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Gift Week: Gift Cards to Employees

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Situation GW03:

Ward, the CFO, at Marathon Bible College (MBC), a private college exempt under Internal Revenue Code section 501(c)(3), calls us with a question. MBC has historically given employees in the accounting department $15 Moonrox Coffee gift cards for their birthdays. Historically, MBC has considered these birthday presents as a de minimis fringe benefit for these employees. Ward asks if this is the correct treatment for tax purposes. Regrettably, we have to tell him that no, the gift cards should be taxable and included in compensation for the accounting department employees and reported on the employees’ Form W-2 each year.

Analysis:

This is a situation where we have to answer based on the way the IRS applies the tax rules. In my opinion, the IRS is clearly in error in their enforcement/interpretation of the taxability of most gift cards. The applicable case law is a 1961 district court case, Hallmark Cards Inc. v. U.S. This case provides the proper analysis in this situation. The Hallmark court reviewed the Service’s determination that employer-provided $15 and $25 dollar “special gift certificates,” which were redeemable in merchandise at any store that sold Hallmark’s products, were subject to employment taxes at the time the employees received them. In Hallmark, the court concluded that the “amounts provided for in the gift certificates were not intended as wages. They were intended to be gifts and gratuities, and in no wise to be considered as any part of the compensation to [Hallmark’s] employees.”

Further, tax regulations set forth that merchandise (such as a bag of coffee), given as a birthday or holiday gift, would generally qualify as a nontaxable, de minimis fringe benefit. Income Tax Regulation § 1.132-6(e)(1) provides examples of de minimis fringe benefits that are excludable from an employee’s gross income. These include occasional typing of personal letters by a company secretary; occasional personal use of an employer’s copying machine; occasional cocktail parties, 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, doughnuts, 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).

Tax Guidance:

The IRS currently relies on a twisted ruling — Technical Advice Memorandum (TAM) 200437030. This TAM (to the best of anyone’s ability to decipher its convoluted and contradictory “logic”) goes in contrast to Hallmark and sets forth that any gift card with a value on it will be taxable to the receiving employee. So, although broken, we are forced to live with conventional wisdom and draconian IRS rules in this arena.

Dave Moja

Dave serves as Partner and is dedicated to meeting client needs in the exempt organization tax arena through review of client returns, consulting engagements, training, and the compilation of the annual CapinCrouse Higher Education Tax Reporting Trends Project. He has 30 years of accounting experience and serves several industry committees, including the AICPA Not-for-Profit Advisory Council. Dave has also served on the IRS Advisory Committee on Tax Exempt and Government Entities (ACT).

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