Clarity Needed in Fringe Benefit Regs, Says Business Aviation Group

August 24, 2020

CC:PA:LPD:PR (REG-119307-19)
Internal Revenue Service
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

RE: IRS REG-119307-19
Comments on Prop. Treas. Reg. § 1.274-14

Dear Sir or Madam:

The National Business Aviation Association (NBAA) represents more than 11,000 member companies that depend on general aviation aircraft to make their businesses more productive and successful. The United States business and general aviation industry, which includes all operations other than scheduled airline flights and the military, supports 1.2 million jobs and $247 billion in economic impact.

We appreciate the opportunity to submit these comments on behalf of the business aviation community with respect to Prop. Treas. Reg. § 1.274-14, which was issued in the federal register with a Preamble on June 23, 2020. "Qualified Transportation Fringe, Transportation and Commuting Expenses under Section 274," 85 Fed. Reg. 37,599 (Jun. 23, 2020). We request that a public hearing be scheduled, and we would like to provide comments at such hearing.

Prop. Treas. Reg. § 1.274-14 relates to the disallowance in § 274(l) of commuting expenses, which was enacted in the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97). On June 13, 2018, NBAA submitted a request to the IRS for priority guidance on certain issues arising under § 274(l) ("2018 Comments"). A copy of that prior request for guidance is attached hereto as Exhibit A.

1. Compensation Fringe Benefits Reported as Taxable Compensation to the Employee

Prior to the TCJA, employers deducted the costs of providing transportation fringe benefits to employees, even though employees were entitled to exclude qualified transportation fringe (QTF) benefits from their taxable income. Under I.R.C. § 132(f), QTFs are mostly commuting costs. Thus, there was an inconsistency in that employers deducted the costs of QTFs, but employees also excluded them from taxable income. The TCJA addressed this inconsistency through § 274(a)(4) which disallows deductions for QTFs and § 274(l) which disallows the deduction for providing commuting benefits to employees. Accordingly, the TCJA amendments cured the inconsistency by disallowing the employer's deduction of the costs attributable to excluded transportation fringe benefits.

However, Prop. Treas. Reg. § 1.274-14 does not address the question of whether the disallowance of commuting expenses under § 274(l) applies to the cost of commuting benefits when the employer properly reports the value of such commuting benefits as a taxable fringe benefit to the employee (such as by including it in the employee's Form W-2).

The Preamble to the proposed regulations notes that the compensation exception in § 274(e)(2) cannot apply to the commuting disallowance in § 274(l). 85 Fed. Reg. 37,608. Of course, the exceptions in § 274(e) apply under the statutory language of § 274(e) only to the specific disallowance provisions in § 274(a) (which do not include § 274(l)). See § 274(e) ("Subsection (a) shall not apply to . . ."). This observation from the Preamble, which tracks the statutory language of § 274(e), does not resolve the question of whether § 274(l) will be interpreted to mean that an employer's costs of providing commuting will be disallowed even when the employer reports the value of the commuting benefit as taxable income to the employee.

Disallowing the deduction of employer commuting expenses under § 274(l), while taxing the value of the commuting received by the employee, would result in double taxation. In other contexts, regulations have avoided double taxation by providing that nondeductible items included in taxable compensation to employees are deductible as compensation expense by the employer. For example, as we noted in our 2018 Comments, the disallowance of deductions for spouse travel under § 274(m)(3) is complemented by Treas. Reg. § 1.274-2(f)(2)(iii) which provides that such costs are deductible by the employer if they are reported as taxable income to the employee. In this regard, the entertainment disallowance in § 274(a) applies to “deduction[s] otherwise allowable under this chapter,” while the deduction disallowances in §§ 274(l) and (m) contain no similar provision. More generally, costs incurred by an employer for fringe benefit items which may be nonbusiness items (such as personal, family and living expenses under § 262) are typically deducted by the employer as compensation expense and their value is taxed to the employee. See Treas. Reg. § 1.162-25T. In this manner, the employer's compensation deductions and the employee's income are consistent and double taxation is generally avoided.

Under the policy of avoiding double taxation, NBAA requests that regulations provide that if the value of the commuting benefit is reported by the employer as compensation to the employee, then the employer should be permitted to deduct the cost of the commuting benefit as compensation expense in accordance with Treas. Reg. § 1.162-25T. Adopting such a regulation is consistent with the regulatory approach taken with respect to the spouse travel disallowance in § 274(m)(3) and the fringe benefit rules generally which are structured to avoid double taxation.

The courts have held that interpretations of tax laws that result in double taxation are to be avoided. In In re Tax Refund Litigation, 766 F. Supp. 1248 (E.D.N.Y. 1991), aff'd, 989 F.2d 1290 (2d Cir. 1993), the court explained as follows:

Even if a double tax is imposed, however, it will not be per se impermissible. United States v. Hemme, 476 U.S. 558, 572, 106 S.Ct. 2017, 2079, 90 L.Ed.2d 538 (1986); Hellmich v. Hellmich, 276 U.S. 233, 238, 48 S.Ct. 244, 246, 72 L.Ed. 544 (1928). Thus the second stage of the analysis requires an examination of the statute and the legislative history to determine whether such Congressional intent can be divined. In the course of this analysis, it must be remembered that double taxation is disfavored. . . .

See also, Federated Mutual Implement & Hardware Ins. Co. v. Comm'r, 266 F.2d 661 (8th Cir. 1959) (explaining that the foreign tax credit was intended to "mitigate the evil of double taxation").

As stated above, in order to interpret a tax statute as imposing double taxation, the statute and legislative history must be examined to determine whether Congress intended to impose double taxation. In the case of § 274(l), the purpose of the statute was to address an inconsistency in the taxation of fringe benefits, not to create a new inconsistency by requiring the disallowance of commuting expenses when such expenses are reported as income to the employee. Imposing double taxation is a harsh treatment that should only be imposed on an activity that Congress seeks to discourage. Nothing in the legislative history suggests that Congress views commuting to and from work as an activity that should be discouraged or penalized by double taxation. In fact, the QTF rules were intended to promote employer-provided commuting benefits. Accordingly, to avoid a double tax treatment of commuting benefits, we request that regulations be adopted similar to the regulations pursuant to the spouse travel rules to allow the employer to deduct the cost of commuting benefits if the employer reports the value of the flight to the employee in the manner required under Treas. Reg. § 1.162-25T.

As the Preamble points out, the compensation exception in § 274(e)(2) applies by its terms only to disallowance provisions in § 274(a), which do not include § 274(l). Therefore, regulations to avoid double taxation with respect to § 274(l) would not include the detailed provisions of §274(e)(2), such as the special rule for specified individuals or the limitation on the deduction to the amount imputed to the employee.

2. Deductible Business Travel Distinguished from Commuting

Prop. Treas. Reg. § 1.274-14(a) explains that the term "travel between the employee's residence and place of employment" in § 274(l) "includes travel that originates at a transportation hub near the employee's residence or place of employment."

This hub concept is unnecessary, and it is likely to produce unintended results. It would seem reasonable for regulations to explain that travel from a residence to a place of employment is subject to § 274(l), when the travel originates at the residence and ends at the place of employment irrespective of the use of different modes of transportation on the trip. For example, the trip could originate at the residence with a taxi ride to the airport followed by a flight to another airport, and end with a taxi ride from the second airport to the place of employment.

In contrast, using the hub concept to address the use of different modes of transportation on a single trip may have the unintended consequence of disallowing purely business travel between two places of employment. Suppose the executive has a principal residence and principal place of employment in City A and his employer also has an office in City B. If the executive flies from an airport in City A to an airport in City B in connection with his employment, the flight from a hub in City A could be viewed as nondeductible flight under § 274(l) from a residence to a place of employment. There is no reason to expect that this provision was intended to apply to business travel between places of employment. Accordingly, the hub concept should be discarded in favor of an explanation that the application of § 274(l) to travel between a residence and place of employment is not affected by the use of different modes of transportation on the trip.

More generally, the proposed regulations should clarify that § 274(l) applies only to travel that constitutes "commuting" for tax purposes. The disallowance in § 274(l) of deductions for transportation between an employee's residence and place of employment codifies the concept that commuting between the employee's home and place of employment does not constitute business travel for tax purposes. This provision complements the disallowance of deductions for qualified transportation fringe benefits in § 274(a)(4) as part of the TCJA's effort to address certain inconsistences in the tax code.

There is no indication that Congress intended to apply this disallowance to business travel from an employee's residence to a secondary place of employment, which is not commuting. This potential effect of § 274(l) should be addressed through regulations to prevent the unintended consequence of disallowing deductible business travel. It seems obvious that such business travel expenses should remain working condition fringe benefits excluded from employees' income under § 132(d).

Failure to remedy this unanticipated consequence of § 274(l) could result in the following unintended negative consequence. It is not unusual for an employee to live and work primarily in one city (City A), and to work for an employer with offices in many other cities (including City B) at which the employee may work from time to time. In this situation, the employee's travel from his residence in City A to his employer's office in City B could be nondeductible under § 274(l), even though such travel would otherwise qualify as business travel and not be commuting. See Markey v. Comm'r, 490 F.2d 1249 (6th Cir. 1974). Such an unintended application of § 274(l) could unexpectedly disallow business travel deductions for many companies which are already struggling due to the COVID-19 pandemic and result in unnecessary tax audits and costly litigation.

Accordingly, we request that the regulations clarify that the disallowance in § 274(l) applies only to travel classified as "commuting" and not to otherwise deductible business travel.

3. Only Marginal Costs of Providing Commuting Benefits Should Be Disallowed

Prop. Treas. Reg. § 1.274-14 does not provide guidance on how to determine expenses "in connection with" commuting benefits for purposes of the disallowance under § 274(l). As we explained in our 2018 Comments, the commuting disallowance in § 274(l) is worded almost exactly the same as the spouse travel disallowance in § 274(m)(3). The spouse travel disallowance applies only to the marginal costs of spouse travel, as the IRS has made clear for many years in IRS Pub. 463, at 5. The same cost allocation principles should apply under § 274(l).

Furthermore, applying a marginal cost disallowance to commuting costs under § 274(l) is consistent with the cost allocation rules generally. Pursuant to the general allocation rules under §162, the presence of a nonbusiness passenger on a flight on a business aircraft results only in the marginal cost of that nonbusiness passenger's travel being a nondeductible personal expense. Treas. Reg. § 1.162-2(b). In this regard, Rev. Rul. 56-168, 1956-1 C.B. 93, explained that only expenses "because of the wife's presence" on a trip are non-deductible, meaning that only the marginal cost of the spouse traveling on the business trip should be disallowed. See also French v. Comm'r, T.C. Memo. 1990-34; Pohl v. Comm'r, T.C. Memo. 1990-298; Marlin v. Comm'r, 54 T.C. 560 (1970), acq. 1970-2 C.B. xx.

The general allocation rules for distinguishing personal from business expenses are modified by the listed property rules, which require that costs to operate listed property such as a business aircraft must be allocated based on hours unless a different method is prescribed by the Commissioner. Treas. Reg. § 1.274-5T(b)(6)(i)(B). No different allocation method has been prescribed under the listed property rules. However, under the entertainment disallowance rules, the allocation of costs to a flight on an employer-provided aircraft is further subdivided proportionately among the passengers. Treas. Reg. § 1.274-10(e). (Thus, the listed property allocation rules and the entertainment disallowance rules for employer-provided aircraft are inconsistent.)

Since the deduction disallowance rules for spouse travel under § 274(m)(3) and for commuting under § 274(l) are not governed by the listed property allocation rules or the entertainment disallowance rules, it follows that they should apply the general allocation rule that disallows only the marginal costs. As noted above, IRS Pub. 463, at 5, confirms that the marginal cost allocation principle applies to the spouse travel rules under § 274(m)(3), and the same principle should apply to the commuting disallowance under § 274(l).

Accordingly, the regulations should explain that the disallowance of commuting expenses applies to the marginal costs of providing the commuting benefit.

4. Exception for Travel To Ensure the Safety of the Employee

Prop. Treas. Reg. § 1.274-14(b) states if there is a bona fide business-oriented security concern as described in Treas. Reg. § 1.132-5(m) for the employee, then the commuting benefit will be deemed necessary for the safety of the employee for purposes of § 274(l). This provision is helpful to clarify when the safety of the employee exception applies.

To further clarify this exception, we suggest the following examples:

a. In an example, an overall security program and security study meeting the requirements of Treas. Reg. § 1.132-5(m)(2)(iv) are implemented for an employee. The study finds that the employee is subject to a bona fide business-oriented security concern due to the risks of being kidnapped or robbed while traveling. In this situation, the safety of the employee exception applies.

b. In another example, an employee is at risk when traveling due to the risks of being kidnapped or robbed. The employer and employee believe in good faith that the commuting benefits are necessary to ensure the safety of the employee. No overall security program is implemented for the employee within the meaning of Treas. Reg. § 1.132-5(m)(2)(ii). In this situation, the safety of the employee exception applies.

c. In another example, an individual has medical conditions that put him at high risk of contracting or dying from COVID-19. His employer provides private air travel to him to reduce this risk. During the pandemic, the safety of the employee exception applies.

5. Section 274(l) Applies Only to Employees

Section 274(l) applies to commuting benefits provided only to "employees." The regulations should clarify the scope of the term "employee" for purposes of § 274(l). Specifically, the regulations should confirm that the term "employee" does not include sole proprietors, independent contractors, partners, and 2% shareholders of S corporations.

As noted in our 2018 Comments, Chief Coun. Adv. 2003-44-008 (Jul. 1, 2003) explains that for purposes of the compensation exception in § 274(e)(2) and (9) the treatment of partners and 2% S corporation shareholders as nonemployees for income tax benefit purposes arises from I.R.C. § 1372 and Treas. Reg. § 1.707-1(c). Guidance stating that the same definition of employee applies for purposes of the QTF regulation is provided at Prop. Treas. Reg. § 1.274-13(b)(2). The same definition of employee should likewise be provided for purposes of Prop. Treas. Reg. § 1.274-14.

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Please contact me at sobrien@nbaa.org or 202-783-9451 with further questions. Thank you for your consideration of these comments.

Sincerely,

Scott O'Brien
Senior Director, Government Affairs
National Business Aviation Association
Washington, DC

Enclosures: 1