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Tax Treatment Of Cellular Telephones And Internet-Provider Allowancesthat can be used for personal purposes. This designation as listed property in section280F(d)(4)(A)(v) has implications for both business deduction and fringe benefitpurposes, because of the detailed recordkeeping requirement with respect to suchproperty.The detailed substantiation rules set forth specifically apply to “any listed property (asdefined in section 280F(d)(4)).” See Section 274(d)(4) of the Code. Under theregulations, deductions for expenses attributable to the business use of cellular phonesare disallowed unless the taxpayer substantiates by adequate records or by sufficientevidence corroborating the taxpayer’s own statement the amount of the expenses, thetime and place of the use of the list property, and the business purpose of the expense.See Generally Treas. Reg. 1.1274-5T(b)(6) and 1.274-5T(c).Cellular phone expenses include the purchase price of the equipment (or annualized‘lease value’ approximation of that price), monthly service charges and any additionalper minute, roaming, long-distance or other operating charges. See, e.g., Treas. Reg.1.274-5T(6)(i).There is an interaction with the working condition fringe benefit exclusion of section132(d) and “accountable plan” rules of section 62(c) of the Code. If an employerprovides a cellular phone and a service plan to an employee (by either paying for thebenefits directly or reimbursing the employee), the exclusions set forth in section 132(d)for working condition fringe benefits and in section 62(c) for tax-free expensereimbursements under the accountable plan rules apply only to the extent that records(including records of both incoming and outgoing calls) are kept to substantiate thebusiness use each calendar year.Note: The exclusion for working condition fringes generally covers any propertyor services provided to any individual (including independent contractors)currently performing services for the employer to the extent the expenses wouldhave been deductible under Section 162 or 167 of the Code (including section274, when required to be applied), if the individual had paid for the benefit andthe expenses relate to the employer’s business. Sections 132(a)(3) and 132(d)of the Code; Treas. Reg. 1.132-5. Likewise, one of the required elements forexcluding and expense reimbursement from the employee’s income and wagesunder Section 62(c) of the Code is compliance with the detailed substantiationrequirements of Section 274(d), when applicable. See Treas. Reg 1.62-2(e)(1)and -2(e)(2).If insufficient or no records are kept, the exclusions for working condition fringes andaccountable plan reimbursements will not apply to exclude the business use of thecellular phone (and the related service plan expenses) from the employee’s grossincome. Therefore, the value of the benefits must be included in the employee’s grossincome and treated as wages for payroll tax purposes. See Treas. Reg. 1,724-5T(e).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 4
Tax Treatment Of Cellular Telephones And Internet-Provider AllowancesThere are no streamlined substantiation rules for cell phones as there are for vehicles.No personal use or de minimis personal use policies are authorized under the section274(d) substantiation rules.The substantiation rules do not permit employers to adopt “no personal use” or “deminimis personal use policies” with respect to cellular phones, such as the rulespermitting reliance on written policies for “vehicles not used for personal purposes” and“vehicles not used of personal purposes other than commuting,” which streamline or atleast minimize the recordkeeping requirements. Treas. Reg. 1.274-6T(a)(2) and 1.2746T(a)(3).Note: If the employer implements such a policy with respect to its cellular phoneprogram, reliance on same will not qualify as sufficient evidence corroboratingthe employee’s own statement and, therefore, will not satisfy the substantiationrequirements of section 274(d) for purposes of excluding the business use as aworking condition fringe benefit or a tax-free business expense reimbursement.In such a case, the result is that the entire value of the benefits (that weretreated as tax-free) become taxable and subject to the retroactive imposition ofpayroll taxes if the IRS successfully challenges the program in an employmenttax examination.Although the regulations permit taxpayers to substantiate the business use of a cellularphone by maintaining adequate records for a portion of the year, an employer relying onsuch a ‘sampling’ method would still be advised to collect the records pertaining to thesampling period and also be prepared to demonstrate that the records arerepresentative of the use for the calendar year. See, e.g., the rules for ‘substantiationby other sufficient evidence’ in Treas Reg. 1.274-5T(c)(3), which permits the use ofsampling for listed property if the taxpayer can demonstrate by other evidence that theperiods for which and adequate record is maintained are representative of the use forthe year.There has been some recent IRS examination activity in this area. Over the years, theTax Court has sustained the requirements of detailed substantiation under section274(d) with respect to cellular phones. See, e.g., Vaksman v. Commissioner, T.C.Memo. 2001-165, aff’d 90 AFTR2d 2002-7639 (5 th Cir. 2002); Woods v. Commissioner,T.C. Memo. 2004-114; Megibow v. Commissioner, T.C. Memo. 2004-41; Nitschke v.Commissioner, T.C.Memo. 2000-230; and Ramsey v. Commissioner, T.C. Memo. 1996189. Therefore, if the IRS were to review an employer’s cellular phone program anddetermine that the substantiation requirements had not been met, judicial precedentexists in favor of the government.There are references to cell phones in The IRS Audit Techniques Guide on FringeBenefits. In a section entitled, “Employee Use of Listed Property,” IRS examiners areadvised by the Guide that cellular phones are listed property and subject to detailedADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 Page 5
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