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."
In support of its conclusion, the IRS cited the following considerations:
1. The definition of de minimis fringe benefits in section 132 refers only to "property or services," and not cash.
2. The income tax regulations provide several examples of de minimis fringe benefits, and none involves cash. Rather, they include:
Occasional typing of personal letters by a company secretary; occasional personal use of an employer's copying machine; group meals, or picnics for employees and their guests; traditional birthday or holiday gifts of property (not cash) with a low fair market value; occasional theater or sporting event tickets; coffee, donuts, and soft drinks; local telephone calls; and flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., on account of illness, outstanding performance, or family crisis).
A congressional committee report provides illustrations of benefits that are excludable as de minimis fringe benefits, including "traditional gifts on holidays of tangible personal property having a low fair market value (e.g., a turkey giving for the year-end holidays)."
3. "It is not administratively impracticable to account for even a small amount of cash provided to an employee because the value of the amount provided is readily apparent and certain. Accordingly … accounting for cash or cash equivalent fringe benefits such as gift certificates is never considered administratively impracticable under section 132."
The IRS concluded, "It is our view that the employer-provided gift coupon operates in essentially the same way as a cash equivalent fringe benefit such as a gift certificate. As with a gift certificate, it is simply not administratively impracticable to account for the employer-provided gift coupons; they have a face value of $35. Accordingly, we conclude that an employer-provided holiday gift coupon with a face value of $35 that is redeemable at several local grocery stores is not excludable from gross income as a de minimis fringe benefit."
The IRS acknowledged that some courts have ruled that gift certificates of small amounts may be nontaxable fringe benefits, but it noted that all of these cases were decided many years ago prior to the enactment of section 132 and so they are no longer relevant.
KEY POINT. The IRS based its ruling on the fact that gift coupons and certificates are "cash equivalents." It should be noted coupons and certificates are unlike cash in some fundamental ways. For example, they generally cannot be used everywhere, they often have expiration dates, in some cases they may be used only by the person to whom they are issued, and in some cases they may be used only once (with any used balance being forfeited). The IRS did not address any of these dissimilarities.
KEY POINT. The IRS rejected the charity's suggestion that any holiday gift with a value of less than $75 should be considered a nontaxable de minimis fringe benefit.
Relevance to church treasurers. The following examples will illustrate the application of the IRS ruling to common church practices.
Example. A church provides its non-pastoral employees with a turkey at Christmas. This is a nontaxable de minimis fringe benefit and so the value of the turkey need not be reported on the employees' W-2 forms. The income tax regulations provide several examples of de minimis fringe benefits, including "traditional birthday or holiday gifts of property (not cash) with a low fair market value."
Example. A church provides its senior pastor with a $250 check as a Christmas gift. This is not a de minimis fringe benefit, and the entire value must be reported as wages on the pastor's W-2 form.
Example. A church provides employees with a $50 gift certificate redeemable at a local restaurant as a holiday gift. The certificate is a cash equivalent whose value is readily ascertainable. It is not a nontaxable de minimis fringe benefit despite the token amount, and so it should be reported as taxable compensation.
Example. A church provides employees with a $25 gift certificate redeemable at a local Krispy Kreme donut store. The certificate is a cash equivalent whose value is readily ascertainable. It must be reported as additional income on employees' W-2 forms. It is not a nontaxable de minimis fringe benefit despite the token amount, and so it must be reported as taxable compensation.
Example. A church provides employees with a Christmas card containing a $25 check. The value of the check must be reported as additional income on employees' W-2 forms. It is not a nontaxable de minimis fringe benefit despite the token amount, and so it must be reported as taxable compensation. The fact that the amount of a check is $25 is irrelevant. No cash gift provided to an employee, regardless of how small the amount, can be treated as a nontaxable de minimis fringe benefit. There is no exception, as is often assumed, for gifts of $25 or less.
Example. A church treats its staff to a holiday dinner at a local restaurant. The value of each dinner averages $20. The value of the meals is a nontaxable de minimis fringe benefit. The income tax regulations provide several examples of de minimis fringe benefits, including "group meals, or picnics for employees and their guests."
Example. At the end of each year a church provides volunteers who work in the church nursery with a $25 gift certificate to a local restaurant in recognition of their selfless services. The IRS ruling addressed in this article suggests that the value of these certificates represents taxable income to the volunteers. However, since they are not employees, the church is not required to report the amount of the certificates on a W-2 form. No Form 1099 is required either, assuming that the volunteers do not receive compensation of $600 or more during the year from the church. It will be up to the volunteers to decide how to handle the certificates for tax purposes.
KEY POINT. Churches can avoid having the value of holiday gifts constituting taxable compensation by providing both employees and volunteers with noncash items of nominal amounts rather than cash or cash equivalents. Such items include turkeys, hams, gift baskets, and candy.