SECTION 5. SIMPLIFIED METHOD

FOR PARTIAL EXCLUSION OF DEMONSTRATION AUTOMOBILE USE BY FULL-TIME SALESPEOPLE

Q–26. What is the partial exclusion of demonstration automobile use?

A–26. Under the partial exclusion method, an amount is included in the fulltime automobile salesperson’s income and wages no less often than monthly. The amount reflects personal use of the demonstration automobile and is based on the value of the use of that vehicle as determined in Question and Answer 33 below. The remaining portion is deemed to represent business use that is excludable from income and wages as a working condition fringe.

Q–27. When can an employer use the partial exclusion method?

A–27. An employer choosing not to use the full exclusion method can use the partial exclusion method to account for the use of any demonstration automobile by a full-time salesperson if the requirements of this revenue procedure are satisfied. Moreover, the partial exclusion method is also available if a full-time salesperson employed by a dealer otherwise satisfying the requirements for the full exclusion exceeds the average 10 miles per day of personal use or does not provide records with respect to business use of a demonstration automobile. In such cases, the employer will generally be able to account for the use of the demonstration automobile by using the partial exclusion method rather than including the full value of the use of demonstration automobile in the income of the full-time salesperson.

Q–28. What are the requirements for the partial exclusion of demonstration automobile use by a full-time salesper- son?

A–28. 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

c. The employer must account for the nondeductible personal use by any fulltime automobile salesperson by including

in gross income and wages the amount specified in the table in Answer 35 no less often than monthly and maintain records specified in Answer 38, which are necessary to support that accounting.

Q–29. What is the treatment if the requirements for the partial exclusion are not met?

A–29. If the use of the demonstration automobile by a full-time salesperson does not satisfy the requirements for partial exclusion, the employer must include all of the value of the use of the vehicle in gross income of that employee using the method for full inclusion described in Answers 40–47 below. But see special rule regarding self-correction below in Question and Answer 51.

Q–30. What is a qualified written policy for purposes of the partial exclu- sion?

A–30. 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 storage of personal possessions in the vehicle.

A model written policy for purposes of the partial exclusion is provided in Appendix B.

Q–31. May a qualified written policy under the full exclusion method be used for the partial exclusion method?

A–31. Yes. Q–32. When may the employer rea- sonably believe that the full-time auto- mobile salesperson complies with the written policy?

A–32. Under the partial exclusion method, the employer may reasonably believe that a salesperson complies with the written policy if 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, the use does not qualify for the partial exclusion.

Q–33. What method does the employer use to determine the value of

the demonstration automobile used by a full-time salesperson?

A–33. An employer may use any reasonable method to determine the value of the demonstration automobile used by a full-time salesperson. That value is used in applying the table in Answer 35. The following method is considered a reasonable method.

Annual Average Look Back Method. Under the annual average look back method, the value of the use of any new demonstration automobile is based on the average sales price of all vehicles sold in the prior year. The average sales price is calculated by taking the sum of the sales prices of all new car and truck sales in the prior calendar year and dividing that sum by the number of new vehicles sold in the prior year. The average sales price is used to determine the value of the demonstration automobile and the corresponding daily inclusion amount under the table in Answer 35. This amount is included in the employee’s income and wages for each day the employee used a demonstration automobile. The amount must be included in income at least monthly. The average sales price must be determined in January of each year and must be applied no later than February of that year.

For used vehicles, the average sales price is calculated by taking the sum of the sales prices of all used vehicles for the prior year and dividing by the number of vehicles sold in the prior year. The value of a demonstration automobile may only be based on used cars for salespeople using only used cars as demonstration automobiles; the average sales price of used cars cannot be combined with the average sales price of new cars for purposes of determining the value of demonstration automobiles that are new. If a dealership sells both new and used vehicles, the employer may use the value based on new vehicles as the value of the demonstration automobiles used by all salespeople. Alternatively, the employer may calculate the value of the demonstration automobiles separately for salespeople using used vehicles and salespeople using new vehicles.

An employer using the annual average look back method must maintain evidence supporting the calculation of the annual average sales price.

Example 1. In 2001, an employer sold 948 new vehicles for total gross sales of $23, 226,000 (as

December 17, 2001 596 2001-51 I.R.B.

calculated consistently within groups of salespeople. For example, all salespeople assigned demonstration automobiles from a single franchise may have the value based on the specific franchise, and all salespeople assigned demonstration automobiles from more than one franchise may have the value based on the combined inventories of the franchises.

However, if two franchises operate out of a store, the employer could not base the value for salespeople of the less expensive franchise on the less expensive franchise while basing the value for salespeople of the more expensive franchise on the combined inventory. In that case, either the value for all salespeople must be based on the combined sales or the value for the two groups of salespeople must be based on the respective franchise sales.

Q–35. What is the amount included in the full-time salesperson’s income and wages for use of the demonstration auto- mobile under the partial exclusion method?

A–35. For each day (including nonworkdays) a full-time salesperson is provided the use of a demonstration automobile, the appropriate amount from the table below, based on the value of the demonstration automobile as determined under a reasonable method as described in Question and Answer 33, must be included in the full-time salesperson’s income and wages no less often than monthly.

shown on the year-end standard financial statement that the dealer provided to the manufacturer). In January 2002, the employer calculates the average sales price by dividing $23,226,000 by 948 vehicles, resulting in $24,500. For each month ending on or after February 1, 2002, to January 31, 2003, of the next year, for each full-time salesperson provided the use of a demonstration automobile, the employer includes in the salesperson’s gross income $6, the amount from the table in Answer 35 based on that value, for each day in the month. This treatment is proper even if one full-time salesperson was provided only used demonstration automobiles. In addition, the employer keeps a copy of the factory statement that provided the amount of the 2001 sales and the number of vehicles sold as a record of his calculation.

Example 2. The same facts as in Example 1, except in addition to the new cars, the employer sold 233 used vehicles in 2001 for a total sales price of $2,903,248. Thus, the average sales price for the used vehicles is $12,456. While all the full-time salespeople sell used vehicles, only two full-time salespeople are provided used vehicles as demonstration automobiles. In this example, the value of the demonstration automobiles for the salespeople provided new cars as demonstration automobiles may not be based on the used cars sold in 2001. However, the employer may use $12,456 to determine the amount included in the income of the two full-time salespeople provided used cars as demonstration automobiles.

Q–34. How does an employer deter- mine the annual average sales price if more than one franchise is operated at or from a single location?

A–34. The employer must use a consistent method for calculating the value of the demonstration automobiles. If more than one franchise is operated at a single physical location (“store”), the annual average sales price for all salespeople may be based on the combined sales of

all franchises operating at the store. The value of a demonstration automobile may only be based on used cars for salespeople provided used cars as demonstration automobiles; the average sales price of used cars cannot be combined with the average sales price of new cars for purposes of determining the value of the use of demonstration automobiles that are new.

However, if a salesperson is only provided demonstration automobiles from a single franchise operating out of the store, the employer may base the annual calculation of value for that salesperson on the sales of the specific franchise. In that case, the value for all salespeople in the store must also be based on specific franchises.

Similarly, if some salespeople receive demonstration automobiles exclusively from the store’s used car inventory and other salespeople received demonstration automobiles exclusively from the store’s new car inventory, the value must generally be calculated separately for each group of salespeople. However, as noted in Question and Answer 33, if the store sells both new and used vehicles, the employer may also use the value based on sales of new vehicles as the value of the demonstration automobiles for all salespeople.

A special consistency rule is available if some salespeople sell automobiles and provide demonstration automobiles from more than one franchise operating out of the store; in that case, the value must be

Value of the Demonstration Automobile Daily Inclusion Amount 0 — $14,999 $3 $15,000 — $29,999 $6 $30,000 — $44,999 $9 $45,000 — $59,999 $13 $60,000 — $74,999 $17 $75,000 and above $21

service are assumed to have the use of an automobile from the first day of the period to the date of separation.

Q–36. How does an employer deter- mine the number of days that a salesper- son has the use of a demonstration auto- mobile?

A–36. Absent evidence to the contrary, full-time salespeople are assumed to have

the use of a demonstration automobile for every day of the period under consideration. Salespeople hired during the period are assumed to have use for every day from the date of hire to the end of the period. Salespeople that separate from

2001-51 I.R.B 597 December 17, 2001

A–41. If use of a demonstration automobile by a full-time salesperson does not qualify for the full exclusion or the partial exclusion, an amount is included in the full-time salesperson’s income and wages no less often than monthly that reflects the full value of the demonstration automobile, with no reduction to take into account business use. See Questions and Answers 42 through 44 below which discuss the use of the annual lease value table to determine the amount included under this method.

Q–42. What are the requirements for using the full inclusion method for dem- onstration automobiles used by employ- ees who are not full-time salespeople or who are full-time salespeople?

A–42. The employer must account for the use by an employee who is not a fulltime salesperson by including in gross income and wages for each day in each period (no less often than monthly) the greater of $3 per day or the pro rata portion of the amount specified in the annual lease value table at Treas. Reg. § 1.61– 21(d)(2)(iii) using the value of the demonstration automobile.

Q–43. Under the full inclusion method, how does an employer deter- mine the value of the demonstration automobiles provided to employees?

A–43. An employer may use any reasonable method to determine the value of the demonstration automobile provided to the employee. For this purpose, a reasonable method includes the annual average look back method listed as a reasonable method for determining the value of a demonstration automobile under the partial exclusion method in Answer 33 above.

Q–44. How is the pro rata portion of the annual lease value amount included in income calculated?

A–44. The pro rata portion of the annual lease value amount is the amount specified in annual lease value table at Treas. Reg. § 1.61–21(d)(2)(iii) using the full value of the demonstration automobile, divided by 365, rounding to nearest dollar amounts.

Q–37. May an employer elect under section 3402(s) of the Code not to with- hold income taxes from the portion of the vehicle fringe benefit required to be included under the partial exclusion method provided under this revenue pro- cedure?

A–37. No. Under this revenue procedure, the periodic inclusion inherent in the requirement to include amounts in income not less often than monthly is intended to substitute for more specific recordkeeping requirements for substantiating the use of the demonstration automobile. Annual inclusion and withholding of other employment taxes with respect to noncash fringe benefits allowed under Announcement 85–113 (1985–31 I.R.B. 31) is unavailable under the methods provided by this revenue procedure.

Q–38. What records must an employer maintain to satisfy the require- ments for the partial exclusion?

A–38. An employer must maintain the following records to satisfy the requirements for the partial exclusion—

a. Records supporting the determination of the value of the use of demonstration automobiles. For these purposes, records identified above in the description of annual average look back method for determining value in Question and Answer 33 will be considered adequate.

b. Evidence that the amount was timely included in the employee’s income and wages. For example, copies of wage statements showing inclusion of the amounts no less often than monthly.

c. 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.

Q–39. What records must an employee maintain to satisfy the require- ments for the partial exclusion?

A–39. The employee is required to maintain no records.