Exempt Organizations Advisory - IRS Proposes Simplified Procedures for Sustainability of Employer-Provided Cell Phones

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)

On June 8th, IRS released Notice 2009-46; 2009-23 IRB 1068, in which the IRS put forth two proposals to simplify the procedures under which employers substantiate an employee’s business use of employer-provided cell phones: simplified substantiation methods and simplified fair market value determination.

Simplified Substantiation Methods

The IRS and Treasury Department are considering three alternative methods to simplify the substantiation requirements applicable to employee usage of employer-provided cell phones: a minimal personal use method (all of employee’s cell phone use is deemed business use); a safe harbor substantiation method (employer treats a percentage of employee’s cell phone use as business use); and a statistical sampling method (employer measures employee’s personal use). Any simplified cell phone substantiation method will be optional;  taxpayers may continue to comply with current Internal Revenue Code § 274(d) substantiation requirements.

The IRS and Treasury Department contemplate that any taxpayer who wishes to use a simplified cell phone substantiation method will be required to implement a written policy that requires employees to carry and use the employer-provided cell phones in connection with the employer’s trade or business and that prohibits personal use of employer-provided cell phones, except for minimal personal use, similar to the requirements currently applicable to employer-provided automobiles in Treasury Regulation § 1.274–6T. In addition, the IRS and Treasury Department anticipate requiring that the employer must reasonably believe that the cell phone is not used for personal purposes except for minimal personal use.

Simplified Fair Market Value Determination

To the extent that an employee's use of an employer-provided cell phone does not qualify as a working condition fringe benefit (because the employer does not satisfy Code § 274(d) or the cell phone is used partially for personal purposes), the fair market value of an employee's use of the employer-provided cell phone is a taxable fringe benefit that is includable in the employee's gross income. An employer's cost to provide the cell phone is not determinative of the fair market value of an employee's fringe benefit. The IRS and Treasury Department are interested in understanding the methods employers currently use to arrive at the fair market value to an employee of an employer-provided cell phone. The IRS and Treasury Department are considering whether a simplified valuation method would be helpful and appropriate to determine such fair market value.

The IRS and Treasury Department have requested public comments on the proposals contained in this notice and suggestions for other approaches for modifying and simplifying the substantiation requirements applicable to employee usage of employer-provided cell phones, particularly in the following areas:

• The specific provisions that should be required to be included in an employer's written policy prohibiting personal use of employer-provided cell phones;
• The types of employee records sufficient to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for purposes of the first proposed minimum personal use method contained in this notice;
• How to define a specified amount or type of "minimal" personal use (e.g., a maximum number of minutes of use or a list of acceptable personal uses) that should be disregarded in determining the amount of personal use of an employer-provided cell phone for purposes of the second proposed minimum personal use method contained in this notice.
• The business use percentage that should be applied in the proposed safe harbor substantiation method contained in this notice and the data and rationale upon which it is based;
• The methods currently used by employers to determine the fair market value of an employee's use of an employer-provided cell phone; and
• Whether a simplified method of determining the fair market value of an employee's use of an employer-provided cell phone would be appropriate, and, if so, suggested simplified methodologies for determining such fair market value.
  

Comments must be submitted in writing on or before September 4, 2009.

IRS Commissioner Issues Statement Regarding Employer-Provided Cell Phones

On June 16th, IRS Commissioner Doug Shulman released the following statement regarding employer-provided cell phones:  "This month, the Internal Revenue Service asked for comments on ways to simplify compliance with rules related to employer-provided cellular telephones.  The current law, which has been on the books for many years, is burdensome, poorly understood by taxpayers, and difficult for the IRS to administer consistently.  Some have incorrectly implied that the IRS is 'cracking down' on employee use of employer-provided cell phones. To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals."

Shulman added, "Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses.  Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers.  The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete."