Ho Ho Ho: IRS Says Holiday Gift Coupons are Taxable

An IRS Technical Advice Memorandum released in 2004 concludes that certain employer-provided gift coupons are taxable income to the employees receiving them, and therefore need to be taken into account in computing income and FICA tax withholding. The employer that was the subject of the ruling traditionally provided holiday hams, turkeys or gift baskets to its employees. In response to employee complaints, it discontinued the baskets and instead began providing a coupon that was redeemable at a number of local grocery stores for up to $35 of groceries. Any unused portion of the coupon would be forfeited.

Section 132 of the Internal Revenue Code excludes de minimis fringe benefits from an employee's taxable wages. The IRS held, however, that the grocery coupons did not qualify as de minimis. A fringe benefit can be excluded from wages as de minimis only when its value is so small as to make accounting for it unreasonable or administratively impracticable. Under the regulations, that requires consideration of the frequency with which the benefit is provided, the value of the benefit, and the practicality of tracking it for payroll tax purposes. Cash or cash equivalent fringe benefits do not qualify under the de minimis exception because their value is readily determinable and easy to track.

The IRS concluded that because the value of each coupon was clearly stated on its face to be $35, it was reasonable to expect the employer to include the $35 in each employee's taxable wages. Ironically, if the employer had continued to provide hams or turkeys in kind, the value of those items would have continued to be excluded from the employees' wages, because such gifts qualify as de minimis. It is interesting that the IRS appears to have ignored the fact that any portion of a coupon that was not used at the time of the purchase would be forfeited, and did not discuss the employment tax consequences of such a forfeiture.

Employers who provide year-end or holiday gifts, or who provide any gift certificates or other cash equivalent gifts or bonuses to employees, might want to consider the gifts' taxability and review their payroll practices in light of this IRS ruling. (While a Technical Advice Memo cannot be cited as precedent in other cases, it does indicate the position the IRS is likely to take in similar situations.) Such an employer also needs to make sure that the value of any taxable gifts is treated correctly (either included or excluded) under the terms of its retirement, 401(k) and other benefit plans.