Shulman Urges Congress to Reform Rules for Employer-Provided Cell Phones
IRS Commissioner Douglas H. Shulman said on June 16 that the Service supports easing the listed property rules under Code Sec. 280F for employer-provided cell phones. Shulman's announcement came just one week after the IRS proposed simplifying the substantiation rules). Shulman also stressed that the IRS is not "cracking down" on employer-provided cell phones, contrary to some media reports.

Listed Property
Under current rules, employer-provided cell phones used for business purposes are excluded from the employee's gross income and the cell phone expense is a deductible business expense for the employer if substantiation requirements are met. Personal use, however, is included in the employee's gross income. In Notice 2009-46, the IRS announced several proposals to simplify the substantiation rules. These included a minimal personal use method, a safe harbor method and a statistical sampling method.

The IRS's announcement was welcomed by businesses and practitioners. "Businesses need flexibility," Karen Facer-Mee, CPA, president of the Greater Philadelphia Chapter of the Pennsylvania Institute of CPAs (PICPA), told CCH. "Employers have different cell phone usage among different departments. Cell phone use by the individuals in the sales department is going to be different from cell phone use by administrative personnel."

At the same time, confusion arose whether the IRS was intending tougher enforcement of the current rules. "Some have incorrectly implied that the IRS is cracking down on employee use of employer-provided cell phones," Shulman said in a statement. "To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals."

Pending Legislation
Shulman called on Congress to reform the listed property rules as they apply to cell phones. "Treasury Secretary Timothy 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." Shulman added that technological changes since 1989 have made the current rules obsolete.

In the House, Rep. Sam Johnson, R-Tex., has introduced legislation (HR 690) to remove cell phones from the category of listed property under Code Sec. 280F. The bill has has 33 co-sponsors and has been referred to the House Ways and Means Committee. Sen. John Kerry, D-Mass., has introduced similar legislation (Sen 144) in the Senate; his bill has 45 co-sponsors and has been referred to the Senate Finance Committee.

Statement of IRS Commissioner Shulman Regarding Employer-Provided Cell Phones

June 17, 2009

Statement of IRS Commissioner Shulman : Employer-provided cell phones .



Statement of IRS Commissioner Doug Shulman

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.

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.

Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2009

January 30, 2009

111th Congress

111th CONGRESS

1st Session H. R. 690

To amend the Internal Revenue Code of 1986 to remove cell phones from listed property under section 280F.

IN THE HOUSE OF REPRESENTATIVES

January 26, 2009

Mr. Sam Johnson of Texas (for himself, Mr. Pomeroy, Mr. Herger, Mr. Cantor, Ms. Schwartz, Mrs. Bono Mack, and Ms. Zoe Lofgren of California) introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to remove cell phones from listed property under section 280F.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,



SECTION 1. SHORT TITLE.

This Act may be cited as the "Modernize Our Bookkeeping In the Law for Employee's Cell Phone Act of 2009".



SEC. 2. REMOVAL OF CELLULAR TELEPHONES (OR SIMILAR TELECOMMUNICATIONS EQUIPMENT) FROM LISTED PROPERTY.

(a) In General. --Subparagraph (A) of section 280F(d)(4) of the Internal Revenue Code (defining listed property) is amended by inserting "and" at the end of clause (iv), by striking clause (v), and by redesignating clause (vi) as clause (v).

(b) Effective Date. --The amendment made by subsection (a) shall apply to taxable years beginning after January 1, 2009.


Notice 2009-46 , I.R.B. 2009-23, 1068, June 8, 2009.


PURPOSE

This notice requests comments from the public regarding several proposals to simplify the procedures under which employers substantiate an employee's business use of employer-provided cellular telephones or other similar telecommunications equipment (hereinafter collectively referred to as "cell phones"). This notice describes the proposals under consideration. The Internal Revenue Service (IRS) and Treasury Department are interested in considering other possible approaches. Therefore, this notice also requests suggestions for alternative approaches to simplify the procedures under which employers substantiate an employee's business use of employer-provided cell phones.

Any changes to the substantiation procedures applicable to employer-provided cell phones will not become effective until the IRS and Treasury Department consider public comments and suggestions received in response to this notice and publish guidance announcing any simplified substantiation procedures.



BACKGROUND



Employers

Section 162(a) of the Internal Revenue Code provides that a deduction is allowed for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. However, § 262(a) provides that, except as otherwise expressly provided, no deduction shall be allowed for personal, living, or family expenses.

Section 274(d)(4) provides that no deduction shall be allowed with respect to any listed property (as defined in § 280F(d)(4)), unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the use of the property, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons using the property. The Secretary may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense that does not exceed an amount prescribed pursuant to such regulations.

Section 280F(d)(4)(A)(v) provides that "listed property" includes any cellular telephone (or other similar telecommunications equipment).

Section 1.274-5T(a) of the temporary Income Tax Regulations provides that no deduction or credit shall be allowed with respect to any listed property unless the taxpayer substantiates each element of the expenditure or use. Section 1.274-5T(b)(6) provides that the elements to be proved with respect to any listed property are:

(i) Amount --(A) The amount of each separate expenditure with respect to an item of listed property, such as the cost of acquisition, and (B) the amount of each business use based on the appropriate measure (that is, time) and the amount of total use of the listed property for the taxable period ( see § 1.274-5T(e)(2));

(ii) Time --The date of the expenditure or use with respect to the listed property; and

(iii) Business purpose --The business purpose for an expenditure or use with respect to any listed property.



Employees

Section 61(a)(1) provides that, except as otherwise provided, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. Section 1.61-21(b)(1) of the Income Tax Regulations requires that an employee generally must include in gross income the amount by which the fair market value of a fringe benefit exceeds the sum of (i) the amount, if any, paid for the benefit by or on behalf of the employee, and (ii) the amount, if any, specifically excluded from gross income by some other section of the Code. The fair market value of a fringe benefit is the amount that an individual would have to pay for the particular fringe benefit in an arm's length transaction. Section 1.61-21(b)(2). The cost incurred by an employer is not determinative of the fair market value of a fringe benefit. Id.

Section 132(a)(3) provides that gross income does not include any fringe benefit that qualifies as a working condition fringe. Section 132(d) provides that "working condition fringe" means 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 § 162 or § 167.

Section 1.132-5(a)(1)(ii) provides that if, under § 274 or any other section of the Code, certain substantiation requirements must be met in order for a deduction under § 162 or § 167 to be allowable, then those substantiation requirements apply in determining whether a property or service is excludable as a working condition fringe. See also § 1.132-5(c)(1). The substantiation requirements of § 274(d) are satisfied by adequate records or sufficient evidence corroborating the employee's own statement. Section 1.132-5(c)(2). Therefore, such records or evidence provided by the employee, and relied upon by the employer to the extent permitted by the regulations promulgated under § 274(d), will be sufficient to substantiate a working condition fringe exclusion. Id.



DISCUSSION

If an employer provides a cell phone to an employee, and the employer acquires and pays the costs of using the cell phone, the employee receives a fringe benefit. To the extent that the employee uses the employer's cell phone for business purposes, the fair market value of such usage qualifies as a working condition fringe benefit excludable from the employee's gross income and the cell phone expense is a deductible business expense for the employer, provided that the substantiation requirements of § 274(d) are met. However, to the extent the employee uses the employer's cell phone for personal purposes, the fair market value of such usage is includable in the employee's gross income. The employer's cost to provide the cell phone is not determinative of the fair market value of the benefit received by the employee.



PROPOSALS

The IRS and Treasury Department are considering the following proposals to simplify the § 274(d) substantiation requirements applicable to employee usage of employer-provided cell phones.



A. Simplified Substantiation Methods



General Requirements

As discussed in greater detail below, 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, a safe harbor substantiation method, and a statistical sampling method (or a combination of the foregoing). Any simplified cell phone substantiation method will be optional; taxpayers may continue to comply with current § 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 § 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.



1. Minimal Personal Use Method

The IRS and Treasury Department are considering two proposals that would allow an employer to deem all of an employee's usage of an employer-provided cell phone as business usage. Under the first proposal, the entire amount of an employee's use of an employer-provided cell phone would be deemed to be for business purposes if the employee can account to his or her employer with sufficient records to establish that the employee maintains and uses a personal (non-employer-provided) cell phone for personal purposes during the employee's work hours.

Alternatively, the second proposal would define a specified amount or type of "minimal" personal use that would be disregarded in determining the amount of personal use of an employer-provided cell phone. For example, "minimal" could be defined by reference to a particular number of minutes of use or for certain personal purposes.



2. Safe Harbor Substantiation Method

The IRS and Treasury Department are considering a safe harbor method under which an employer would treat a certain percentage of each employee's use of an employer-provided cell phone as business usage. The remaining percentage of use would be deemed to be for personal purposes. For this proposal, the IRS and Treasury Department propose a business use percentage of 75 percent.



3. Statistical Sampling Method

The IRS and Treasury Department are considering a proposal that would allow employers to use statistical sampling techniques to measure an employee's personal use of an employer-provided cell phone. In general, an employer could use an approved statistical sampling methodology similar to that provided in Rev. Proc. 2004-29, 2004-1 C.B. 918, to determine the percentage of personal use of employer-provided cell phones. The employer would multiply that percentage times the value of each employee's total usage to determine the value of personal usage. The remaining portion of the employee's usage would be deemed to be for business purposes.



B. 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 § 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.



REQUEST FOR COMMENTS

The IRS and Treasury Department request 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. The IRS and Treasury Department are particularly interested in any comments regarding:
 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 (nonemployer-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, and should include a reference to Notice 2009-46. Submissions should be sent to:

Internal Revenue Service
Attn: CC:PA:LPD:PR
( Notice 2009-46), Room 5203P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions also may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR ( Notice 2009-46), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Alternatively, comments may be submitted electronically directly to the IRS via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include "Notice 2009-46" in the subject line of any electronic communication. All comments will be available for public inspection and copying.



DRAFTING INFORMATION

The principal author of this notice is Jeffrey T. Rodrick of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice, contact Mr. Rodrick at (202) 622-4930 (not a toll-free call).