De Minimis Fringe Benefit Rules: Current Guidance and Tax Implications

By Bruce M. Bird and J. Harrison McCraw

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• Occasional typing of personal letters by a company secretary;
• Occasional cocktail parties, group meals, or picnics for employees or their guests;
• Traditional birthday or holiday gifts of property with a low fair market value (FMV);
• Occasional theater or sporting event tickets;
• Coffee, doughnuts, and soft drinks;
• Local telephone calls; and
• Flowers, fruit, books, or similar property provided to employees under special circumstances.

Treasury Regulations section 1.132-6(e)(2) also provides examples of fringe benefits to which the de minimis rules do not apply. The following benefits fall outside of the de minimis rules:

• Season tickets to sporting or theatrical events;
• Community use of an employer-provided vehicle or other vehicle more than one day a month;
• Membership in a private country club or athletic facility; and
• Use of employer-owned or -leased facilities for a weekend.

In addition, special rules apply for certain categories of de minimis fringe benefits, including group term life insurance on the lives of dependents, employer-operated eating facilities, and public transit passes (or reimbursements) for independent contractors. These special rules are outside of the scope of this article.

According to Treasury Regulations section 1.132-6(d)(4), where the benefit is too valuable or is provided too frequently, then the benefit will not qualify as a de minimis fringe benefit. Typically, in such situations, the value of the entire benefit will be included in an employee’s gross income (Treasury Regulations section 1.132-6). In some cases, however, a fringe benefit may be either partially or totally excludible under another Tax Code provision. Examples include no-additional-cost and working-condition fringe benefits. Where most of the value of a benefit is excludible, in some situations the excess may be excludible as a de minimis fringe benefit.

For example, consider an airline employee who is permitted to fly for free on a standby basis. In 2004, the employee flew from Atlanta to Honolulu. The ticket’s FMV is $700. The $700 would be excludible from the employee’s gross income under the “no additional cost” services rule. This would be true even if the employee received a free meal on the plane with an FMV of $8, which would constitute a de minimis fringe benefit.

In addition, the frequency with which an employer provides similar benefits to its employees affects whether the benefit constitutes a de minimis fringe benefit. According to Treasury Regulations section 1.132-6(b)(1), the frequency with which similar benefits are provided is typically considered on an individual basis. For example, if a company with 1,000 employees provides only the same three employees with coffee and doughnuts each workday, the value of the coffee and doughnuts received by these three employees is taxable.

In some cases, however, determining the frequency with which fringe benefits are provided to individual employees may be administratively difficult. In such situations, frequency may be determined on a group basis [Treasury Regulations section 1.132-6(b)(2)]. For example, if a company has taken sufficient measures to demonstrate that at least 85% of the use of its copying machines is for business purposes, personal use of the copiers will be treated as a de minimis fringe benefit.

Hallmark Cards [200 F. Supp. 847 (12/13/61)]. Prior to Christmas 1955, Hallmark Cards presented its Kansas City plant employees with gift certificates. The company presented its full-time plant employees with service of one year or more with a $25 gift certificate, and its part-time employees with a $15 gift certificate. Employees with less than a year’s service were given a gold pencil. The gift certificates were redeemable in merchandise at any store that sold Hallmark products. The amounts provided in the gift certificates by the employer were not related to the employee’s earnings.

Before Hallmark gave its Kansas City plant employees gift certificates, it had held Christmas parties for them. Management ultimately cancelled the Christmas parties in part due to the number of employees potentially involved—6,400. The company also decided against giving some form of food product to its employees, because a large number of them were unmarried.

Hallmark did not withhold employment taxes on the value of the gift certificates it presented to its employees. In addition, it did not appear that Hallmark’s employees included the face value of the certificates as income on their respective tax returns. Hallmark stated its position that the gift certificates constituted a pure gratuity or gift awarded for the purpose of generating goodwill among its employees and among its dealers, who would also benefit.

The IRS argued that the gift certificate amounts constituted wages. The IRS based its position primarily upon IRC section 3401(a) and Revenue Ruling 59-58. IRC section 3401(a) defines “wages” as: “All remuneration for services performed by an employee for his employer including the cash value of all remuneration paid in any medium other than cash.” Revenue Ruling 59-58 [C.B. 59-1 (p. 17)] provides that the value of merchandise of nominal value distributed by an employer to an employee at Christmas or a comparable holiday as part of a general distribution to employees to promote goodwill does not constitute wages subject to tax withholding or wages for FICA or FUTA purposes. This revenue ruling does not apply to distributions of cash, gift certificates, or similar items of readily convertible cash value, regardless of the amount involved.

In Hallmark, the U.S. District Court (West. Dist. Mo., West. Div.) took the position that the Hallmark gift certificates were not redeemable in cash but only in merchandise. Endorsement by a participating store was required for the store to receive credit for the stated amount. A participating merchant would be unlikely to deliver cash for the certificate when the merchandise would result in a profit or benefit for the store.

Additionally, gifts are excludible from the recipient’s gross income under IRC section 102. In Comm’r v. Duberstein (363 US 278), the Supreme Court examined the employer’s intent in its determination of whether a payment by an employer constituted taxable wages or a nontaxable gift. The Supreme Court reasoned that a gift, in the statutory sense, flowed from a “detached and disinterested generosity … out of affection, respect, admiration or like impulse.” Therefore, the court held, Hallmark clearly did not intend the certificates to be wages, and Hallmark’s employees could exclude from their gross income the value of the gift certificates received.

American Airlines, Inc. v. U.S. (204 F3d 1103). In 1985, due to a labor strike at a major competitor, American Airlines took on substantially increased passenger loads. In appreciation, in June 1985 the company gave each employee two $50 American Express restaurant vouchers. The vouchers were not issued in a particular recipient’s name and could be redeemed for less than face value. Each voucher consisted of a blank American Express charge card form bearing American Airlines’ account number, and expired on December 31, 1985. Of the approximately $4,250,000 in vouchers issued, $4,159,000—97.4% of the total—were redeemed by American Airlines employees and paid for by the company.

American Airlines treated the vouchers as de minimis fringe benefits not subject to federal income or FICA tax withholdings given: 1) their small value, 2) the fact the program was a one-time distribution, and 3) the administrative difficulty of tracking employee redemptions. On audit, the IRS concluded that the airline should have treated the value of the vouchers issued as wages and withheld the appropriate taxes. American Airlines, in turn, paid the appropriate tax and filed for a refund, which was later disallowed by the IRS.

On October 6, 1995, American Airlines filed suit in the Court of Federal Claims seeking a refund based on the contention that the voucher program qualified as a de minimis fringe benefit within the meaning of IRC section 132(a)(4). American Airlines contended that because the vouchers did not contain the name of a given employee, determining which employees used the vouchers was impossible. The company argued that although creating a voucher-tracking system was possible, to do so “would have been unreasonable and administratively impracticable in light of the low value and infrequency of such distributions.”

The Court of Federal Claims held that the American Express vouchers were not excludible from wages as de minimis fringe benefits. The court held that the vouchers were in fact a “cash equivalent fringe benefit” pursuant to Treasury Regulations section 1.132-6T(c). The vouchers did not qualify as de minimis fringe benefits because it was not unreasonable or administratively impracticable for the airline to account for the “cash” or “cash benefits” conferred. The court noted that the temporary Treasury Regulation it cited had been issued on December 23, 1985, prior to the vouchers’ expiration. (Temporary Treasury Regulations section 1.132-6T applies to the tax treatment of de minimis fringe benefits for 1985 to 1988. The final regulations are contained in Treasury Regulations section 1.132-6.)

As a general rule, it is not impractical for a taxpayer to account for a cash-equivalent fringe benefit. The court noted that, to the extent any impracticability existed, it was of American Airlines’ own making. The court then stated that, even in the absence of Treasury Regulations section 1.132-6T, the voucher system still constituted a cash-equivalent benefit. The vouchers, in effect, were: 1) blank American Express charge forms, 2) bearing American Airlines’ account number, and 3) in an amount “not to exceed $50.” Furthermore, the vouchers contained neither the employee’s name nor any restrictions on their transfer. There were no stated restrictions on the face or back of the vouchers limiting their use to restaurants. In essence, the vouchers constituted bearer paper (204 F3d 1103).

Technical Advice Memorandum (TAM) 200437030 (4/30/04). In this TAM, the taxpayer, an IRC section 501(c)(3) tax-exempt organization, had for many years provided its employees with a ham, turkey, or gift basket as an annual holiday gift. During the two most recent tax years, however, the taxpayer stopped providing such items and instead provided gift coupons to its employees. This change resulted from employee requests concerning certain religious convictions, dietary limitations, or health-related concerns. The gift coupons had a face value of $35. The taxpayer intended for the gift coupons to be approximately equal in value to the annual holiday gifts previously provided. The taxpayer implemented the gift-coupon program to reduce the costs previously incurred in obtaining and delivering holiday gifts to its employees and to eliminate any potential liability resulting from providing perishable food products to its employees. In addition, the gift coupon provided employees with greater convenience.

The gift coupon had the taxpayer’s name and address printed on its front. The coupon prominently displayed its $35 face value amount and the words “gift coupon.” The coupon listed the food stores where it could be redeemed and provided the following restrictions: 1) the coupon could be used toward the purchase of $35 of any grocery product, excluding tobacco, alcohol, or pharmacy goods; 2) the listed grocery store could reserve the right not to accept the coupon; 3) the coupon could be used only once and any unused portion would be forfeited; and 4) the coupon could be redeemed between November 15 and January 31 of the following year.

The coupon, shaped like a bank check, included the words “endorse here” next to a signature line in the bottom-right corner. On the back of the coupon, the employee’s name and address were printed, along with a number identifying the department in which the employee worked.
In year 1, the gift coupons listed four food stores in which they could be redeemed. The coupons provided in year 2 were identical to those provided in year 1, except that they listed 23 food stores in a larger, multistate area in which the coupon could be redeemed. In both years, the gift coupons listed food stores with multiple locations for redemption.

The taxpayer did not withhold or pay any employment taxes for any portion of the $35 gift coupons provided to its employees during the two tax years in question. Moreover, its employees presumably did not include the value of the gift coupons in their income.

In TAM 200437030, the IRS noted that Treasury Regulations section 1.132-6(c) provides that, except for special rules that apply to occasional meal money, the provision of any cash fringe benefit is never excludible as a de minimis fringe benefit. For example, providing cash to an employee for a theater ticket that would itself be excludible as a de minimis fringe is not excludable as a de minimis fringe.

In the legislative history of the Deficit Reduction Act of 1984 (DEFRA 1984), pursuant to which IRC section 132 was enacted, Congress provided illustrations of benefits that are excludible as de minimis fringe benefits, such as “traditional gifts on holidays of tangible personal property having a low fair market value (e.g., a turkey given for the year-end holidays).” [See Staff of the Joint Committee on Taxation, 98th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 858–59 (1984), hereinafter JCS-41-84.]

According to IRC section 132(e)(1), applying the statutory definition of a de minimis fringe benefit requires addressing three factors: value, frequency, and administrative impracticability. Because cash and cash-equivalent fringe benefits such as gift certificates have a readily ascertainable value, they do not constitute de minimis fringe benefits, because these items are not unreasonable or impracticable to account for by the employer.

The IRC section 132(e)(1) definition of a de minimis fringe benefit is limited to property or services and does not include cash. [See also Treasury Regulations section 1.132-6(a).] The specific example in the regulations describing holiday gifts is limited to property and does not include cash [see Treasury Regulations section 1.132-6(e)(1)]. The holiday gift example that Congress provided in the DEFRA 1984 legislative history describes “tangible personal property” (see JCS-41-84, p. 859). With specific exceptions not applicable to this case, Treasury Regulations section 1.132-6(c) demonstrates that cash is not excludible as a de minimis fringe benefit even when the property or services acquired would be excludible as a de minimis fringe benefit if provided in kind.

The IRS further noted that accounting for even a small amount of cash provided to an employee is not administratively impracticable, because the value is readily apparent and certain. Accordingly, unless a narrow and specific exception applies, such as the special rules that apply to occasional meal money and transit passes, accounting for cash or cash-equivalent fringe benefits such as gift certificates is never considered administratively impracticable under IRC section 132.

After reviewing the facts in this case, the IRS indicated its position that the employer-provided “gift coupon” operates in essentially the same way as a cash-equivalent fringe benefit such as a gift certificate. As with a gift certificate, it is simply not administratively impracticable to account for the employer-provided gift coupons. The coupons have a face value of $35. (See American Airlines, above.)

The IRS further noted that the heading for Treasury Regulations section 1.132-6(e)(1) states that it describes “examples” of benefits excluded from income. The regulation itself does not provide an exclusion from gross income; it merely describes examples of fringe benefits that are potentially excludible, assuming the statutory requirements pertaining to value, frequency, and administrative impracticability are satisfied. The legislative history (JCS-41-84, p. 858) makes clear that the statutory requirements regarding value, frequency, and administrative impracticability must be satisfied even with respect to gifts on holidays of tangible personal property having a low fair market value. Specifically, the Joint Committee Report states: “[T]he frequency with which such benefits are offered may make the exclusion unavailable for that benefit, regardless of difficulties in accounting for the benefits. By way of illustration, the exclusion is not available if traditional holiday gifts are provided to employees each month.”

The IRS noted that the analysis in Hallmark and in Revenue Ruling 59-58 had been superseded by changes in the law. In this regard, the IRS noted that the conclusions in both of these authorities that the items were “gifts” preceded the enactment of IRC section 102(c), pursuant to which amounts transferred by or for an employer to, or for the benefit of, an employee are not excludable from the employee’s gross income as gifts. Moreover, both of these authorities preceded DEFRA 1984, which enacted a comprehensive method for dealing with employer-provided fringe benefits and thus largely superseded earlier case law and IRS administrative guidance on employer-provided fringe benefits.

On July 18, 1984, Congress enacted section 531 of DEFRA 1984, amending IRC section 61(a) to include “fringe benefits” in the definition of gross income, and adding new IRC section 132 to exclude certain fringe benefits from gross income. Section 132 substituted a statutory approach for the prior common-law approach generally used to determine whether the fringe benefit was compensatory or noncompensatory. Consequently, effective January 1, 1985, any fringe benefit is includable in the recipient’s gross income unless excluded by a specific statutory provision.

After the passage of DEFRA 1984, it is necessary to apply IRC 132(e) and the regulations thereunder when analyzing whether a low-value, employer-provided holiday gift is excludable from gross income. The statutory method designed by Congress to analyze de minimis fringe benefits specially addresses such holiday gifts. Accordingly, the appropriate body of law to apply in this case is IRC section 132(e) and its regulations, not the regulations applied in Revenue Ruling 59-58 and in Hallmark.

Whether a gift coupon is “redeemable in cash” is not determinative of whether the coupon is a “cash equivalent fringe benefit” for Treasury Regulations section 1.132-6(c) purposes. Instead, the IRS looked to the language of IRC section 132(e) that requires a determination of whether it is administratively impracticable to account for the gift coupons provided in this case. The IRS noted that no facts existed to indicate the administrative impracticability of the taxpayer’s accounting for a holiday gift coupon having a face value of $35 redeemable at several local grocery stores. Rather, each employee who received a gift coupon received a taxable cash-equivalent fringe benefit in the amount of $35.

The taxpayer suggested that the Treasury Regulations section 1.274-3(b)(iv) definition of tangible personal property should be applied. This regulation governs the limits of an employer’s deduction for certain employer-provided length-of-service and safety-achievement awards. Under this regulation, the definition of tangible personal property (for amounts less than $100) “does not include cash or any gift certificate other than a nonnegotiable gift certificate conferring only the right to receive tangible personal property.”

In addition, by reference to Treasury Regulations section 1.274-5(c)(2)(iii)(A)(2), which provides substantiation requirements in connection with the deduction of certain business expenses, the taxpayer suggested that property with a value of less than $75 is de minimis for the purposes of IRC section 132(e). The IRS declined to accept the taxpayer’s arguments that these provisions—which generally impose limits on the deduction of business-related entertainment, meal, and gift expenses and also provide substantiation requirements that taxpayers must meet in order to prove that certain business expenses were in fact paid or incurred—have any application in determining whether an item constitutes a de minimis fringe benefit under IRC section 132(e). The IRS specifically noted that the taxpayer’s contention that “it would seem that items of less than $75 in value would … be considered de minimis” is inconsistent with IRC section 132(e), which requires a determination of value relative to the frequency with which a particular benefit is provided.

Tax Planning Implications

TAM 200437030 sets forth the IRS’s position that an employer-provided holiday gift coupon with a $35 face value and redeemable at several local grocery stores does not constitute a nontaxable de minimis fringe benefit under IRC section 132(a)(4). The TAM illustrates the difficulty a taxpayer faces in attempting to qualify a holiday gift coupon or a gift card as a nontaxable fringe benefit.

The current IRS position is that the analysis in Hallmark and Revenue Ruling 59-58 has been superseded by changes in the law. The passage of DEFRA in 1984 set forth a statutory scheme under IRC section 132(e) and its regulations whereby the taxability of low-value employer-provided holiday gifts in the context of the de minimis rules is specifically addressed.

For purposes of Treasury Regulations section 1.132-6(c), whether a gift coupon is “redeemable in cash” is not determinative of whether a gift coupon is a “cash equivalent fringe benefit.” Rather, the language of IRC section 132(e) requires a determination of whether it is administratively impracticable for the taxpayer to determine the value of and account for the holiday gift coupons.

When an employee attends a staff meeting at which the employer provides two pots of coffee and a box of doughnuts, the value of the benefit the employee receives is not certain or easily ascertained. In the case of the holiday gift coupon, however, there is no difficulty in either determining its value or accounting for it; each employee who receives a gift coupon receives a cash-equivalent fringe benefit worth its face value. In effect, TAM 200437030 works to dissuade employers from giving its employees holiday gift coupons or gift cards.

A de minimis fringe benefit is any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable. Under IRC section 132, a de minimis fringe benefit received by an employee is typically excluded from his gross income. For this purpose, the frequency with which the employer provides similar fringes to its employees must be taken into account. Stated alternatively, if the fringe benefit is too valuable or is provided too frequently, then the de minimis rules typically will not apply.

As a general rule, for purposes of IRC section 132, cash provided by an employer to an employee does not constitute a de minimis fringe benefit. Typically, the amount of cash received is irrelevant; a “cash-equivalent” benefit is treated as cash. For example, an employee’s use of an employer credit card or an employee’s receipt of a credit card voucher would not be a de minimis fringe benefit.

The authors gratefully acknowledge grant support from the IRS Taxpayer Advocate Service.