The IRS appears to be drawing the line on employers´ classification of some perks as "too small to worry about."
Under the Internal Revenue Code, de minimis fringes are excluded from an employee´s (or other service provider´s) income and wages. Consequently, the value of the item is not subject to withholding of income, FICA or FUTA taxes.
As might be expected, the IRS is a little more hesitant to classify something as de minimis than are employers and their employees. At the same time, this classification is becoming increasingly relevant as employers think of new and interesting ways to keep employees happy without incurring the costs of raising salaries.
Treasury regulations define a de minimis fringe benefit as "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." In other words, the benefit is too small to worry about. The regulations exclude cash or cash equivalents (with the exception of certain meal money or transportation fare) from being de minimis on the theory that it is not unreasonable or administratively impracticable to account for such items.
After accounting for the frequency with which the item is offered (either on an individual employee basis or a workforce basis), the question becomes whether the item is "small" enough. Until recently, the IRS repeatedly refused to answer that question, always indicating that it was a matter of facts and circumstances. The regulations provide some helpful examples of de minimis fringes that have guided employers and arguably permitted them to move the de minimis line upwards as the typical fair market value of the listed items increased. For example, the regulations provide that occasional theater or sporting event tickets are examples of de minimis fringe benefits.
This regulatory example implies an ability to define "de minimis" by something other than an amount below a certain fixed ceiling and acknowledges that what is considered de minimis today may be different from what was considered de minimis 10 to 15 years ago. Tax advisors could provide advice regarding how to determine this moving "ceiling" under specific facts and circumstances.
Within this framework, the IRS traditionally refused to set a formal de minimis line of demarcation, and declined to say publicly whether a particular amount would or would not qualify as such. The IRS has now changed course and has recently stated in two memoranda that the particular amounts at issue were not de minimis. These memoranda only represent the IRS´ informal position.
CCA 200108042
On Feb. 26, the IRS released Chief Counsel Advice (CCA) Memorandum 200108042 (Dec. 20, 2000) specifically addressing the de minimis fringe benefit exclusion. The IRS national office issued the CCA to the IRS Employment Tax Program Manager, signifying that the IRS field offices are likely to follow the conclusion set forth in the nonbinding memorandum in handling cases in the field.
The question prompting the CCA was whether a non-monetary recognition award with a fair market value of $100 qualifies as de minimis fringes. No facts were provided. The office of Chief Counsel recited the regulations including examples (although the CCA left out the word "sporting" in listing the example for tickets for sporting and entertainment events) and provided the following opinion: "Thus, if an employer distributes turkeys, hams or other merchandise of nominal value to its employees at holidays, the value of these items would not constitute salary or wages. Conversely, non-monetary achievement awards having a fair market value of $100 would not qualify as de minimis fringes and, consequently, would constitute salary and wages."
In other words, the Chief Counsel´s office appears to be staking out a "public" position for the first time that $100 is not "nominal" and therefore not de minimis. The office takes this unqualified position seemingly without regard to the regulatory examples of occasional sporting or entertainment tickets or occasional cocktail parties and, perhaps more importantly, without regard to whether accounting for the item at issue would be unreasonable or administratively impracticable.
TAM 200030001
An earlier Technical Advice Memorandum (TAM) issued by the Chief Counsel´s office better illustrates that this new position may disregard the administrative difficulties in accounting for certain benefits that may have a value of $100 or more. In TAM 200030001, released Aug. 2, 2000, the Chief Counsel´s office addressed the deduction available to a taxpayer for the food and beverages provided at various conferences held for its broker representatives.
The TAM concluded that the deduction disallowance rules applied to the food and beverages, in part, because they did not qualify for the de minimis fringe benefit exception. The taxpayer knew that the aggregate cost of the food and beverages provided at the conferences ranged from $109 to $709 per representative. In the TAM, the IRS concluded that the $109 amount was not de minimis, even assuming the broker attended only one conference each year. The Chief Counsel office likened the benefit to use of employer-owned facilities for a weekend, which the regulations list as an example of benefits that are not de minimis, rather than likening it to an occasional cocktail party. This comparison is somewhat perplexing in light of the TAM´s acknowledgement in a footnote that some or all of the benefits (conference with accompanying food and beverages) may be excludable as working condition fringes.
Not only did this TAM set the stage for the IRS expressly ruling out particular dollar amounts as de minimis, perhaps more importantly it showed a disregard for the concept behind the de minimis exclusion. The fact that the taxpayer took its aggregate food and beverage costs for the entire conference and divided it by the number of known attendees, with a resulting per-person cost of $109 to $709, does not necessarily mean that the value to an attendee was $109 or $709, respectively.
This is for two reasons: cost is not necessarily equal to value, and a broker´s attendance at a conference does not necessarily include attendance at all gatherings involving food and beverages. A logical basis for including cocktail parties, group meals and picnics as regulatory examples of de minimis fringes is the difficulty in (1) determining value for an event for which there is no charge or few, if any, comparables and (2) determining actual participation.
While these two rulings are not binding on employers so that employers may arguably exclude amounts of $100 or more as de minimis, they do indicate some public movement by the IRS into de minimis fringe benefit determination. Specifically, they indicate the IRS´ opinion of how much is not "too small to worry about."
From Employer''s Guide to Fringe Benefit Rules, ©Thompson Publishing Group, Inc.
Janine Cook and David R. Fuller are partners in the tax department of McDermott, Will & Emery´s Washington, D.C. office. They are the contributing editors of the Guide.