SECTION 4. SIMPLIFIED METHOD

FOR THE FULL EXCLUSION OF QUALIFIED AUTOMOBILE DEMONSTRATION USE

Q–11. What are the requirements under this revenue procedure for the Simplified Method for Full Exclusion of Qualified Automobile Demonstration use?

A–11. The requirements are as follows:

a. The employer must have a qualified written policy limiting the use of the demonstration automobile;

b. The employer must reasonably believe that the full-time automobile salesperson complies with the written policy; and

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For example, an employee other than the salesperson could record the mileage on the demonstration automobiles at the arrival and departure of the vehicle at the sales office on each workday. A reasonable system would also include mileage entries for the vehicles by the full-time salespeople using the vehicle if there was random verification of the accuracy of the entries by an employee other than the salespeople at least once in every determination period, as described in Question and Answer 18.

Q–18. What is the applicable period for determining whether the average 10 miles per day is exceeded?

A–18. Under the simplified full exclusion method provided by this revenue procedure, the employer must determine whether the average 10 miles per day of personal use has been exceeded no less often than once each calendar month. If an employer chooses to make the determination every two weeks, the applicable period is two weeks, and the amount of personal use in addition to commuting allowed for the two weeks is 140 miles (14 days multiplied times 10 miles per day). If the employer chooses to make the determination monthly, the amount varies from month to month, depending on the number of days in the calendar month.

Q–19. What is commuting mileage? A–19. Commuting mileage is the total number of miles a demonstration automobile is driven by a salesperson when commuting to and from the dealer’s sales office during the period at issue. For this purpose, commuting mileage includes only one round trip to and from the sales office per workday. The employer should assume that the commuting distance is the same for every day the employee drives the automobile to work unless the employer has reason to believe that the employee has moved.

Q–20. How does an employer deter- mine the commuting mileage for a full- time salesperson?

A–20. A full-time salesperson’s commuting mileage can be determined by any reasonable method. Reasonable methods include employee mileage records of a single commute, computer research programs identifying distance between the

c. The employer must determine, no less often than monthly, that the personal use of the vehicle by the full-time salesperson was limited and maintain the records described in Answer 23 supporting the determination. (But see Question and Answer 51 regarding correcting errors identified during the calendar year.)

Q–12. What is a qualified written policy for purposes of the full exclusion?

A–12. A qualified written policy is in place if the employer establishes and communicates to each full-time automobile salesperson allowed the use of a demonstration automobile a written policy which (1) Prohibits use of the vehicle outside of normal business hours by individuals other than full-time salespeople.

(2) Prohibits use of the vehicle for personal vacation trips.

(3) Prohibits use outside of the sales area in which the employer’s sales office is located.

(4) Prohibits storage of personal possessions in the vehicle.

(5) Limits the total use by mileage of the vehicle by the salesperson outside normal working hours to commuting between the salesperson’s home and the dealer’s sales office and to an additional average number of miles per day of 10 miles or less.

A model qualified written policy for purposes of the full exclusion is provided in Appendix A.

Q–13. When may the employer rea- sonably believe that the full-time auto- mobile salesperson complies with the written policy?

A–13. Under the full exclusion method, the employer may reasonably believe that a salesperson complies with the written policy where the calculations of total mileage outside of normal working hours indicate that the limit on personal use was not exceeded and the employer has no actual knowledge that the other requirements of the policy are not satisfied. For example, if the employer had actual knowledge that a salesperson’s family members used the demonstration automobile in violation of the policy, the use during the period does not qualify for the full exclusion even if the mileage records indicate that the lim

its on mileage outside of normal working hours have not been exceeded during the period.

Q–14. What is the sales area of an automobile dealer?

A–14. Under Treas. Reg. § 1.132– 5(o)(5)(i), sales area is generally defined as the geographic area surrounding the automobile dealer’s sales office from which the office regularly derives customers. Paragraph (ii) under that regulation provides a safe harbor rule that, as a minimum, allows that an automobile dealer’s sales area may be treated as the area within a radius of 75 miles of the sales office.

Q–15. When is the personal use of the demonstration automobile limited for purposes of the full exclusion?

A–15. For a full-time salesperson, personal use is considered limited as required under section 132(j)(3) if the total mileage a demonstration automobile is used outside normal working hours, less commuting mileage, does not exceed an average of 10 miles per day. For this purpose, the mileage on each demonstration automobile a salesperson uses for either commuting or personal purposes must be taken into account.

Q–16. How does an employer deter- mine the total mileage that a demonstra- tion automobile is used outside of nor- mal working hours?

A–16. For purposes of this revenue procedure, an employer can determine the total mileage that a demonstration automobile is used outside of normal working hours under the Simplified Out/In Method. Under this method, the total miles that a demonstration automobile is used during normal working hours is not taken into account and only mileage outside of normal working hours is considered. To satisfy this method, the mileage on the automobile must be recorded under a reasonable system (1) at the end of the working hours of the salesperson using the automobile (out mileage) and (2) at the beginning of that salesperson’s working hours on the next working day (in mileage).

Q–17. What is a reasonable system for recording out and in mileage?

A–17. Any reasonable system may be used for recording out and in mileage.

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employee’s home address and the dealer’s sales office, or employee selfreporting that reasonably corresponds to the driving distance between the employee’s home address and the dealer’s sales office.

Q–21. Is commuting mileage limited to the most direct route between the employee’s home and the sales office?

A–21. No. An employee can use any commuting route that is reasonable in time or mileage. However, an employee may not increase his or her reported commuting mileage to allow for additional personal use; the average 10 miles per day allowance is intended to provide limited personal use in addition to commuting.

Example 1. A salesperson employee lives in a subdivision on the opposite side of a significant urban area from the sales office. Although a direct route through the urban area is shorter, using a highway around the urban area generally takes less time, although the actual mileage is greater. In this case, the employer can use the longer commuting mileage reflecting the use of the highway for purposes of determining the employee’s personal use mileage in excess of commuting.

Example 2. A salesperson belongs to a fitness club located eight miles outside of any reasonable commuting route between the sales office and the salesperson’s home. Even if the salesperson regularly stops at the fitness club on the trip home, the employer cannot include the additional eight miles in the commuting mileage for purposes of determining the employee’s personal use mileage in excess of commuting.

Q–22. How does an employer using the full exclusion method calculate per- sonal use?

A–22. The following examples illustrate calculations of personal use and determinations of whether the requirement that personal use outside of working hours was limited in accordance with the qualified policy.

Example 1. The employer adopts the simplified out/in method and implements a written policy that satisfies the requirements of this revenue procedure. The employer chooses to determine personal use monthly. For a 30 day month, the total mileage for the automobiles used by full-time salesperson Y during the month is 1,450 miles. Based on the mileage recorded at arrival and departure during the month, 800 miles relate to use during normal working hours and is not taken into account. Salesperson Y’s round trip commute is 15 miles and Y works 20 days during the month, for a total commuting mileage of 300 miles during the month. The total use outside of normal working hours is calculated by taking the

1,450 total miles and subtracting the use during working hours, resulting in 650 miles. Total use outside of normal working hours for the month, 650 miles, less commuting miles for the month, 300 miles, results in 350 miles. This is greater than 10 miles per day for 30 days (300 miles). Thus, use by salesperson Y is not considered to be limited during the month and salesperson Y does not qualify for the exclusion for the month. Nonetheless, salesperson Y may qualify for the partial exclusion under this revenue procedure if the requirements for that method are satisfied.

Example 2. The same facts as in Example 1, except that for a 31 day month, the total mileage for the automobiles used by full-time salesperson X for the month is 1,600 miles. Based on the mileage recorded at arrival and departure during the month, 720 miles relate to use during working hours. Salesperson X’s round trip commute is 30 miles and X works 22 days during the month, for total commuting mileage of 660 miles during the month. The total use outside of normal working hours is calculated by taking the 1,600 total miles and subtracting 720 miles, the use during working hours, resulting in 880 miles. Total use outside of working hours for the month, 880 miles, less commuting miles for the month, 660 miles, results in 220 miles. This is less than 10 miles per day for 31 days (310 miles). Thus, use by X is considered to be limited during the month.

Q–23. What records must an employer maintain to satisfy the require- ments for the full exclusion?

A–23. An employer must maintain the following records to satisfy the requirements for the full exclusion for any month a. A copy of the written policy on use and evidence that it was communicated to employees, such as a copy of a poster notifying employees of the policy, a copy of a letter or an electronic communication notifying the employee of the policy, or signed statements by the employees acknowledging receipt of the written policy.

b. Records establishing that the salesperson’s personal use by mileage was calculated no less often than once each calendar month. This may include:

(i) Records identifying each demonstration automobile assigned to each salesperson during the period.

(ii) Records identifying the total mileage for each demonstration automobile assigned to a salesperson during the period.

(iii) Records supporting the total use outside of normal working hours under the Simplified Out/In Method described

in Question and Answer 16 and any verification of those records. In particular, the employer would maintain records of out and in mileage of the demonstration automobiles provided to full-time salespeople for each day the automobile is used.

(iv) Records identifying the round trip commuting mileage of each salesperson assigned a demonstration automobile from salesperson’s home to the dealer’s sales office during the period. See Questions and Answers 19, 20 and 21 regarding the determination of commuting mileage.

Q–24. What records must an employee maintain to satisfy the require- ments for the full exclusion?

A–24. The employee is required to maintain no records except to the extent the employee is required to provide information to the employer to allow the employer to maintain the records as noted above.

Q–25. What are the tax consequences if one or more employees fail to satisfy the limited personal use requirement?

A–25. For each full-time salesperson whose personal use mileage exceeds the 10 miles per day average for the applicable determination period, the employer must include all or a portion of the value of the use of the demonstration automobile for the period in the income of that full-time salesperson. The employer may continue to use the full exclusion for all other full-time salespeople whose personal use mileage is limited.

The employer may implement the partial exclusion method by including amounts in income either in the current period or in the period immediately following the current period. Whichever method is chosen, the employer must implement the exclusion in a consistent manner. Thus, after determining that an employee does not qualify for the full exclusion for the month, the employer can include an amount in the employee’s income for the current month. Alternatively, the employer can include an amount in the employee’s income during the next month. In that case, the amount included in the next month under the partial or full inclusion method is determined by the number of days in the next month.

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