Taxing the perks: US delays ax on fringe benefits
"What," they cried on corporate dining rooms, "is the IRS trying once again to tax our subsidized lunch? Are they after our company cars, the employee discount, our free golf course and tennis courts? How much tax will we have to pay on our perquisites?"
For 2 1/2 years, a congressional ban has kept the Internal Revenue Service from issuing guidelines on the taxation of corporate fringe benefits. That ban expired May 31. Originally, the administration hoped to produce a set of regulations sometime this summer. But "widespread apprehension" has caused Treasury Secretary Donald Regan to promise that no such rules will be forthcoming before next July 1.
Decisions on the taxability of free or subsidized employee goodies are now made by individual IRS agents.
Few of us enjoy such fringe benefits as the president of Warner Communications, who had a screening room installed in his apartment, or top investment bankers, whose fabled private dining rooms offer Duck l'Orange on Limoges china while the rest of the company gets tuna surprise under plastic wrap.
But inflation has made noncash compensation increasingly attractive. Many corporations offer free club memberships, subsidized cafeterias, and products at cost. Employees come to view the baubles as a just reward.
"Of course I need it," says a department manager for a Washington store that offers its employees a 30 percent discount. "We don't get paid enough as it is."
Changing work styles have led to innovative employee benefits: Wang Laboratories offers a children's day-care center at its Lowell, Mass., plant, and the Perkin- elmer Corporation of Connecticut supplies a fleet of vans to encourage employee car pools.
At some companies, benefits now account for over 40 percent of the payroll.
The IRS has cast a covetous eye of this compensation for some time, arguing that recipients carry a lighter tax burden than those poor souls who are paid only in cash.
In 1975, the Treasury issued a discussion draft of proposed regulations. The draft drew more discussion than anticipated, much of it the verbal equivalent of a barrage of rotten tomatoes. Treasury withdrew the rules late in 1976.
In October of 1978, Congress imposed a freeze on tax rules dealing with fringe benefits. The freeze was extended, but was allowed to expire this year, on May 31.
At a subcommittee hearing in mid- May, John Chapoton, assistant secretary of the Treasury for tax policy, and Roscoe Egger, commissioner of the IRS, both testified in favor of some form of taxation for fringe benefits, indicating that more proposed guidelines would soon be issued.
Mr. Chapoton and Mr. Egger, in a joint statement, said they were disturbed about "the growing public perception that fringe benefits are not taxable. This perception . . . has begun to move our voluntary-compliance system down the road of favored treatment for in-kind fringe benefits and harsh treatment of cash salary and wages."
Investment bankers foresaw themselves listing numerous Duck l'Oranges on their Form 1040s. Ordinary employees worried about their company life insurance benefits. Angry letters flooded Congress, while administration officials made conflicting statements.
"It was a matter of extreme confusion on the part of the public," says a congressional staff member who works on the issue.
Rep. William R. Cotter (D) of Connecticut, chairman of the Select Revenue Measures Subcommittee, requested that the secretary of the treasury calm the troubled waters. Secretary Regan replied in a letter that controversy had caused the Treasury to "reconsider its approach to this difficult problem," adding that no rules would be issued before July of 1982.
IRS officials say it will be difficult to hang taxable dollar values on fringe benefits.
For the most part, the benefits cannot be quickly converted into cash. Airline employees, for example, often fly the friendly skies on a free pass -- but the pass is nontransferable, and seats are allocated on a space-available basis. Thus the value of the pass, to the employee, is not the same as the price of a regular ticket.
Many retail stores sell to their employees at a discount. But the employee can't shop around elsewhere for a favored style or brand, and it would be hard to resell the product at retail and pocket the difference. What should the tax on this type of transaction be?
It will take a lot of road-testing to get the bugs out of regulations for taxing such perquisites. Accordingly the Treasury has promised to provide adequate time for public comment and to work closely with Congress before the guidelines are set down in stone.
Chapoton and Egger also said necessary business equipment, like office furniture, won't be taxed and that the IRS would keep its paws off items of small value, like the company picnic.
Congress is still standing by, watching with a wary eye to see if the IRS will get out of hand. Several bills that would permanently ban the taxation of fringe benefits have been introduced on Capitol Hill. A congressional staffer says he does not see any "impetus" behind the bills and that they are unlikely to pass.
"A permanent ban is not a very appropriate way to approach the issue," he said.