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Tax Treatment Of Cellular Telephones And Internet-Provider AllowancesII.INTRODUCTIONThe invention of cellular telephones (or cell phones) and the development of aworldwide web called the “internet” have dramatically changed the way many peoplearound the world, in particular the United States, live, work, and play, everyday of theirlives. The cell phone emerged around the same time as the Internet went public. 1Cell phones were first made available to the public in 1984. Back then, they were verylarge, expensive instruments. 2 It has been estimated that there were more than 219million cell phones in use in the United States as of 2005, and over 2 billion worldwide. 3The first cell phone caused a fundamental technology and market shift toward theperson and away from the place. Motorola introduced the 16-ounce “Dyna TAC” phoneinto commercial service in 1983, with each phone costing the consumer $3,500. It tookseven additional years before there were a million subscribers in the United States.Today, there are more cellular subscribers than wireline phone subscribers in theworld, with mobile phones weighing as little as 3 ounces 4 (emphasis added).In 1989, the Internal Revenue Service designated cell phones as “listed property”. Thedesignation recognizes that employers give mobile communication devices toemployees for business purposes, but because of their very nature, they also could beused for personal use.As a result, to exclude the use by an employee from taxable income, employers mustbe able to track and substantiate their employees’ usage of mobile communicationsdevices. Technically, the law excludes any personal calls or e-mails, in the case ofBlackberries, as a deductible expense. 5With the proliferation of cell phones and internet usage in the workplace, the issue oftax-related parity with other common “business-purpose” tools such as the officedesktop telephone and access to the internet via the office computer has surfaced andneeds to be addressed in the Internal Revenue Code.1Website www.historicaltextarchive.com2Website www.library.thinkquest.org3Website www.infoplease.com4Website www.thehistoryof.net5Bureau of National Affairs (BNA), Daily Tax Report, 26-DTR G-6, February 8, 2008ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 2
Tax Treatment Of Cellular Telephones And Internet-Provider AllowancesIII.SCOPE OF THE PROBLEMPersonal use and the taxation of cell phones is specifically referred to in IRS CodeSection 280F(d)(4)(A)(v), (see Appendix for IRS Code Sections). That reference to IRCSection 280F is cited specifically in IRS Code Section 274(d)(4), which is part of IRSCode Section 274(d) Substantiation Required.Sec 274(d) indicates no credit shall be allowed:unless the taxpayer substantiates by adequate records or by sufficient evidencecorroborating the taxpayer's own statement (A) the amount of such expense orother item, (B) the time and place of the travel, entertainment, amusement,recreation, or use of the facility or property, or the date and description of the gift,(C) the business purpose of the expense or other item, and (D) the businessrelationship to the taxpayer of persons entertained, using the facility or property,or receiving the gift. The Secretary may by regulations provide that some or all ofthe requirements of the preceding sentence shall not apply in the case of anexpense which does not exceed an amount prescribed pursuant to suchregulations. This subsection shall not apply to any qualified non personal usevehicle (as defined in subsection (i)).IRC Section 274(d) is generally referred to as the “Accountable Plan Rule”. Therequirements for documentation to apply are not conducive to cell phone usage byindividuals employed and in possession of an employer provided cell phone. In fact, weassert these rules are administratively burdensome for any employer, regardless of thenumber of employees. To comply with this IRS Code Section, employers need toreview each and every line item on each and every cell phone bill received anddistinguish those calls that are personal in nature from those calls that are businessrelated. The employer would then be required to seek reimbursement for the personalphone calls from the employee.This treatment of identifying personal phone calls differs radically from an employeewho is employed at his employers’ place of business and has a land line telephone ontheir desk. In this scenario, the employee is permitted to make infrequent use of thetelephone for personal reasons and no reimbursement is required of this desk boundemployee as the IRS Code identifies certain fringe benefits as not subject to taxation(See IRS Code Section 132(e)). This treatment is disparate to employees who areperforming the same actions but who happen to have received a cell phone from theiremployer. We believe there is a presumption of primary business use when a cellphone is provided to an employee.Since 1989, cellular phones and telecommunications equipment (including PDA’s andBlackberrys) have been included in the definition of “listed property” under Section 280Fof the Code (See Appendix), which limits the amount of depreciation for certain propertyADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 3
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