Background. Most churches provide employees and volunteers with "gifts" at Christmas. Common examples include hams, turkeys, fruit baskets, small amounts of cash, or gift certificates. Church treasurers may assume that these gifts are so small that they need not be reported as taxable income, but an Internal Revenue Service ruling suggests that this assumption is incorrect. IRS Letter Ruling 200437030.
A charity provided employees with a ham, turkey, or gift basket as an annual holiday gift. Over the years, several employees complained about the gifts because of religious or dietary restrictions, and requested a gift coupon of comparable value. In response, the charity began providing employees with a gift coupon having a face value of $35 instead of a ham, turkey, or gift basket. The coupons listed food stores where they were redeemable. The charity did not withhold or pay any employment taxes for any portion of the $35 gift coupons provided to employees.
The IRS ruling. The IRS ruled that these coupons represented taxable income that should have been added to the employees' W-2 forms. It rejected the charity's argument that the coupons were a de minimis fringe benefit that were so low in value that they could be ignored for tax purposes.
The IRS conceded that taxable income does not include any fringe benefit that qualifies as a de minimis fringe benefit. Section 132(e)(1) of the tax code defines a de minimis fringe benefit as "any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable."
The IRS concluded that cash can never be a de minimis fringe benefit since it is not "unreasonable or administratively impracticable" to account for its value. The same conclusion applies to "cash equivalents," such as gift coupons, even though the property acquired with a coupon would have been a nontaxable de minimis fringe benefit had it been provided by the employer.
The IRS noted, "When an employee attends a staff meeting where two pots of coffee and a box of donuts are provided by the employer, the value of the benefit the employee receives is not certain or easily ascertained. Further, the administrative costs associated with determining the value of the benefit and accounting for it may be more expensive than providing the benefit. In this case, there is no difficulty in determining the value or accounting for it; each employee that received a gift coupon received a cash equivalent fringe benefit worth $35."
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