|
PLR Defines Gross Income for Purposes of Leave Donation Programs
In a Private Letter Ruling (PLR) reviewing a taxpayer’s current leave donation program and proposed modifications to that program, the IRS examined whether donor and recipient employees are subject to section 61 of the Internal Revenue Code and its related withholding rules, or whether they meet certain exceptions affecting income and employment tax withholding (PLR 200720017).
The Taxpayer requesting the ruling has various programs and policies under which employees accrue paid leave that can be used for a variety of reasons, including vacation, personal days, and sick days. Leave must be approved by the Taxpayer, and is available only to the extent an employee has accrued the hours.
Under one policy, donor employees are allowed to surrender accrued hours of paid leave to recipient employees who lack sufficient hours of paid leave time to meet certain needs. After meeting certain eligibility requirements, an employee may submit a written request and authorization to request leave under the policy for a medical emergency (as defined in the policy), to care for a spouse or child in the event of a medical emergency, or for extended leave following the death of a parent, spouse, or child. Donor employees must complete an authorization form, and must donate leave to a specific employee. The policy restricts the amount and type of paid leave that may be surrendered, and once donated, paid leave cannot be returned to the donor employee, but will remain available to the recipient employee. If the donor and recipient employees have different pay rates, the leave time is converted based on the recipient employee’s pay rate, so that the dollar value of the surrendered leave remains the same, but leave taken by the recipient employee is always paid at the recipient employee’s rate of pay.
Under a proposed modification to the policy, eligible employees who experience “catastrophic casualty losses” (e.g., from a terrorist attack, fire, or natural disaster) could request time off. The nature of such losses would be further defined under the policy. The modification would permit employees to donate hours to a leave bank in the event of a terrorist attack, natural disaster, or public health crisis that affects a large number of employees. Hours in the bank would become available to approved applicants on a first-come-first-served basis. The leave bank would be available only for a limited amount of time following the crisis event.
Under section 61, gross income means all income from whatever source derived, including compensation for services. Under the general assignment of income rules, assigning someone else the right to receive compensation for personal services does not relieve the donor of tax liability on the assigned income. However, there are several exceptions to this rule, including certain employer-sponsored medical leave-sharing and major disaster leave-sharing plans.
Rev. Rul. 90-29 addresses employer-sponsored medical leave-sharing plans under which eligible employees may qualify to receive leave surrendered to the employer or leave deposited by employees in an employer-sponsored leave bank. The ruling provides that amounts paid by the employer under such a program are includable in the gross income of the recipient under section 61 as compensation for services, are considered wages for employment tax purposes (including FICA and FUTA), and income tax withholding purposes (unless otherwise excluded). Under Rev. Rul. 90-29, employees who donate leave to the employer or to an employer-sponsored leave bank do not realize income and incur no deductible expenses or loss.
Notice 2006-59 addresses employer-sponsored plans to assist employees affected by a presidentially declared major disaster. If leave is donated under such a plan, the IRS will not take the position that the leave donor realizes income or has wages or compensation with respect to the donated leave, provided the plan treats payments made by the employer to the recipient as wages for employment and income tax withholding purposes, unless otherwise excluded. Leave donors may not claim an expense, charitable contribution, or loss deduction for the donation.
In reviewing the Taxpayer’s programs, the IRS concluded that the policy currently in effect is close to that described in Rev. Rul. 90-29, and thus payments under the policy are includible in the recipient employee’s gross income under section 61, and are not includible in the donor employee’s gross income. However, the IRS concluded that the proposed modifications to the policy would take it outside of the scope of Rev. Rul. 90-29 because a recipient employee could take paid leave during a time of catastrophic loss that may or may not involve a personal or family medical emergency.
The IRS found that the modified policy is also outside the scope of a qualified employer-sponsored major disaster leave-sharing plan under Notice 2006-59 because it is not limited to aiding the victims of a “major disaster,” as declared by the President of the United States. Because the modified policy does not meet any of the exceptions under section 61, the tax consequences to donor employees would be governed by the assignment of income doctrine, resulting in the donor employee retaining the income tax liability on the assigned leave.
Although this ruling is only applicable to the taxpayer in question, employers should be mindful of the terms and parameters of their leave donation programs in order to properly withhold for employment and income taxes.
| 
