Final Fringe Benefit Rules

 [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final amendments to the fringe benefit regulations relating to the valuation of fringe benefits under section 61 and the exclusion of certain benefits as working condition fringes under section 132(a)(3) of the Internal Revenue Code of 1986. The final amendments (1) eliminate the requirement that employers must notify their employees of the election to use a special valuation rule, (2) clarify the requirements for using the special valuation rules, (3) provide additional rules for local transportation provided to government employees because of bona fide business-oriented security concerns, and (4) clarify the treatment of bona fide volunteers who perform services for exempt organizations or for a Federal, state, or local government unit. The final amendments affect any person providing or receiving these fringe benefits and provide these persons with the guidance necessary to comply with the law.

 DATES: These rules are effective December 30, 1992, except for the revision of section 1.61-21(c)(3)(ii) which is effective January 1, 1989, and the removal of section 1.61-2T(c)(3)(ii) which is effective January 1, 1985. However, taxpayers may treat the rules as applicable to benefits provided on or after January 1, 1989.

 FOR FURTHER INFORMATION CONTACT: Marianna Dyson, at 202-622-4606 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On September 25, 1991, the Treasury Department and the Internal Revenue Service published proposed amendments (56 FR 48465) to the final working condition fringe benefit regulations under section 132(d) of the Internal Revenue Code of 1986 (Code). The proposed amendments provide additional rules for transportation provided to government employees because of bona fide business-oriented security concerns and clarify the treatment of bona fide volunteers who perform services for exempt organizations or for a Federal, state, or local government unit. In addition, the notice of September 25, 1991, invited comments concerning the requirements under section 1.61-21(c) of the regulations, which sets forth the rules for notifying employees of the employer's election to use a special valuation rule for valuing a benefit in lieu of using the general valuation rules based on facts and circumstances.

 Comments were received from the public, and on January 30, 1992, the Internal Revenue Service held a public hearing concerning the proposed amendments. In response to the comments and a statement made at the public hearing, this Treasury decision adopts the proposed amendments to the fringe benefit regulations as revised.

 The amendments to the final regulations under section 61 are contained in section 1.61-21. The amendments to the final regulations under section 132 are contained in sections 1.132-0, 1.132-1, and 1.132-5.

SUMMARY OF COMMENTS AND EXPLANATION OF PROVISIONS

1. USE OF SPECIAL VALUATION RULES

 Under section 61 of the Code and the income tax regulations thereunder, a fringe benefit provided by an employer is presumed to be income to the recipient-employee, unless it is specifically excluded from gross income by another section in subtitle A of the Code. The employee is required to include in gross income the fair market value of the benefit after subtracting amounts paid, by or on behalf of the employee, for the benefit, as well as amounts excluded from income by another section of the Code. See section 1.61-21(b)(1) of the regulations.

 In general, the regulations require that the fair market value of a fringe benefit be determined based on all the facts and circumstances. As an alternative, section 1.61-21(c) provides that certain commonly provided fringe benefits may be valued using the special valuation rules set forth in section 1.61-21(d) through (j). The option to use a special valuation rule is the employer's, but if a special valuation rule is used by the employer to value the benefit for reporting purposes, that rule is the only special valuation rule that may be used by either the employer or employee for any purpose. However, the employee may always use the general valuation rules based on facts and circumstances.

 If an employer elects to use a special valuation rule, the existing rules in section 1.61-21(c)(3) require the employer to notify employees of the election. If the employer does not provide notice in the time and manner prescribed by section 1.61-21(c)(3)(ii), the employer is prohibited from using special valuation and, instead, must use the general valuation rules based on facts and circumstances. Correspondingly, the employee is restricted to using those rules.

EXPLANATION

 The notice of September 25, 1991, invited comments concerning the notice requirements generally under section 1.61-21(c). In response to a comment, this Treasury Decision amends the regulations by eliminating the notice requirements of sections 1.61-21(c)(3)(ii) and 1.61-2T(c)(3)(ii), effective January 1, 1989, and January 1, 1985, respectively. In addition, the amendments clarify the remaining requirements for using the special valuation rules in the future.

 For benefits provided after December 31, 1992, the final amendments provide that neither the employer nor the employee may use special valuation unless one of the following four conditions is satisfied: (1) the employer treats the value of the benefit as wages (for reporting purposes) within the prescribed time; (2) the employee includes the value of the benefit in income within the prescribed time; (3) the employee is not a control employee, as defined in section 1.61-21(f)(5) and (f)(6); or (4) the employer demonstrates a good faith effort to treat the benefit correctly for reporting purposes. If none of the conditions for using special valuation is met, both the employer and employee must use the general valuation rules based on facts and circumstances.

 The amendments do not change the rule that the decision to use a special valuation rule remains with the employer. Furthermore, the amendments retain the rule that the employee generally may use a special valuation rule only if the employer uses the rule. Under the final amendments, however, an employee may use a special valuation rule not used by the employer, but only if the employer does not treat the value of the benefit as wages for reporting purposes within a prescribed time and one of the other conditions described above is met.

 This Treasury decision also amends section 1.61-21 to correctly reference paragraph (k) , the special valuation rule for transportation provided to certain employees, which was added to the fringe benefits regulations by Treasury Decision 8389 on January 15, 1992.

2. EMPLOYER-PROVIDED TRANSPORTATION FOR SECURITY CONCERNS

BACKGROUND

 As discussed in the preamble to the proposed amendments issued on September 25, 1991, sections 61 and 132 of the Code provide that the value of employer-provided transportation must be included in the employee's gross income unless the transportation is provided in connection with the employer's business. Because commuting and other personal use of employer-provided transportation by an employee is not transportation provided in connection with the employer's business, the value of the transportation is included in the employee's gross income as a fringe benefit.

 If an employee or a member of the employee's immediate family is transported to and from work in the employer's vehicle because of threats made against them, the value of the local transportation used for commuting and other personal purposes will also be included in the employee's gross income. However, under section 1.132-5(m) of the regulations, if the employer provides transportation to an employee because of a "bona fide business-oriented security concern" which results in an "overall security program" being provided to the threatened employee, the employee may exclude from gross income the value of any special security designs on the vehicle (e.g., bullet- proof glass) and the services of a chauffeur/bodyguard, even though the transportation is used for personal purposes.

 In addition to demonstrating the existence of a bona fide business-oriented security concern under section 1.132-5(m), the employer must establish an overall security program with respect to the threatened employee. An employer not meeting the requirements for an overall security program under section 1.132-5(m)(2)(iii)(A) of the regulations (e.g., 24-hour protection is not provided) will be treated as having an overall security program only if protection is provided pursuant to the recommendations of an "independent security study" performed by a private security consultant. See section 1.132-5(m)(2)(iv).

EXPLANATION

 The final fringe benefit regulations under sections 61 and 132 of the Code were issued on July 6, 1989, and were effective January 1, 1989 (54 FR 28576). As explained in the preamble to the previously proposed amendments to section 1.132-5(m) published on September 25, 199l, the final fringe benefit regulations as applied to Federal, state, and local government employees, particularly those involved in law enforcement, may create unintended tax consequences. Thus, the notice of September 25, 1991, proposes special rules for application to government employers and employees when a bona fide business- oriented security concern exists with respect to a particular employee and the government employer transports the employee by vehicle as part of an overall security program. The notice also proposes special rules relating to the government employer's notification to the employee of its election to use a special valuation rule. Consistent with the stated objective of addressing the tax problems that may result when government employers are faced with the urgent need to protect employees and their families under specific, imminent threats, the proposed amendments are finalized with modification as explained below.

 Comments concerning the proposed regulations suggest that employers may be taking the position that "a bona fide business- oriented security concern" exists in the absence of any specific basis for concern regarding the employee's safety. To avoid any uncertainty concerning the application of the regulations, the final regulations clarify that a bona fide business-oriented security concern does not exist with respect to either a nongovernment or government employee unless the facts and circumstances establish a specific basis for concern regarding the safety of the employee. A specific basis for concern may be established, for example, by threats of death, serious bodily harm, or kidnapping or by a recent history of terrorist activity in the geographic area. A generalized security concern is not sufficient to establish a bona fide business-oriented security concern. In addition, even though a bona fide business-oriented security concern is determined to exist with respect to a particular employee, the employer remains responsible for periodically evaluating the facts and circumstances to determine whether the bona fide business-oriented security concern still exists.

 The Service has also received comments which reveal the need for clarification of certain of the proposed rules. The proposed amendments provide detailed rules permitting a security study performed by the government employer itself to qualify as an independent security study if certain conditions are met. The final amendments retain the proposed rules, but clarify that the independent security study must be performed with respect to each employee who is provided protection, and that a security study must include an estimate of the length of time protective services will be necessary and of the extent to which employer-provided transportation may be necessary during the period of protection.

 The final regulations also clarify that the exclusion for personal use, other than commuting, applies only to local vehicle transportation. The exclusion does not apply to employer-provided aircraft. In addition, the proposed amendments relating to the government employer's notice requirement are not adopted because of the revision to section 1.61-21(c) as explained, above.

 The final amendments to section 1.132-5(m) are effective December 30, 1992; however, taxpayers may treat the rules as applicable to benefits provided on or after January 1, 1989.

2. VOLUNTEERS

BACKGROUND

 Public comments were received by the Service expressing concern about the application of section 132 to volunteers who perform services for organizations exempt under section 501(a) of the Code and who receive directors' and officers' liability insurance protection (D&O insurance) from those organizations.

 Section 132(a) of the Code excludes certain fringe benefits from gross income. Generally, these fringe benefits are excludable by an "employee," whether the employee is compensated or is working as a volunteer. For certain purposes, the term "employee," which is defined in section 1.132-1(b), includes independent contractors. For purposes of sections 132(a)(1) and (2) (relating to no-additional- cost services and qualified employee discounts), however, independent contractors are not treated as "employees." Thus, under section 132(a), bona fide volunteers, like their paid counterparts, may not exclude no-additional-cost services and qualified employee discounts from gross income unless the exempt organization or government employer has the right to direct and control the volunteer's services (i.e., there is an employer-employee relationship).

 Although volunteers who are employees may exclude from gross income the fringe benefits listed above, and all volunteers (including independent contractors) may exclude de minimis fringe benefits, the language of section 1.132-1(b) relating to working condition fringes does not encompass bona fide volunteers.

 Section 132(d) of the Code and section 1.132-5(a)(1) of the income tax regulations provide that a "working condition fringe" is any property or service provided to an employee of an employer to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a deduction under section 162 or 167. (For purposes of the working condition fringe exclusion, the term "employee" is defined broadly to include employees, partners, directors and independent contractors).

 Section 162 of the Code provides a deduction for all the ordinary and necessary expenses paid or incurred in carrying on a trade or business. An individual engaged in carrying on a trade or business has a profit motive for purposes of section 162. An individual who performs services as a bona fide volunteer does not have a profit motive and thus cannot claim a deduction under section 162 for expenses incurred in connection with such volunteer work. For example, the value of D&O insurance provided to the volunteer would not be excludable as a working condition fringe benefit, even though the same insurance coverage would be excludable from the income of a paid employee or director who has a profit motive.

 To correct this technical problem, the Service, pursuant to the authority granted in section 132(k), proposed an amendment to the regulations which was published in the Federal Register on September 25, 1991 (56 FR 48465). As stated in the preamble, the proposed amendment is intended to ensure that, like their paid counterparts, bona fide volunteers may exclude working condition fringe benefits, including D&O insurance, from gross income.

 The proposed amendment provides that, solely for purposes of section 132(d), a bona fide volunteer, including a director or officer, who performs services for an organization that is exempt from tax under section 501(a), or for a Federal, state, or local government unit, is deemed to have a profit motive for purposes of section 162. Under the proposed amendment, an individual who provides services (including services as an officer, trustee, or director) is, for purposes of section 132(d), a "bona fide volunteer" for an exempt organization or government unit only if the total value of the benefits provided with respect to the volunteer services is substantially less than the total value of the volunteer services the individual provides to the organization. The value of liability insurance coverage is deemed, under the proposed regulation, to be substantially less than the value of the individual's volunteer services to the organization, provided the insurance coverage is limited to acts performed in the discharge of official duties or the performance of services on behalf of the exempt organization or government employer.

EXPLANATION

 All of the comments praised the proposed amendment concerning the treatment of bona fide volunteers and urged final adoption quickly. Some of the comments also suggested that the scope of the proposed amendment be expanded and/or clarified to ensure that various issues are addressed.

 A few of the comments requested clarification that the receipt of nominal amounts of compensation for services does not disqualify bona fide volunteers from taking advantage of the section 132(a)(3) working condition fringe exclusion. This concern is addressed not only by the definition of a "bona fide volunteer" in the final amendments, but by the general definition of a working condition fringe in section 132(d).

 The final regulations provide that a bona fide volunteer is someone who does not have a profit motive under section 162, but is deemed to have a profit motive ONLY for purposes of the working condition fringe exclusion. The most typical example is the unpaid individual who performs services for an exempt organization or government employer and may receive benefits, but the total value of the benefits provided by the exempt organization or government employer is substantially less than the total value of the volunteer services that the individual provides to the organization. The receipt of D&O liability insurance by the bona fide volunteer, or an exempt organization or government employer's undertaking to indemnify the volunteer for liability, does not by itself confer a profit motive on the volunteer, provided the insurance coverage or indemnification relates to acts performed by the volunteer in the discharge of duties, or the performance of services, on behalf of the exempt organization or government employer. In the case of such a bona fide volunteer, new paragraph (r) of section 1.132-5 deems the volunteer to have a profit motive and thus insures that the volunteer may exclude the value of the D&O insurance provided by the exempt organization or government employer as a working condition fringe.

 If it is determined that the individual does, in fact, have a profit motive within the meaning of section 162 and is not a "bona fide volunteer" within the meaning of section 1.132-5(r), the value of the D&O insurance provided by the organization is excludable from the individual's gross income as a working condition fringe by application of section 132(a)(3). This is because, under section 132(d), a payment for D&O insurance by an individual with a profit motive would be allowable as a deduction under section 162 had he or she paid for it directly. To summarize, as a result of this Treasury Decision in conjunction with existing statutory provisions, the value of D&O insurance and of other working condition fringes provided to an individual who performs services for a tax exempt organization or government employer is excludable as a working condition fringe whether or not the individual has a profit motive.

 One comment suggested that indemnification payments permitted by law, whether made by an insurer or directly by the employer, should be treated in the same manner as D&O insurance premiums. The final regulations adopt this suggestion.

 A few comments suggested that the final regulations address the application of the self-dealing rules of section 4941, as well as the application of Rev. Rul. 82-223, 1982-2 C.B. 301, to private foundations' D&O insurance premiums and indemnification payments. The resolution of this issue is not possible in the context of this final regulation, but will be addressed separately.

 Like other tax-exempt organizations, private foundations need not allocate portions of D&O insurance premiums to individual directors and officers or include any such allocable amounts in Forms 1099 or W-2, provided such amounts are excludable from gross income under the final regulations. Whether or not such allocable amounts need to be treated as compensation for the limited purpose of section 4941, no employer should issue a Form 1099 or W-2 for any such amount that is excludable from gross income as a working condition fringe benefit described in section 132(d).

 Finally, in response to one comment, an example is included to illustrate the provisions of the final regulation.

 The rules of section 1.132-5(r) are effective December 30, 1992; however, taxpayers may treat the rules as applicable to benefits provided on or after January 1, 1989.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Marianna Dyson, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations), Internal Revenue Service. However, personnel from other offices of the Service and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR 1.61-1 THROUGH 1.133-1T

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8457

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.61-2T is amended as follows:

1. Paragraph (c)(3)(ii) is removed.

2. The heading for paragraph (c)(3)(i) is removed and paragraph (c)(3)(i) is redesignated as paragraph (c)(3).

Par. 3. Section 1.61-21 is amended as follows:

1. Paragraph (a)(7) is amended by revising the entry for section 1.61-21(c)(3)

2. Paragraph (a)(7) is amended by adding an entry for section 1.61-21(k).

3. Paragraph (c)(1) is revised.

4. Paragraph (c)(2)(i) is amended by revising the paragraph heading and adding a new sentence at the end.

5. Paragraphs (c)(2)(ii) and (c)(2)(iii) are redesignated (c)(2)(iii) and (c)(2)(iv), respectively.

6. A new paragraph (c)(2)(ii) is added.

7. The headings for paragraphs (c)(3) and (c)(3)(i) are revised and a new sentence is added at the end of paragraph (c)(3)(i)

8. Paragraph (c)(3)(ii) is revised.

9. The first sentence of paragraph (c)(7) is revised.

10. In paragraph (c)(4), the reference to paragraph "(j)" in the first sentence is removed and "(k)" is added in its place.

11. The revisions and additions read as follows:

SECTION 1.61-21 TAXATION OF FRINGE BENEFITS.

(a) * * *

(7) * * *

SECTION 1.61-21(c) SPECIAL VALUATION RULES

* * * * *

(3) Additional rules for using special valuation.

* * * * *

SECTION 1.61-21(k) COMMUTING VALUATION RULE FOR CERTAIN EMPLOYEES

(1) In general.

(2) Trip-by-trip basis.

(3) Commuting value.

(4) Definition of employer-provided transportation.

(5) Unsafe conditions.

(6) Qualified employee defined.

(7) Examples.

(8) Effective date.

* * * * *

(c) SPECIAL VALUATION RULES -- (1) IN GENERAL. Paragraphs (d) through (k) of this section provide special valuation rules that may be used under certain circumstances for certain commonly provided fringe benefits. For general rules relating to the valuation of fringe benefits not eligible for valuation under the special valuation rules or fringe benefits with respect to which the special valuation rules are not used, see paragraph (b) of this section.

(2) USE OF THE SPECIAL VALUATION RULES -- (i) FOR BENEFITS PROVIDED BEFORE JANUARY 1, 1993. * * * The provisions of this paragraph are effective for benefits provided before January 1, 1993.

(ii) FOR BENEFITS PROVIDED AFTER DECEMBER 31, 1992. The special valuation rules may be used for income tax, employment tax, and reporting purposes. The employer has the option to use any of the special valuation rules. An employee may use a special valuation rule only if the employer uses that rule or the employer does not meet the condition of paragraph (c)(3)(ii)(A) of this section, but one of the other conditions of paragraph (c)(3)(ii) of this section is met. The employee may always use general valuation rules based on facts and circumstances (see paragraph (b) of this section) even if the employer uses a special rule. If a special rule is used, it must be used for all purposes. If an employer properly uses a special rule and the employee uses the special rule, the employee must include in gross income the amount determined by the employer under the special rule reduced by the sum of --

(A) Any amount reimbursed by the employee to the employer; and

(B) Any amount excludable from income under another section of subtitle A of the Internal Revenue Code of 1986. If an employer properly uses a special rule and properly determines the amount of an employee's working condition fringe under section 132 and section 1.132-5 (under the general rule or under a special rule), and the employee uses the special valuation rule, the employee must include in gross income the amount determined by the employer less any amount reimbursed by the employee to the employer. The employer and employee may use the special rules to determine the amount of the reimbursement due the employer by the employee. Thus, if an employee reimburses an employer for the value of a benefit as determined under a special valuation rule, no amount is includible in the employee's gross income with respect to the benefit. The provisions of this paragraph are effective for benefits provided after December 31, 1992.

* * * * *

(3) ADDITIONAL RULES FOR USING SPECIAL VALUATION -- (i) ELECTION TO USE SPECIAL VALUATION RULES FOR BENEFITS PROVIDED BEFORE JANUARY 1, 1993. * * * The provisions of this paragraph are effective for benefits provided before January 1, 1993.

(ii) CONDITIONS ON THE USE OF SPECIAL VALUATION RULES FOR BENEFITS PROVIDED AFTER DECEMBER 31, 1992. Neither the employer nor the employee may use a special valuation rule to value a benefit provided after December 31, 1992, unless one of the following conditions is satisfied --

(A) The employer treats the value of the benefit as wages for reporting purposes within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided;

(B) The employee includes the value of the benefit in income within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided;

(C) The employee is not a control employee as defined in paragraphs (f)(5) and (f)(6) of this section; or

(D) The employer demonstrates a good faith effort to treat the benefit correctly for reporting purposes.

* * * * *

(7) SPECIAL ACCOUNTING RULE. If the employer is using the special accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (see section 601.601(d)(2)(ii)(b) of this chapter) (relating to the reporting of and withholding on the value of noncash fringe benefits), benefits which are deemed provided in a subsequent calendar year pursuant to that rule are considered as provided in that subsequent calendar year for purposes of the special valuation rules. * * *

* * * * *

Par. 4. Section 1.132-0 is amended as follows:

1. The entry for section 1.132-5(m)(6) is revised; and the entries for paragraphs (m)(7) and (m)(8) are added.

2. An entry for section 1.132-5(r) is added.

3. The revisions and additions read as follows:

SECTION 1.132-O OUTLINE OF REGULATIONS UNDER SECTION 132.

* * * * *

SECTION 1.132-5(m) EMPLOYER-PROVIDED TRANSPORTATION FOR SECURITY CONCERNS.

* * * * *

(6) Special valuation rule for government employees.

(7) Government employer and employee defined.

(8) Examples.

* * * * *

SECTION 1.132-5(r) VOLUNTEERS.

(1) In general.

(2) Limit on application of this paragraph.

(3) Definitions.

(4) Example.

* * * * *

Par. 5. Section 1.132-1(g) is amended by adding two sentences after the first sentence to read as follows:

SECTION 1.132-1 EXCLUSION FROM GROSS INCOME FOR CERTAIN FRINGE BENEFITS.

* * * * *

(g) * * * Furthermore, in section 1.132-5, the eleventh sentence of paragraph (m)(1), Examples 6 and 7 in paragraph (m)(8) , and paragraphs (m)(2)(i), (m)(2)(v), (m)(3)(iv), (m)(6), (m)(7), and (r) are effective December 30, 1992; however, taxpayers may treat the rules as applicable to benefits provided on or after January 1, 1989. For the applicable rules relating to employer-provided transportation for security concerns prior to December 30, 1992, see section 1.132-5(m) (as contained in 26 CFR part 1 (sections 1.61 to 1.169) revised April 1, 1992). * * * * * * * *

Par. 6. Section 1.132-5 is amended as follows:

1. A new sentence is added between the tenth and eleventh sentences of paragraph (m)(1).

2. Paragraph (m)(2)(i) is revised.

3. Paragraphs (m)(2)(v) and (m)(3)(iv) are added.

4. Paragraph (m)(6) is redesignated as paragraph (m)(8) and Examples (6) and (7) are added.

5. Paragraphs (m)(6) and (m)(7) are added.

6. Paragraph (r) is added.

7. The revisions and additions read as follows:

SECTION 1.132-5 WORKING CONDITION FRINGES.

* * * * *

(m) * * *

(1) * * * However, if an independent security study meeting the requirements of paragraph (m)(2)(v) of this section has been performed with respect to a government employee, the government employee may exclude the value of the personal use (other than commuting) of the employer-provided vehicle that the security study determines to be reasonable and necessary for local transportation. * * *

(2) * * *

(i) IN GENERAL. For purposes of this paragraph (m), a bona fide business-oriented security concern exists only if the facts and circumstances establish a specific basis for concern regarding the safety of the employee. A generalized concern for an employee's safety is not a bona fide business-oriented security concern. Once a bona fide business-oriented security concern is determined to exist with respect to a particular employee, the employer must periodically evaluate the situation for purposes of determining whether the bona fide business-oriented security concern still exists. Example of factors indicating a specific basis for concern regarding the safety of an employee are --

(A) A threat of death or kidnaping of, or serious bodily harm to, the employee or a similarly situated employee because of either employee's status as an employee of the employer; or

(B) A recent history of violent terrorist activity (such as bombings) in the geographic area in which the transportation is provided, unless that activity is focused on a group of individuals which does not include the employee (or a similarly situated employee of an employer), or occurs to a significant degree only in a location within the geographic area where the employee does not travel.

* * * * *

(v) INDEPENDENT SECURITY STUDY WITH RESPECT TO GOVERNMENT EMPLOYEES. For purposes of establishing the existence of an overall security program under paragraph (m)(2)(ii) of this section with respect to a particular government employee, a security study conducted by the government employer (including an agency or instrumentality thereof) will be treated as a security study pursuant to paragraph (m)(2)(iv) of this section if, in lieu of the conditions of paragraphs (m)(2)(iv)(A) through (D) of this section, the following conditions are satisfied:

(A) The security study is conducted by a person expressly designated by the government employer as having the responsibility and independent authority to determine both the need for employer- provided security and the appropriate protective services in response to that determination;

(B) The security study is conducted in accordance with written internal procedures that require an independent and objective assessment of the facts and circumstances, such as the nature of the threat to the employee, the appropriate security response to that threat, an estimate of the length of time protective services will be necessary, and the extent to which employer-provided transportation may be necessary during the period of protection;

(C) With respect to employer-provided transportation, the security study evaluates the extent to which personal use, including commuting, by the employee and the employee's spouse and dependents may be necessary during the period of protection and makes a recommendation as to what would be considered reasonable personal use during that period; and

(D) The employer applies the specific security recommendations contained in the study to the employee on a consistent basis.

(3) * * *

(iv) SPOUSES AND DEPENDENTS OF GOVERNMENT EMPLOYEES. The security rules of this paragraph (m)(3) apply to the spouse and dependents of a government employee. However, the value of local vehicle transportation provided to the government employee's spouse and dependents for personal purposes, other than commuting, during the period that a bona fide business-oriented security concern exists with respect to the government employee will not be included in the government employee's gross income if the personal use is determined to be reasonable and necessary by the security study described in paragraph (m)(2)(v) of this section.

* * * * *

(6) SPECIAL VALUATION RULE FOR GOVERNMENT EMPLOYEES. If transportation is provided to a government employee for commuting during the period that a bona fide business-oriented security concern under section 1.132-5(m) exists, the commuting use may be valued by reference to the values set forth in section 1.61-21(e)(1)(i) or (f)(3)(vehicle cents-per-mile or commuting valuation of $1.50 per one-way commute, respectively) without regard to the additional requirements contained in section 1.61-21(e) or (f) and is deemed to have met the requirements of section 1.61-21(c).

(7) GOVERNMENT EMPLOYER AND EMPLOYEE DEFINED. For purposes of this paragraph (m), "government employer" includes any Federal, state, or local government unit, and any agency or instrumentality thereof. A "government employee" is any individual who is employed by the government employer.

(8) * * *

EXAMPLE (6). J is a United States District Judge. At the beginning of a 3-month criminal trial in J's court, a member of J's family receives death threats. M, the division (within government agency W) responsible for evaluating threats and providing protective services to the Federal judiciary, directs its threat analysis unit to conduct a security study with respect to J and J's family. The study is conducted pursuant to internal written procedures that require an independent and objective assessment of any threats to members of the federal judiciary and their families, a statement of the requisite security response, if any, to a particular threat (including the form of transportation to be furnished to the employee as part of the security program), and a description of the circumstances under which local transportation for the employee and the employee's spouse and dependents may be necessary for personal reasons during the time protective services are provided. M's study concludes that a bona fide business-oriented security concern exists with respect to J and J's family and determines that 24-hour protection of J and J's family is not necessary, but that protection is necessary during the course of the criminal trial whenever J or J's family is away from home. Consistent with that recommendation, J is transported every day in a government vehicle for both personal and business reasons and is accompanied by two bodyguard/chauffeurs who have been trained in evasive driving techniques. In addition, J's spouse is driven to and from work and J's children are driven to and from school and occasional school activities. Shortly after the trial is concluded, M's threat analysis unit determines that J and J's family no longer need special protection because the danger posed by the threat no longer exists and, accordingly, vehicle transportation is no longer provided. Because the security study conducted by M complies with the conditions of section 1.132-5(m)(2)(v), M has satisfied the requirement for an independent security study and an overall security program with respect to J is deemed to exist. Thus, with respect to the transportation provided for security concerns, J may exclude as a working condition fringe the value of any special security features of the government vehicle and the value attributable to the two bodyguard/chauffeurs. See Example (1) of this paragraph (m)(8). The value of vehicle transportation provided to J and J's family for personal reasons, other than commuting, may also be excluded during the period of protection, because its provision was consistent with the recommendation of the security study.

EXAMPLE (7). Assume the same facts as in Example (6) and that J's one-way commute between home and work is 10 miles. Under paragraph (m)(6) of this section, the Federal government may value transportation provided to J for commuting purposes pursuant to the value set forth in either the vehicle cents-per- mile rule of section 1.61-21(e) or the commuting valuation rule of section 1.61-21(f). Because the commuting valuation rule yields the least amount of taxable income to J under the circumstances, W values the transportation provided to J for commuting at $1.50 per one-way commute, even though J is a control employee within the meaning of section 1.61-21(f)(6).

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(r) VOLUNTEERS -- (i) IN GENERAL. Solely for purposes of section 132(d) and paragraph (a)(1) of this section, a bona fide volunteer (including a director or officer) who performs services for an organization exempt from tax under section 501(a), or for a government employer (as defined in paragraph (m)(7) of this section), is deemed to have a profit motive under section 162.

(2) LIMIT ON APPLICATION OF THIS PARAGRAPH. This paragraph (r) shall not be used to support treatment of the bona fide volunteer as having a profit motive for purposes of any provision of the Internal Revenue Code of 1986 (Code) other than section 132(d). Nothing in this paragraph (r) shall be interpreted as determining the employment status of a bona fide volunteer for purposes of any section of the Code other than section 132(d).

(3) DEFINITIONS -- (i) BONA FIDE VOLUNTEER. For purposes of this paragraph (r), an individual is considered a "bona fide volunteer" if the individual does not have a profit motive for purposes of section 162. For example, an individual is considered a "bona fide volunteer" if the total value of the benefits provided with respect to the volunteer services is substantially less than the total value of the volunteer services the individual provides to an exempt organization or government employer.

(ii) LIABILITY INSURANCE COVERAGE FOR A BONA FIDE VOLUNTEER. For purposes of this paragraph (r), the receipt of liability insurance coverage by a volunteer, or an exempt organization or government employer's undertaking to indemnify the volunteer for liability, does not by itself confer a profit motive on the volunteer, provided the insurance coverage or indemnification relates to acts performed by the volunteer in the discharge of duties, or the performance of services, on behalf of the exempt organization or government employer.

(4) EXAMPLE. The following example illustrates the provisions of paragraph (r) of this section.

EXAMPLE. A is a manager and full-time employee of P, a tax- exempt organization described in section 501(c)(3). B is a member of P's board of directors. Other than $25 to defray expenses for attending board meetings, B receives no compensation for serving as a director and does not have a profit motive. Therefore, B is a bona fide volunteer by application of paragraph (r)(3)(i) of this section and is deemed to have a profit motive under paragraph (r)(1) of this section for purposes of section 132(d). In order to provide liability insurance coverage, P purchases a policy that covers actions arising from A's and B's activities performed as part of their duties to P. The value of the policy and payments made to or on behalf of A under the policy are excludable from A's gross income as a working condition fringe, because A has a profit motive under section 162 and would be able to deduct payments for liability insurance coverage had he paid for it himself. The receipt of liability insurance coverage by B does not confer a profit motive on B by application of paragraph (r)(3)(ii) of this section. Thus, the value of the policy and payments made to or on behalf of B under the policy are excludable from B's income as a working condition fringe. For the year in which the liability insurance coverage is provided to A and B, P may exclude the value of the benefit on the Form W-2 it issues to A or on any Form 1099 it might otherwise issue to B.