Employees Can Donate the Value of Leave Time Tax Free

Employees Can Donate the Value of Leave Time Tax Free

News story posted in IRS Notices on 25 October 2001| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In the aftermath of September 11th, many employers are considering leave-based donation programs whereby employees can forego taking leave and donate its value to charity. In a substantive move, the Treasury and IRS have issued Notices 2001-64 and 2001-69 which waive longstanding assignment-of-income and constructive receipt doctrines by enabling employees to contribute the value of vacation, sick, or personal leave time directly to charity without first having to take it into income.

PGDC SUMMARY

In the aftermath of September 11th, many employers are considering leave-based donation programs whereby employees can forego taking leave and donate its value to charity. In a substantive move, the Treasury and IRS have issued Notices 2001-64 and 2001-69 which waive longstanding assignment-of-income and constructive receipt doctrines by enabling employees to contribute the value of vacation, sick, or personal leave time directly to charity without first having to take it into income.

The Notices apply to contributions made before January 1, 2003 and solicit comments regarding leave-based donation programs and whether existing rules should be modified permanently to accommodate them.

FULL TEXT:

Notice 2001-64

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS

October 24, 2001

Treasury and IRS today issued interim guidance that provides employees will not be taxed on donated leave. In the aftermath of the September 11th terrorist attacks, a number of employers have adopted or are considering adopting leave-based donation programs. These programs generally allow employees to forgo their vacation, sick, or personal leave in exchange for their employers' contributing the value of that leave to charity.

The Notice eliminates uncertainty regarding the Federal income tax treatment of payments by employers under these programs, by providing that employees will not be taxed on donated leave. The Notice applies to payments made to charities before January 1, 2003. The Notice also solicits comments as to the taxation of leave-based donation programs and whether the existing tax rules should be modified with regard to such programs.

"In the aftermath of the September 11th attacks employers and employees are trying to make a difference by contributing to various relief funds. We want to facilitate these worthwhile efforts by eliminating concerns about the tax consequences," stated Mark Weinberger, Treasury Assistant Secretary for Tax Policy.

PGDC Editor's Note: The text of Notice 2001-64 and 2001-69 are identical with the exception of additional contact information which appears at the end of Notice 2001-69. Notice 2001-69 follows:

* * * * *

Part III -- Administrative, Procedural and Miscellaneous

PURPOSE AND OVERVIEW

In the aftermath of the September 11, 2001 terrorist attacks, a number of employers have adopted or are considering adopting leave-based donation programs, under which employees forgo vacation, sick, or personal leave in exchange for employer contributions of amounts to organizations described in section 170(c) of the Internal Revenue Code. This Notice provides interim guidance on the application of income and employment taxes to, and the proper reporting of, payments by employers under these programs. During the period covered by this interim guidance, the Internal Revenue Service and the Treasury Department intend to study whether it may be appropriate to modify the regulations under section 61 to address certain leave-based donation programs.

BACKGROUND

Under general assignment-of-income tax principles, where, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in section 170(c) and an amount for such services is paid to such organization by the person to whom services are rendered, the amount so paid constitutes income to the person performing the services. Section 1.61-2(c) of the Income Tax Regulations. See also Lucas v. Earl, 281 U.S. 111 (1930); Rev. Rul. 58-495, 1958-2 C.B. 27. Under general constructive receipt principles, when income is made available so that the taxpayer may draw upon it at any time, the income is constructively received by the taxpayer unless the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Section 1.451-2(a). However, application of assignment-of-income and constructive receipt principles depends on the facts and circumstances of each case. See, e.g., Commissioner v. Giannini, 129 F.2d 638 (9th Cir. 1942).

INTERIM GUIDANCE

The Service will not assert that payments made by an employer to an organization described in section 170(c), in exchange for vacation, sick, or personal leave that the employee elects to forgo, constitute gross income or wages of an employee, PROVIDED that the payments are made to such organizations before January 1, 2003. Similarly, the Service will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees.

Amounts to which this interim guidance applies need not be included in Box 1, 3 (if applicable), or 5 of the Form W-2.

Participating employees may not claim a charitable contribution deduction under section 170 with respect to the value of forgone leave excluded from compensation and wages. In the case of an employer, the Service will not assert that payments made under such programs before January 1, 2003 are deductible under section 170, rather than under section 162.

REQUEST FOR COMMENTS

The Service and the Treasury Department invite comments on the taxation of leave-based donation programs, including comments on whether section 1.61-2(c) should be modified to except certain leave- based donation programs from the assignment-of-income doctrine, and on appropriate limitations to any such exception. Comments are also requested on the application of constructive receipt principles in connection with those programs. Finally, comments are requested on what types of leave-based donation programs employers currently offer.

Comments may be submitted on or before February 1, 2002, to Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224, Attn: CC:ITA:RU (Notice 2001-69), Room 5226. Submissions may also be sent electronically via the Internet to the following e-mail address: notice.comments@m1.irscounsel.treas.gov. All materials submitted will be available for public inspection and copying.

FURTHER INFORMATION

For further information, please contact Mr. Sheldon A. Iskow at (202) 622-4920 (not a toll-free call).

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