SECTION 2. BACKGROUND

Q–6. What provisions of the tax law may apply to a vehicle provided to an employee by an employer?

A–6. In general, section 61(a)(1) of the Internal Revenue Code (the Code) provides that gross income means all income, including compensation for services. Fringe benefits are specifically listed as an example of compensation for services. The examples of fringe benefits under Treas. Reg. § 1.61–2T(a)(1) include an employer-provided automobile.

However, section 132(a) of the Code permits certain fringe benefits, including working condition fringes, to be excluded from gross income. In certain circumstances, all or part of the value of the use of an employer-provided automobile may be a working condition fringe.

Q–7. When is the use of an employer- provided automobile a working condi- tion fringe?

A–7. Section 132(d) of the Code generally defines a working condition fringe as any property or services provided to an employee by an employer to the extent that, if the employee paid for such property or services, the payment would be allowable as a business expense deduction. Thus, generally any business use of an employer-provided vehicle, including a demonstration automobile, by any employee is a working condition fringe.

In addition, section 132(j)(3) of the Code specifically provides that “qualified automobile demonstration use” by a full

time automobile salesperson is treated as a working condition fringe.

However, regulations related to working condition fringe benefits at section 1.132–5(c)(1) generally provide that working condition fringe benefits may not be excluded unless the substantiation requirements of either section 274(d) or section 162 and corresponding regulations are satisfied. Thus, even if business use of an employer-provided vehicle is a working condition fringe, it may not be excluded from the employee’s gross income unless that business use is properly substantiated.