-35, 2002-1 C.B. 1067 (cash allowances to pipeline workers for rig costs not substantiated).

(342) See, e.g., I.R.S. Notice 2005-59, 2005-35 I.R.B. 443 (deemed substantiation rules for pipeline workers); Rev. Proc. 2002-41, 2002-1 C.B. 1098.

(343) See supra notes 125-43 and accompanying text.

(344) See supra notes 149-62 and accompanying text.

(345) "If the devil is in the details, then the tax base is the devil in any tax system, for the complexity of a tax system is generally proportional to the difficulty of determining its base." Abreu, supra note 262, at 1356.

(346) The so-called "Armey Flat Tax" would exclude noncash fringe benefits from the employee's income, but deny a deduction to the employer. Id. at 1372. The so-called "Nunn-Domenici Tax" also addresses fringe benefits, excluding some from the employee's income and potentially including others. Id. at 1374. Both proposals would need to identify what types of noncash benefits are subject to treatment, so the classification issue under current law remains an issue. Id. at 1402-03. Classification issues aside, this is not to say that tax proposals would not change the benefits calculus in employee versus employer negotiations. Professor Abreu, for example, proposes that the Armey Flat Tax would create an employer preference for cash wages (which would be deductible) over noncash compensation (which would not be deductible). Id. at 1389-90. For recent discussions of various alternative tax base proposals, see Deborah A. Geier, Incremental Versus Fundamental Tax Reform and the Top One Percent, 56 SMU L. REV. 99 (2003); Daniel S. Goldberg, E-Tax: Fundamental Tax Reform and the Transition to a Currency-Free Economy, 20 VA. TAX REV. 1 (2000); David A. Weisbach, Does the X-Tax Mark the Spot?, 56 SMU L. REV. 201 (2003); CONG. RES. SERV., NEW TAX PROPOSALS: FLAT, VAT, AND VARIATIONS, CRS 92-386 (1992), available at 1992 WL 699715; CONG. RES. SERV., FLAT TAX PROPOSALS AND FUNDAMENTAL TAX REFORM: AN OVERVIEW, CRS IB95060 (1998), available at 1998 WL 845787.

(347) A retail sales tax on goods or services, could, of course, be circumvented through employee discounts, no-additional-cost services, de minimis fringes, and so forth.

(348) See AULT & ARNOLD, supra note 331, at 174.

(349) The number of articles that at least refer to this phrase defy a thorough list. For the leading summary of the competing arguments, see Boris I. Bittker, A "Comprehensive Tax Base" as a Goal of Income Tax Reform, 80 HARV. L. REV. 925 (1967).

(350) For example, the Joint Committee on Taxation's explanation of the Tax Reform Act of 1986 claimed that "[w]ith the adoption of ... [the passive activity loss] restrictions, the elimination of other preferences, and other base-broadening provisions, the Act sharply reduces the top individual tax rate from 50 percent to 28 percent, while leaving the tax burden of the highest income groups essentially unchanged." STAFF OF JOINT COMM. ON TAXATION, 100TH CONG., GENERAL EXPLANATION OF THE TAX REFORM ACT OF 1986, at 7 (Joint Comm. Print 1987).

(351) This is simply the principle "that individuals with similar incomes pay similar amounts of tax." Id. The receipt of tax-free fringe benefit income by some employees and taxable compensation income by others may violate this principle, but depending upon the nature of the fringe benefit in question, there is uncertainty as to whether the two situations are comparable enough to make this claim.

(352) See supra notes 325-27 and accompanying text.

(353) This concept is also referred to as "vertical equity." If an otherwise excluded item is enjoyed by upper income taxpayers more widely than lower income taxpayers, taxing that item will increase the effective rate of tax applied to upper income taxpayers.

(354) See, e.g., Simon, supra note 87, at 922-47 (proposing that section 83 be applied to most fringe benefits).

(355) See supra note 11.

(356) See supra notes 223-35 and accompanying text.

(357) In a 1993 private letter ruling requested by an airline, the Service ruled that the airline was not required to file information returns in connection with awards earned by travelers under its frequent flyer program. However, the Service did note that employees could realize taxable gross income if the employee received a cash award in connection with employer-purchased tickets. The ruling does not directly address the income tax treatment of an employee's receipt of a free ticket on account of employer-purchased travel. See I.R.S. Priv. Ltr. Rul. 93-40-007 (Oct. 8, 1993). In 1995, the Service indicated that employee frequent flier awards could produce taxable income. See I.R.S. Tech. Adv. Mem. 95-47-001 (Nov. 24, 1995). It later announced, however, that it would not pursue this issue if the employee does not convert the awards to cash. See Ann. 2002-18, 2002-1 C.B. 621. One taxpayer did manage to produce taxable income by selling the awards to his employer (a corporation controlled by him and his wife) in a convoluted scheme. The court did not reach the issue of whether the accumulation of frequent flyer miles constitute gross income, and it instead focused on the taxpayer's sale of property in which he had a basis of zero. See Charley v. Commissioner, 91 F.3d 72 (9th Cir. 1996). The treatment of frequent flyer awards is beyond the scope of this article. For a concise summary of the practical reporting and enforcement issues presented if such awards were taxable, see SCHMALBECK & ZELENAK, supra note 326, at 218. Members of Congress earn frequent flyer miles on trips that are paid for by private parties or the federal government, and accounting for those benefits has drawn some criticism. See Larry Margasak & Sharon Theimer, Congress' Frequent Flying in Question, DAILY CAMERA, July 18, 2005, at B1.

(358) As a practical matter it would be difficult to enforce this unless employers would reimburse only employer-linked credit cards and not personal cards. That seems like a very awkward requirement to impose on taxpayers.

(359) See Consolidated Omnibus Budget Reconciliation Act of 1985, Pub. L. No. 99-272, [section] 13207(b)(1), (c)(1), 100 Stat. 82, 319-21 (1986); Tax Reform Act of 1986, Pub. L. No. 99-514, [section][section] 1114(b)(5), 1151(e)(2)(A), (g)(5), 1853(a), 1899A(5), 100 Stat. 2085, 2451, 2506-07, 2870, 2958; Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, [section][section] 1011B(a)(31)(B), 6066(a), 102 Stat. 3342, 3488, 3702-03; Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, [section][section] 7101(b), 7841(d)(7), (d)(19), 103 Stat. 2106, 2304-05, 2428-29; Energy Policy Act of 1992, Pub. L. No. 102-486, [section] 1911 (a)-(c), 106 Stat. 2776, 3012-14; Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, [section][section] 13101(b), 13201(b)(3)(F), 13213(d), 107 Stat. 312, 420, 459, 474-75; Taxpayer Relief Act of 1997, Pub. L. No. 105-34, [section][section] 970, 1072, 111 Stat. 788, 897, 948; Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, [section] 9010, 112 Stat. 107, 507-08 (1998); Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, [section] 665, 115 Stat. 38, 143; Military Family Tax Relief Act of 2003, Pub. L. No. 108-121, [section] 103(a), (b), 117 Stat. 1335, 1337-38; Working Families Tax Relief Act of 2004, Pub. L. No. 108-311, [section] 207(13), 118 Stat. 1166, 1177.

(360) An expanded exclusion not discussed in the text is a benefit for military families with respect to base closure aid, see I.R.C. [section] 132(n), added by the Military Family Tax Relief Act of 2003.

(361) Consolidated Omnibus Budget Reconciliation Act of 1985 [section] 13207(a)(1).

(362) See, e.g., Tax Reform Act of 1986 [section]1114(b)(5)(B) (adding current I.R.C. [section] 132(j)(6), providing that air cargo transportation is the same service as passenger transportation). This amendment would permit a Federal Express employee, for example, to fly on commercial passenger airlines if there is a reciprocal arrangement. It could also permit Federal Express employees to hitch personal rides on Federal Express cargo planes as a no-additional-cost fringe. This responded to a Service private letter ruling finding that such rides produced taxable gross income. See supra notes 184-86 and accompanying text.

(363) See Treas. Reg. [section]1.132-6T(d)(1) (1989) ($15 monthly de minimis exclusion for transit passes).

(364) I.R.C. [section]132(h)(4) as enacted by DRA 1984 had provided that "parking provided to an employee on or near the business premises of the employer" was a working condition fringe. That provision was found at I.R.C. [section] 132(i)(4) at the time of its elimination by the Energy Policy Act of 1992 which included such parking as part of a broader 'qualified transportation fringe" in current I.R.C. [section] 132(f)(1).

(365) See Energy Policy Act of 1992, Pub. L. No. 102-486, [section] 1911(a), (b), 106 Stat. 2776, 3012-14 (adding current I.R.C. [section] 132(a)(5), (f)). The exclusion for transportation provided to employees in a "commuter highway vehicle" (essentially a van) provided by I.R.C. 132(f)(1)(A) had been previously provided by I.R.C. [section] 124 that was repealed by Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, [section] 11801(a)(9), 104 Stat. 1388, 1388-520.

(366) Taxpayer Relief Act of 1997, Pub. L. No. 105-34, [section] 970(a), 111 Stat. 788, 897 (adding the last sentence of current I.R.C. [section] 132(e)(2)). This was a factor in the casino meals litigation discussed at supra notes 242-50 and accompanying text.

(367) Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, [section] 9010(a)(1), 112 Stat. 107, 507 (amending current I.R.C. [section] 132(f)(4)). The constructive income issue remains an abiding concern in other compensation contexts. See, e.g., I.R.S. Priv. Ltr. Rul. 2006-01-005 (Jan. 6, 2006) (employees who do not participate in a leave donation program will not have gross income merely because they have the ability to participate in the program).

(368) See supra note 164.

(369) See Transportation Equity Act for the 21st Century, [section] 9010(b)(2)(A)-(B), (c)(1) (in tandem establishing the current dollar limits in I.R.C. [section] 132(f)(2)).

(370) See infra note 374 and accompanying text.

(371) Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, [section] 665(a), (b), 115 Stat. 38, 143 (adding current I.R.C. [section]132(a)(7), (m), respectively).

(372) One approach is to place overall caps on the amount of excludable fringe benefits, or a single per employee cap on all fringe benefits, so that employees could pick and choose among benefits in a cafeteria style. See, e.g., 131 CONG. REC. 1105, 1105 (extension of remarks of Rep. Willis D. Gradison, Jr. suggesting cap limits on each fringe or a single cap on the total value of all fringes offered to each employee).

(373) See 1984 H.R. REP. No. 98-432, at 1109 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 784.


(375) Id. One proposal short of repealing the exclusion would tax all employer-paid health insurance premiums but provide a refundable tax credit for twenty percent of the premiums, with the eligible premiums capped at $350 and $170 per month for family coverage and individual coverage, respectively. This was projected to save $112.2 billion annually by fiscal year 2002. See U. S. GEN. ACCOUNTING OFFICE, GAO/OCG-97-2, ADDRESSING THE DEFICIT: BUDGETARY IMPLICATIONS OF SELECTED GAO WORK FOR FISCAL YEAR 1998, at 334 (1997), available at

(376) See supra note 7 and accompanying text.

(377) See Accountants, Kings Among Graduates, CHINA DAILY, June 7, 2005, available at 2005 WLNR 9026560.

(378) See, e.g., Doug McPherson, Frugal Employers Choose Pay-Less Perks, DENVER POST, Apr. 17, 2005, at G1.

(379) These may qualify as a working condition fringe if related to the employer's trade or business, be excluded if part of an educational assistance plan, see I.R.C. [section] 127, be deductible as a trade or business expense, see Treas. Reg. [section] 1.162-5 (1967), or be eligible for a tuition credit, see I.R.C. [section] 25A.

(380) I.R.C. [section] 129 permits up to a $5,000 exclusion from income for employer-provided dependent care assistance. Amounts excluded from income are not eligible for the dependent care credit of I.R.C. [section] 21. See I.R.C. [section] 129(e)(7). Arguably, amounts in excess of the exclusion could be treated as amounts deemed paid by the employee that would be eligible for the dependent care credit.

(381) If this is just a matter of availability with no employer subsidy, this should not be a taxable benefit.

(382) This can qualify as a de minimis fringe benefit under the regulations if the meal was necessary to permit the employee to work overtime. See supra notes 223-35 and accompanying text. If the practice is instead taking home "leftovers," it would seem that a de minimis fringe benefit is still appropriate if the practice is relatively infrequent.

(383) This might qualify as a working condition fringe.

(384) Although not a working condition fringe, this could be a de minimis fringe benefit.

(385) If this is just a matter of availability with no employer subsidy, this should not be a taxable benefit.

(386) This might qualify as part of an employer health plan, excluded under I.R.C. [section] 106. See supra note 199.

(387) The employer's deduction, if any, might be scrutinized by the Service. See, e.g., Trebilcock v. Commissioner, 64 T.C. 852 (1975), acq., 1976-2 C.B. 1, aff'd, 557 F.2d 1226 (6th Cir. 1977) (disallowing employer's deduction for payments to a minister for services rendered to employees).

(388) See Troy E. Renck, Teams Percolating to Please Players, DENVER POST, Mar. 15, 2005, at 1D.

(389) Id.

(390) Id.

(391) See supra notes 120-22 and accompanying text (discussing a case addressing round-trip tickets for Alaskan oil field workers).

(392) Renck, supra note 388.

(393) An agent was quoted that "[y]oung guys always had roommates ... and eventually you had veterans who wanted their (privacy)." Id. Working condition fringes, like de minimis fringe benefits, have no general nondiscrimination requirement.

(394) Id. The season tickets may qualify as a no-additional-cost fringe for teams with poor attendance, but would be taxable if the employer would suffer foregone revenue or the entertainment is for another sport. The uniform number is one of those tax-free workplace intangibles in an organization, much like a coveted corner office.

(395) See supra notes 290-324 and accompanying text (discussing anecdotes concerning taxpayer compliance in the area of executive compensation).
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