Overtime Inconvenience Allowances Are De Minimis Fringe Benefits

The Court of Federal Claims recently issued a decision involving a multi-million dollar de minimis fringe benefits case in favor of an employer, International Business Machines (IBM). The case is International Business Machines Corp. v. United States.

The Facts

In 1985 and 1986, IBM paid meal allowances to employees who worked outside their regularly scheduled hours.   Under IBM´s overtime inconvenience allowances (OTIA) program, each employee was entitled to a meal allowance of $3.25 whenever the employee reported to work at least two hours early or stayed at work at least two hours beyond his or her normal quitting time. Meal allowances were also provided for extended overtime and for weekend and holiday work. The program´s purpose was to facilitate overtime work by easing the burden of additional meal expenses.

IBM was able to track more than three million individual data records for the OTIA allowances received by more than 85,000 employees in 1985 and 1986. According to that data, IBM paid OTIA allowances of more than $3 million to its employees in each year. Approximately 90 percent of the employees who received OTIA payments in 1985 and 1986 received fewer than 60 payments per year, or less than $195 a year in overtime meal money. Approximately 700 employees (between 0.6 percent and 0.7 percent of the entire workforce) received more than 150 meal allowances, or more than $485 each year.   Treating these amounts as de minimis fringes, IBM excluded the OTIA allowances from gross income and from wages for purposes of FICA, FUTA, income tax withholding and Form W-2 reporting.

At Issue

At issue was whether IBM´s OTIA payments constituted de minimis fringe benefits under Code Section 132.   IBM considered the payments to be "occasional meal money" and thus de minimis fringes within the meaning of Temp. Treas. Reg. §1.132-6T.   The IRS argued that the term "occasional" in the temporary regulations meant "infrequent" and that evidence showed that the OTIA payments were made too frequently - at least to some employees - for all of the payments to qualify as de minimis fringe benefits. IBM argued that the temporary regulations did not establish a specific frequency limit on either the number or the value of occasional meal allowances and, therefore, there was no such limit under the temporary regulations.

IBM also argued that it had no notice of its withholding obligations and therefore could not be liable for payroll taxes. IBM asserted that under the standard set by the Supreme Court in Central Illinois Public Service Company v. U.S., 435 U.S. 21 (1978), employers are not liable for withholding payroll taxes if the IRS fails to give appropriate notice of the withholding requirement.

The Decision

In granting summary judgment in favor of IBM, the Court of Federal Claims found that the government´s construction of its regulation was without support and cannot be relied upon to overcome the specific language of the temporary regulation. The plain meaning of the word "occasional" did not infer a frequency limit, the court reasoned. The final regulations now establish a "frequency" test and expressly state the meal money payments based upon an employee´s hours of extra work are taxable fringes. Although noting that the final rule illustrates what the government apparently hoped to accomplish with the temporary regulations, the court refused to read into the temporary rules the requirements that the government did not put in place until the 1989 adoption of final regulations.

The court also ruled in favor of IBM on the matter of its liability for payroll taxes and whether the government provided adequate notice. The court held that IBM´s belief was reasonable under the payroll tax rules (and, therefore, the OTIA payments were excludable from payroll taxes) because the government never provided IBM with any "notice" of the limit on the number or value of occasional meal allowances covered under the temporary regulation. The court noted that without any guidance regarding a possible limit on when overtime payments would be deemed as other than occasional, there is nothing that could have led IBM to conclude that its OTIA payments had to be individually examined to determine if the payment would qualify for the exemption. Thus, the court said, "even if IBM had looked at each payment, it would not have known when, if ever, it had crossed the line."

What This Means

Although International Business Machines is a case of first impression, it has no specific precedential value since the case turns on the application of the temporary regulations in effect between 1985 and 1988.  

Notwithstanding the court´s own attempts to lessen the impact of its decision, the case is important because it provides a glimpse of how the Court of Federal Claims may analyze de minimis fringe benefits generally, as well as how it will apply the reasonable belief and Central Illinois standards.  

The IBM decision clearly illustrates that the aggregate value of a de minimis fringe was not tied to a specific dollar threshold. Although the IRS may continue to seek to establish a low dollar threshold for de minimis fringes, the decision illustrates that there is no specific limit.   In fact, if there were such limits, support now exists for pushing the standard far higher than that envisioned by the IRS, as a number of IBM employees received meal allowances of more than $485 in 1985 and 1986 dollars.

The decision has added importance because the Central Illinois case has often been asserted but less frequently applied in favor of taxpayers to minimize or avoid past payroll withholding obligations.   In IBM, the court established and extended the application of Central Illinois from the application of payroll taxes to fringe benefits.

At a Glance

Case: International Business Machines Corp. v. United States, 87 AFTR 2d Par. 2001-389 (Jan. 9, 2001)

At Issue: Whether IBM´s overtime inconvenience allowance payments constituted de minimis fringe benefits under Code Section 132.

From Employer''s Guide to Fringe Benefit Rules, ©Thompson Publishing Group, Inc

David R. Fuller is a partner in the tax department of McDermott, Will & Emery´s Washington, D.C. office. He is a contributing editor of the Guide.