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SUBCHAPTER A—INCOME TAX
PART 1—INCOME TAXES
COMPUTATION OF TAXABLE INCOME
Definition of Gross Income, Adjusted GrossIncome, and Taxable
Income
Sec.1.61–1 Gross income.1.61–2 Compensation for services,
including
fees, commissions, and similar items.1.61–2T Taxation of fringe
benefits—1985
through 1988 (temporary).1.61–3 Gross income derived from
business.1.61–4 Gross income of farmers.1.61–5 Allocations by
cooperative associa-
tions; per-unit retain certificates—taxtreatment as to
cooperatives and pa-trons.
1.61–6 Gains derived from dealings in prop-erty.
1.61–7 Interest.1.61–8 Rents and royalties.1.61–9
Dividends.1.61–10 Alimony and separate maintenance
payments; annuities; income from life in-surance and endowment
contracts.
1.61–11 Pensions.1.61–12 Income from discharge of indebted-
ness.1.61–13 Distributive share of partnership
gross income; income in respect of a de-cedent; income from an
interest in an es-tate or trust.
1.61–14 Miscellaneous items of gross income.1.61–15 Options
received as payment of in-
come.1.61–21 Taxation of fringe benefits.1.62–1 Adjusted gross
income.1.62–1T Adjusted gross income (temporary).1.62–2
Reimbursements and other expense
allowance arrangements.1.62–2T Reimbursement and other
expense
allowance arrangements (temporary).1.63–1 Change of treatment
with respect to
the zero bracket amount and itemizeddeductions.
1.63–2 Cross reference.1.67–1T 2-percent floor on
miscellaneous
itemized deductions (temporary).1.67–2T Treatment of
pass-through entities
(temporary).1.67–3 Allocation of expenses by real estate
mortgage investment conduits.1.67–3T Allocation of expenses by
real es-
tate mortgage investment conduits (tem-porary).
1.67–4T Allocation of expenses by non-grantor trusts and estates
(temporary).[Reserved]
ITEMS SPECIFICALLY INCLUDED IN GROSSINCOME
1.71–1 Alimony and separate maintenancepayments; income to wife
or former wife.
1.71–1T Alimony and separate maintenancepayments
(temporary).
1.71–2 Effective date; taxable years endingafter March 31, 1954,
subject to the Inter-nal Revenue Code of 1939.
1.72–1 Introduction.1.72–2 Applicability of section.1.72–3
Excludable amounts not income.1.72–4 Exclusion ratio.1.72–5
Expected return.1.72–6 Investment in the contract.1.72–7 Adjustment
in investment where a
contract contains a refund feature.1.72–8 Effect of certain
employer contribu-
tions with respect to premiums or otherconsideration paid or
contributed by anemployee.
1.72–9 Tables.1.72–10 Effect of transfer of contracts on in-
vestment in the contract.1.72–11 Amounts not received as
annuity
payments.1.72–12 Effect of taking an annuity in lieu of
a lump sum upon the maturity of a con-tract.
1.72–13 Special rule for employee contribu-tions recoverable in
three years.
1.72–14 Exceptions from application of prin-ciples of section
72.
1.72–15 Applicability of section 72 to acci-dent or health
plans.
1.72–16 Life insurance contracts purchasedunder qualified
employee plans.
1.72–17 Special rules applicable to owner-employees.
1.72–17A Special rules applicable to em-ployee annuities and
distributions underdeferred compensation plans to self-em-ployed
individuals and owner-employees.
1.72–18 Treatment of certain total distribu-tions with respect
to self-employed indi-viduals.
1.72(e)–1T Treatment of distributions wheresubstantially all
contributions are em-ployee contributions (temporary).
1.73–1 Services of child.1.74–1 Prizes and awards.1.75–1
Treatment of bond premiums in case
of dealers in tax-exempt securities.1.77–1 Election to consider
Commodity
Credit Corporation loans as income.1.77–2 Effect of election to
consider com-
modity credit loans as income.1.78–1 Dividends received from
certain for-
eign corporations by certain domesticcorporations choosing the
foreign taxcredit.
1.79–0 Group-term life insurance—defini-tions of certain
terms.
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26 CFR Ch. I (4–1–99 Edition)Pt. 1
1.79–1 Group-term life insurance—generalrules.
1.79–2 Exceptions to the rule of inclusion.1.79–3 Determination
of amount equal to
cost of group-term life insurance.1.79–4T Questions and answers
relating to
the nondiscrimination requirements forgroup-term life insurance
(temporary).
1.82–1 Payments for or reimbursements ofexpenses of moving from
one residence toanother residence attributable to em-ployment or
self-employment.
1.83–1 Property transferred in connectionwith the performance of
services.
1.83–2 Election to include in gross income inyear of
transfer.
1.83–3 Meaning and use of certain terms.1.83–4 Special
rules.1.83–5 Restrictions that will never lapse.1.83–6 Deduction by
employer.1.83–7 Taxation of nonqualified stock op-
tions.1.83–8 Applicability of section and transi-
tional rules.1.84–1 Transfer of appreciated property to
political organizations.1.85–1 Unemployment compensation.1.88–1
Nuclear decommissioning costs.
ITEMS SPECIFICALLY EXCLUDED FROM GROSSINCOME
1.101–1 Exclusion from gross income of pro-ceeds of life
insurance contracts payableby reason of death.
1.101–2 Employees’ death benefits.1.101–3 Interest
payments.1.101–4 Payment of life insurance proceeds
at a date later than death.1.101–5 Alimony, etc.,
payments.1.101–6 Effective date.1.101–7 Mortality table used to
determine
exclusion for deferred payments of lifeinsurance proceeds.
1.102–1 Gifts and inheritances.1.103–1 Interest upon obligations
of a State,
territory, etc.1.103–2 Dividends from shares and stock of
Federal agencies or instrumentalities.1.103–3 Interest upon
notes secured by mort-
gages executed to Federal agencies or in-strumentalities.
1.103–4 Interest upon United States obliga-tions.
1.103–5 Treasury bond exemption in the caseof trusts or
partnerships.
1.103–6 Interest upon United States obliga-tions in the case of
nonresident aliensand foreign corporations, not engaged inbusiness
in the United States.
1.103–7 Industrial development bonds.1.103–8 Interest on bonds
to finance certain
exempt facilities.1.103–9 Interest on bonds to finance
indus-
trial parks.1.103–10 Exemption for certain small issues
of industrial development bonds.1.103–11 Bonds held by
substantial users.
1.103–16 Obligations of certain volunteer firedepartments.
1.103(n)–1T Limitation on aggregate amountof private activity
bonds (temporary).
1.103(n)–2T Private activity bond defined(temporary).
1.103(n)–3T Private activity bond limit(temporary).
1.103(n)–4T Elective carryforward of unusedprivate activity bond
limit (temporary).
1.103(n)–5T Certification of no considerationfor allocation
(temporary).
1.103(n)–6T Determinations of population(temporary).
1.103(n)–7T Election to allocate State ceil-ing to certain
facilities for local fur-nishing of electricity (temporary).
1.103A–2 Qualified mortgage bond.1.104–1 Compensation for
injuries or sick-
ness.1.105–1 Amounts attributable to employer
contributions.1.105–2 Amounts expended for medical care.1.105–3
Payments unrelated to absence from
work.1.105–4 Wage continuation plans.1.105–5 Accident and health
plans.1.105–6 Special rules for employees retired
before January 27, 1975.1.105–11 Self-insured medical
reimburse-
ment plan.1.106–1 Contributions by employer to acci-
dent and health plans.1.107–1 Rental value of parsonages.1.108–1
Stock-for-debt exception not to
apply in de minimis cases.1.108–2 Acquisition of indebtedness by
a per-
son related to the debtor.1.108–3 Intercompany losses and
deductions.1.108–4 Election to reduce basis of depre-
ciable property under section 108(b)(5) ofthe Internal Revenue
Code .
1.108–5 Time and manner for making elec-tion under the Omnibus
Budget Rec-onciliation Act of 1993.
1.108–6 Limitations on the exclusion of in-come from the
discharge of qualified realproperty business indebtedness.
1.108(c)–1T [Reserved]1.109–1 Exclusion from gross income of
les-
sor of real property of value of improve-ments erected by
lessee.
1.111–1 Recovery of certain items previouslydeducted or
credited.
1.112–1 Combat zone compensation of mem-bers of the Armed
Forces.
1.113–1 Mustering-out payments for mem-bers of the Armed
Forces.
1.117–1 Exclusion of amounts received as ascholarship or
fellowship grant.
1.117–2 Limitations.1.117–3 Definitions.1.117–4 Items not
considered as scholarships
or fellowship grants.1.117–5 Federal grants requiring future
serv-
ice as a Federal employee.
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Internal Revenue Service, Treasury Pt. 1
1.118–1 Contributions to the capital of a cor-poration.
1.119–1 Meals and lodging furnished for theconvenience of the
employer.
1.120–1 Statutory subsistence allowance re-ceived by police.
1.120–3 Notice of application for recognitionof status of
qualified group legal servicesplan.
1.121–1 Gain from sale or exchange of resi-dence of individual
who has attained age55.
1.121–2 Limitations.1.121–3 Definitions.1.121–4 Election.1.121–5
Special rules.1.122–1 Applicable rules relating to certain
reduced uniformed services retirementpay.
1.123–1 Exclusion of insurance proceeds forreimbursement of
certain living ex-penses.
1.125–2T Question and answer relating tothe benefits that may be
offered under acafeteria plan (temporary).
1.125–4T Permitted election changes (tem-porary).
1.127–1 Amounts received under a qualifiededucational assistance
program.
1.127–2 Qualified educational assistance pro-gram.
1.132–0 Outline of regulations under section132.
1.132–1 Exclusion from gross income for cer-tain fringe
benefits.
1.132–1T Exclusion from gross income ofcertain fringe
benefits—1985 through 1988(temporary).
1.132-2 No-additional-cost services.1.132-2T No-additional-cost
service—1985
through 1988 (temporary).1.132–3 Qualified employee
discounts.1.132–3T Qualified employee discount—1985
through 1988 (temporary).1.132–4 Line of business
limitation.1.132–4T Line of business limitation—1985
through 1988 (temporary).1.132–5 Working condition
fringes.1.132–5T Working condition fringe—1985
through 1988 (temporary).1.132–6 De minimis fringes.1.132–6T De
minimis fringe—1985 through
1988 (temporary).1.132–7 Employer-operated eating
facilities.1.132–7T Treatment of employer-operated
eating facilities—1985 through 1988 (tem-porary).
1.132–8 Fringe benefit nondiscriminationrules.
1.132–8T Nondiscrimination rules—1985through 1988
(temporary).
1.133–1T Questions and answers relating tointerest on certain
loans used to acquireemployer securities (temporary).
1.141–0 Table of contents.
TAX EXEMPTION REQUIREMENTS FOR STATEAND LOCAL BONDS
1.141–1 Definitions and rules of general ap-plication.
1.141–2 Private activity bond tests.1.141–3 Definition of
private business use.1.141–4 Private security or payment
test.1.141–5 Private loan financing test.1.141–6 Allocation and
accounting rules.1.141–7T Special rules for output facilities
(temporary).1.141–8T $15 million limitation for output
facilities (temporary).1.141–9 Unrelated or disproportionate
use
test.1.141–10 Coordination with volume cap. [Re-
served]1.141–11 Acquisition of nongovernmental
output property. [Reserved]1.141–12 Remedial actions.1.141–13
Refunding issues. [Reserved]1.141–14 Anti-abuse rules.1.141–15
Effective dates.1.141–15T Effective dates (temporary).1.141–16
Effective dates for qualified private
activity bond provisions.1.142–0 Table of contents.1.142–1
Exempt facility bonds.1.142–2 Remedial actions.1.142–3 Refunding
issues. [Reserved]1.142–4 Use of proceeds to provide a
facility.1.142(a)(5)–1 Exempt facility bonds: Sewage
facilities.1.142(f)(4)–1T Manner of making election to
terminate tax-exempt bond financing(temporary).
1.144–0 Table of contents.1.144–1 Qualified small issue bonds,
quali-
fied student loan bonds, and qualified re-development bonds.
1.144–2 Remedial actions.1.144–3 Standard deduction for
individuals
choosing income averaging. [Reserved]1.145–0 Table of
contents.1.145–1 Qualified 501(c)(3) bonds.1.145–2 Application of
private activity bond
regulations.1.147–0 Table of contents.1.147–1 Other requirements
applicable to
certain private activity bonds.1.147–2 Remedial
actions.1.147(b)–1 Bond maturity limitation treat-
ment of working capital.1.148–0 Scope and table of
contents.1.148–1 Definitions and elections.1.148–2 General
arbitrage yield restriction
rules.1.148–3 General arbitrage rebate rules.1.148–4 Yield on an
issue of bonds.1.148–5 Yield and valuation of investments.1.148–6
General allocation and accounting
rules.1.148–7 Spending exceptions to the rebate
requirement.1.148–8 Small issuer exception to rebate re-
quirement.
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26 CFR Ch. I (4–1–99 Edition)Pt. 1
1.148–9 Arbitrage rules for refunding issues.1.148–10 Anti-abuse
rules and authority of
Commissioner.1.148–11 Effective dates.1.149(b)–1 Federally
guaranteed bonds.1.149(d)–1 Limitations on advance
refundings.1.149(e)–1 Information reporting require-
ments for tax–exempt bonds.1.149(g)–1 Hedge bonds.1.150–1
Definitions.1.150–2 Proceeds of bonds used for reim-
bursement.1.150–4 Change in use of facilities financed
with tax-exempt private activity bonds.1.150–5T Filing notices
and elections (tem-
porary).
REGULATIONS APPLICABLE TO CERTAIN BONDSSOLD PRIOR TO JULY 8,
1997
1.148–1A Definitions and elections.1.148–2A General arbitrage
yield restriction
rules.1.148–3A General arbitrage rebate rules.1.148–4A Yield on
an issue of bonds.1.148–5A Yield and valuation of invest-
ments.1.148–6A General allocation and accounting
rules.1.148–9A Arbitrage rules for refunding
issues.1.148–10A Anti-abuse rules and authority of
Commissioner.1.148–11A Effective dates.1.149(d)–1A Limitations
on advance
refundings.1.150–1A Definitions.
DEDUCTIONS FOR PERSONAL EXEMPTIONS
1.151–1 Deductions for personal exemptions.1.151–2 Additional
exemptions for depend-
ents.1.151–3 Definitions.1.151–4 Amount of deduction for each
ex-
emption under section 151.1.152–1 General definition of a
dependent.1.152–2 Rules relating to general definition
of dependent.1.152–3 Multiple support agreements.1.152–4 Support
test in case of child of di-
vorced or separated parents.1.152.4T Dependency exemption in the
case
of a child of divorced parents, etc. (tem-porary).
1.153–1 Determination of marital status.1.154 Statutory
provisions; cross references.
ITEMIZED DEDUCTIONS FOR INDIVIDUALS ANDCORPORATIONS
1.161–1 Allowance of deductions.1.162–1 Business
expenses.1.162–2 Traveling expenses.1.162–3 Cost of
materials.1.162–4 Repairs.1.162–5 Expenses for education.1.162–6
Professional expenses.
1.162–7 Compensation for personal services.1.162–8 Treatment of
excessive compensa-
tion.1.162–9 Bonuses to employees.1.162–10 Certain employee
benefits.1.162–10T Questions and answers relating to
the deduction of employee benefits underthe Tax Reform Act of
1984; certain lim-its on amounts deductible (temporary).
1.162–11 Rentals.1.162–12 Expenses of farmers.1.162–13
Depositors’ guaranty fund.1.162–14 Expenditures for advertising or
pro-
motion of good will.1.162–15 Contributions, dues, etc.1.162–16
Cross reference.1.162–17 Reporting and substantiation of
certain business expenses of employees.1.162–18 Illegal bribes
and kickbacks.1.162–19 Capital contributions to Federal
National Mortgage Association.1.162–20 Expenditures attributable
to lob-
bying, political campaigns, attempts toinfluence legislation,
etc., and certainadvertising.
1.162–21 Fines and penalties.1.162–22 Treble damage payments
under the
antitrust laws.1.162–25 Deductions with respect to noncash
fringe benefits.1.162–25T Deductions with respect to
noncash fringe benefits (temporary).1.162–27 Certain employee
remuneration in
excess of $1,000,000.1.162–28 Allocation of costs to lobbying
ac-
tivities.1.162–29 Influencing legislation.1.163–1 Interest
deduction in general.1.163–2 Installment purchases where inter-
est charge is not separately stated.1.163–3 Deduction for
discount on bond
issued on or before May 27, 1969.1.163–4 Deduction for original
issue discount
on certain obligations issued after May27, 1969.
1.163–5 Denial of interest deduction on cer-tain obligations
issued after December31, 1982, unless issued in registered
form.
1.163–5T Denial of interest deduction on cer-tain obligations
issued after December31, 1982, unless issued in registered
form(temporary).
1.163–6T Reduction of deduction where sec-tion 25 credit taken
(temporary).
1.163–7 Deduction for OID on certain debtinstruments.
1.163–8T Allocation of interest expenseamong expenditures
(temporary).
1.163–9T Personal interest (temporary).1.163–10T Qualified
residence interest (tem-
porary).1.163–12 Deduction of original issue discount
on instrument held by related foreignperson.
1.163–13 Treatment of bond issuance pre-mium.
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Internal Revenue Service, Treasury Pt. 1
1.163(d)–1 Time and manner for makingelection under the Omnibus
Budget Rec-onciliation Act of 1993.
1.164–1 Deduction for taxes.1.164–2 Deduction denied in case of
certain
taxes.1.164–3 Definitions and special rules.1.164–4 Taxes for
local benefits.1.164–5 Certain retail sales taxes and gaso-
line taxes.1.164–6 Apportionment of taxes on real prop-
erty between seller and purchaser.1.164–7 Taxes of shareholder
paid by cor-
poration.1.164–8 Payments for municipal services in
atomic energy communities.1.165–1 Losses.1.165–2 Obsolescence of
nondepreciable prop-
erty.1.165–3 Demolition of buildings.1.165–4 Decline in value of
stock.1.165–5 Worthless securities.1.165–6 Farming losses.1.165–7
Casualty losses.1.165–8 Theft losses.1.165–9 Sale of residential
property.1.165–10 Wagering losses.1.165–11 Election in respect of
losses attrib-
utable to a disaster.1.165–12 Denial of deduction for losses
on
registration-required obligations not inregistered form.
1.165–13T Questions and answers relating tothe treatment of
losses on certain strad-dle transactions entered into before
theeffective date of the Economic RecoveryTax Act of 1981, under
section 108 of theTax Reform Act of 1984 (temporary).
1.166–1 Bad debts.1.166–2 Evidence of worthlessness.1.166–3
Partial or total worthlessness.1.166–4 Reserve for bad
debts.1.166–5 Nonbusiness debts.1.166–6 Sale of mortgaged or
pledged prop-
erty.1.166–7 Worthless bonds issued by an indi-
vidual.1.166–8 Losses of guarantors, endorsers, and
indemnitors incurred on agreementsmade before January 1,
1976.
1.166–9 Losses of guarantors, endorsers, andindemnitors
incurred, on agreementsmade after December 31, 1975, in
taxableyears beginning after such date.
1.166–10 Reserve for guaranteed debt obliga-tions.
1.167(a)–1 Depreciation in general.1.167(a)–2 Tangible
property.1.167(a)–3 Intangibles.1.167(a)–4 Leased
property.1.167(a)–5 Apportionment of basis.1.167(a)–5T Application
of section 1060 to
section 167 (temporary).1.167(a)–6 Depreciation in special
cases.1.167(a)–7 Accounting for depreciable prop-
erty.1.167(a)–8 Retirements.
1.167(a)–9 Obsolescence.1.167(a)–10 When depreciation deduction
is
allowable.1.167(a)–11 Depreciation based on class lives
and asset depreciation ranges for prop-erty placed in service
after December 31,1970.
1.167(a)–12 Depreciation based on class livesfor property first
placed in service beforeJanuary 1, 1971.
1.167(a)–13T Certain elections for intangibleproperty
(temporary).
1.167(b)–0 Methods of computing deprecia-tion.
1.167(b)–1 Straight line method.1.167(b)–2 Declining balance
method.1.167(b)–3 Sum of the years-digits method.1.167(b)–4 Other
methods.1.167(c)–1 Limitations on methods of com-
puting depreciation under section 167(b)(2), (3), and (4).
1.167(d)–1 Agreement as to useful life andrates of
depreciation.
1.167(e)–1 Change in method.1.167(f)–1 Reduction of salvage
value taken
into account for certain personal prop-erty.
1.167(g)–1 Basis for depreciation.1.167(h)–1 Life tenants and
beneficiaries of
trusts and estates.1.167(i)–1 Depreciation of improvements
in
the case of mines, etc.1.167(l)–1 Limitations on reasonable
allow-
ance in case of property of certain publicutilities.
1.167(l)–2 Public utility property; electionas to post-1969
property representinggrowth in capacity.
1.167(l)–3 Multiple regulation, asset acquisi-tions,
reorganizations, etc.
1.167(l)–4 Public utility property; electionto use asset
depreciation range system.
1.167(m)–1 Class lives.1.168–5 Special rules.1.168(d)–0 Table of
contents for the applica-
ble convention rules.1.168(d)–1 Applicable
convention—Half-year
and mid-quarter conventions.1.168(f)(8)–1T Safe-harbor lease
information
returns concerning qualified mass com-muting vehicles
(temporary).
1.168(h)–1 Like–kind exchanges involvingtax-exempt use
property.
1.168(i)–0 Table of contents for the generalasset account
rules.
1.168(i)–1 General asset accounts.1.168(i)–2 Lease
term.1.168(j)–1T Questions and answers con-
cerning tax-exempt entity leasing rules(temporary).
1.168A–1 Amortization of emergency facili-ties; general
rule.
1.168A–2 Election of amortization.1.168A–3 Election to
discontinue amortiza-
tion.1.168A–4 Definitions.
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–1
1.168A–5 Adjusted basis of emergency facil-ity.
1.168A–6 Depreciation of portion of emer-gency facility not
subject to amortiza-tion.
1.168A–7 Payment by United States ofunamortized cost of
facility.
1.169–1 Amortization of pollution control fa-cilities.
1.169–2 Definitions.1.169–3 Amortizable basis.1.169–4 Time and
manner of making elec-
tions
AUTHORITY: 26 U.S.C. 7805, unless otherwisenoted.Section 1.61–2T
also issued under 26 U.S.C. 61.Section 1.61–21 also issued under 26
U.S.C. 61.Sections 1.62–1T and 1.62–2 also issued under
26 U.S.C. 62;Sections 1.67–2T and 1.67–3T also issued under
26 U.S.C. 67(c);Section 1.67–3 also issued under 26 U.S.C.
67(c).Sections 1.72–4, 1.72–5, 1.72–6, 1.72–7, 1.72–8,
and 1.72–11 also issued under 26 U.S.C. 72(c).Section 1.101–7
also issued under 26 U.S.C.
101(d)(2)(B)(ii);Section 1.103–10 also issued under 26
U.S.C.
103(b)(6);Section 1.103A–2 also issued under 26 U.S.C.
103A(j);Section 1.108–1 also issued under 26 U.S.C.
108(e)(8) and 108(e)(10(B);Section 1.108–2 also issued under 26
U.S.C.
108;Section 1.108–3 also issued under 26 U.S.C.
108, 267, and 1502.Section 1.108–4 also issued under 26
U.S.C.
108.Section 1.108–5 also issued under 26 U.S.C.
108.Section 1.108(c)–1 also issued under the au-
thority of 26 U.S.C. 108(d)(9);Sections 1.132–0 through 1.132–8T
also issued
under 26 U.S.C. 132;Sections 1.148–0 through 1.148–11 also
issued
under 26 U.S.C. 148 (f), (g), and (i);Sections 1.148–6 also
issued under 26 U.S.C.
148 (f), (g), and (i);Section 1.149(b)–1 also issued under 26
U.S.C.
149(b)(3)(B) (v);Section 1.149(d)–1 also issued under 26
U.S.C.
149(d)(7);Section 1.149(e)–1 also issued under 26 U.S.C.
149(e);Section 1.149(g)–1 also issued under 26 U.S.C.
149(g)(5);Sections 1.150–4 also issued under 26 U.S.C.
150 (c)(5);Section 1.163–8T also issued under 26 U.S.C.
469(k)(4);Section 1.163–9T also issued under 26 U.S.C.
163(h)(3)(D);Section 1.163–11T is also issued under 26
U.S.C. 163(h);Section 1.165–12 also issued under 26 U.S.C.
165(j)(3);
Section 1.166–10 also issued under 26 U.S.C.166(f);
Section 1.168(d)–1 also issued under 26 U.S.C.168(d)(3);
Section 1.168(f)(8)–1T also added under sec.112(c), Black Lung
Benefits Revenue Act of1981 (Pub. L. 97–119);
Section 1.168(h)–1 also issued under 26 U.S.C.168.
Section 1.168(i)–1 also issued under 26 U.S.C.168(i)(4).
Section 1.168(i)–2 also issued under 26 U.S.C.168.
Section 1.168(j)–1T also added under 26 U.S.C.168(j)(10);
SOURCE: T.D. 6500, 25 FR 11402, Nov. 26, 1960;25 FR 14021, Dec.
21, 1960, unless otherwisenoted.
COMPUTATION OF TAXABLEINCOME
DEFINITION OF GROSS INCOME, ADJUSTEDGROSS INCOME, AND TAXABLE
INCOME
§ 1.61–1 Gross income.
(a) General definition. Gross incomemeans all income from
whateversource derived, unless excluded by law.Gross income
includes income realizedin any form, whether in money, prop-erty,
or services. Income may be real-ized, therefore, in the form of
services,meals, accommodations, stock, orother property, as well as
in cash. Sec-tion 61 lists the more common items ofgross income for
purposes of illustra-tion. For purposes of further illustra-tion, §
1.61–14 mentions several mis-cellaneous items of gross income
notlisted specifically in section 61. Grossincome, however, is not
limited to theitems so enumerated.
(b) Cross references. Cross referencesto other provisions of the
Code are tobe found throughout the regulationsunder section 61. The
purpose of thesecross references is to direct attentionto the more
common items which areincluded in or excluded from gross in-come
entirely, or treated in some spe-cial manner. To the extent that
an-other section of the Code or of the reg-ulations thereunder,
provides specifictreatment for any item of income, suchother
provision shall apply notwith-standing section 61 and the
regulationsthereunder. The cross references do notcover all
possible items.
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Internal Revenue Service, Treasury § 1.61–2
(1) For examples of items specificallyincluded in gross income,
see Part II(section 71 and following), SubchapterB, Chapter 1 of
the Code.
(2) For examples of items specificallyexcluded from gross
income, see partIII (section 101 and following), Sub-chapter B,
Chapter 1 of the Code.
(3) For general rules as to the taxableyear for which an item is
to be in-cluded in gross income, see section 451and the regulations
thereunder.
§ 1.61–2 Compensation for services, in-cluding fees,
commissions, and simi-lar items.
(a) In general. (1) Wages, salaries,commissions paid salesmen,
compensa-tion for services on the basis of a per-centage of
profits, commissions on in-surance premiums, tips, bonuses
(in-cluding Christmas bonuses), termi-nation or severance pay,
rewards, juryfees, marriage fees and other contribu-tions received
by a clergyman for serv-ices, pay of persons in the military
ornaval forces of the United States, re-tired pay of employees,
pensions, andretirement allowances are income tothe recipients
unless excluded by law.Several special rules apply to membersof the
Armed Forces, National Oceanicand Atmospheric Administration,
andPublic Health Service of the UnitedStates; see paragraph (b) of
this sec-tion.
(2) The Code provides special rules in-cluding the following
items in gross in-come:
(i) Distributions from employees’trusts, see sections 72, 402,
and 403, andthe regulations thereunder;
(ii) Compensation for child’s services(in child’s gross income),
see section 73and the regulations thereunder;
(iii) Prizes and awards, see section 74and the regulations
thereunder.
(3) Similarly, the Code provides spe-cial rules excluding the
following itemsfrom gross income in whole or in part:
(i) Gifts, see section 102 and the regu-lations thereunder;
(ii) Compensation for injuries orsickness, see section 104 and
the regu-lations thereunder;
(iii) Amounts received under accidentand health plans, see
section 105 andthe regulations thereunder;
(iv) Scholarship and fellowshipgrants, see section 117 and the
regula-tions thereunder;
(v) Miscellaneous items, see section122.
(b) Members of the Armed Forces, Na-tional Oceanic and
Atmospheric Adminis-tration, and Public Health Service.
(1)Subsistence and uniform allowancesgranted commissioned officers,
chiefwarrant officers, warrant officers, andenlisted personnel of
the ArmedForces, National Oceanic and Atmos-pheric Administration,
and PublicHealth Service of the United States,and amounts received
by them as com-mutation of quarters, are excludedfrom gross income.
Similarly, thevalue of quarters or subsistence fur-nished to such
persons is excluded fromgross income.
(2) For purposes of this section, quar-ters or subsistence
includes the fol-lowing allowances for expenses in-curred after
December 31, 1993, bymembers of the Armed Forces, mem-bers of the
commissioned corps of theNational Oceanic and Atmospheric
Ad-ministration, and members of the com-missioned corps of the
Public HealthService, to the extent that the allow-ances are not
otherwise excluded fromgross income under another provisionof the
Internal Revenue Code: a dis-location allowance, authorized by
37U.S.C. 407; a temporary lodging allow-ance, authorized by 37
U.S.C. 405; atemporary lodging expense, authorizedby 37 U.S.C.
404a; and a move-in hous-ing allowance, authorized by 37 U.S.C.405.
No deduction is allowed under thischapter for any expenses
reimbursed bysuch excluded allowances. For the ex-clusion from
gross income of—
(i) Disability pensions, see section104(a)(4) and the
regulations there-under;
(ii) Miscellaneous items, see section122.
(3) The per diem or actual expense al-lowance, the monetary
allowance inlieu of transportation, and the mileageallowance
received by members of theArmed Forces, National Oceanic
andAtmospheric Administration, and thePublic Health Service, while
in a travelstatus or on temporary duty away fromtheir permanent
stations, are included
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2
in their gross income except to the ex-tent excluded under the
accountableplan provisions of § 1.62–2.
(c) Payment to charitable, etc., organi-zation on behalf of
person rendering serv-ices. The value of services is not
includ-ible in gross income when such servicesare rendered directly
and gratuitouslyto an organization described in section170(c).
Where, however, pursuant to anagreement or understanding,
servicesare rendered to a person for the benefitof an organization
described in section170(c) and an amount for such servicesis paid
to such organization by the per-son to whom the services are
rendered,the amount so paid constitutes incometo the person
performing the services.
(d) Compensation paid other than incash—(1) In general. Except
as other-wise provided in paragraph (d)(6)(i) ofthis section
(relating to certain prop-erty transferred after June 30, 1969),
ifservices are paid for in property, thefair market value of the
propertytaken in payment must be included inincome as compensation.
If services arepaid for in exchange for other services,the fair
market value of such otherservices taken in payment must be
in-cluded in income as compensation. Ifthe services are rendered at
a stipu-lated price, such price will be presumedto be the fair
market value of the com-pensation received in the absence
ofevidence to the contrary. For specialrules relating to certain
options re-ceived as compensation, see §§ 1.61–15,1.83–7, and
section 421 and the regula-tions thereunder. For special rules
re-lating to premiums paid by an em-ployer for an annuity contract
which isnot subject to section 403(a), see sec-tion 403(c) and the
regulations there-under and § 1.83–8(a). For special rulesrelating
to contributions made to anemployees’ trust which is not
exemptunder section 501, see section 402(b) andthe regulations
thereunder and § 1.83–8(a).
(2) Property transferred to employee orindependent contractor.
(i) Except asotherwise provided in section 421 andthe regulations
thereunder and § 1.61–15(relating to stock options), and para-graph
(d)(6)(i) of this section, if prop-erty is transferred by an
employer toan employee or if property is trans-ferred to an
independent contractor, as
compensation for services, for anamount less than its fair
market value,then regardless of whether the transferis in the form
of a sale or exchange, thedifference between the amount paid forthe
property and the amount of its fairmarket value at the time of the
trans-fer is compensation and shall be in-cluded in the gross
income of the em-ployee or independent contractor. Incomputing the
gain or loss from thesubsequent sale of such property, itsbasis
shall be the amount paid for theproperty increased by the amount
ofsuch difference included in gross in-come
(ii)(a) Cost of life insurance on the lifeof the employee.
Generally, life insur-ance premiums paid by an employer onthe life
of his employee where the pro-ceeds of such insurance are payable
tothe beneficiary of such employee arepart of the gross income of
the em-ployee. However, the amount includiblein the employee’s
gross income is de-termined with regard to the provisionsof section
403 and the regulationsthereunder in the case of an
individualcontract issued after December 31, 1962,or a group
contract, which provides in-cidental life insurance protection
andwhich satisfies the requirements of sec-tion 401(g) and §
1.401–9, relating to thenontransferability of annuity con-tracts.
For the special rules relating tothe includibility in an employee’s
grossincome of an amount equal to the costof certain group term
life insurance onthe employee’s life which is carried di-rectly or
indirectly by his employer,see section 79 and the
regulationsthereunder. For special rules relatingto the exclusion
of contributions by anemployer to accident and health plansfor the
employee, see section 106 andthe regulations thereunder.
(b) Cost of group-term life insurance onthe life of an
individual other than an em-ployee. The cost (determined
underparagraph (d)(2) of § 1.79–3) of group-term life insurance on
the life of an in-dividual other than an employee (suchas the
spouse or dependent of the em-ployee) provided in connection with
theperformance of services by the em-ployee is includible in the
gross incomeof the employee.
(3) Meals and living quarters. Thevalue of living quarters or
meals which
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Internal Revenue Service, Treasury § 1.61–2T
an employee receives in addition to hissalary constitutes gross
income unlessthey are furnished for the convenienceof the employer
and meet the condi-tions specified in section 119 and
theregulations thereunder. For the treat-ment of rental value of
parsonages orrental allowance paid to ministers, seesection 107 and
the regulations there-under; for the treatment of
statutorysubsistence allowances received by po-lice, see section
120 and the regulationsthereunder.
(4) Stock and notes transferred to em-ployee or independent
contractor. Exceptas otherwise provided by section 421and the
regulations thereunder and§ 1.61–15 (relating to stock options),
andparagraph (d)(6)(i) of this section, if acorporation transfers
its own stock toan employee or independent contractoras
compensation for services, the fairmarket value of the stock at the
timeof transfer shall be included in thegross income of the
employee or inde-pendent contractor. Notes or other evi-dences of
indebtedness received in pay-ment for services constitute income
inthe amount of their fair market valueat the time of the transfer.
A taxpayerreceiving as compensation a note re-garded as good for
its face value at ma-turity, but not bearing interest, shalltreat
as income as of the time of re-ceipt its fair discounted value
com-puted at the prevailing rate. As pay-ments are received on such
a note,there shall be included in income thatportion of each
payment which rep-resents the proportionate part of thediscount
originally taken on the entirenote.
(5) Property transferred on or beforeJune 30, 1969, subject to
restrictions. Not-withstanding paragraph (d) (1), (2), or(4) of
this section, if any property istransferred after September 24,
1959, byan employer to an employee or inde-pendent contractor as
compensationfor services, and such property is sub-ject to a
restriction which has a sig-nificant effect on its value at the
timeof transfer, the rules of § 1.421–6(d)(2)shall apply in
determining the timeand the amount of compensation to beincluded in
the gross income of the em-ployee or independent contractor.
This(5) is also applicable to transfers sub-ject to a restriction
which has a sig-
nificant effect on its value at the timeof transfer and to which
§ 1.83–8(b) (re-lating to transitional rules with re-spect to
transfers of restricted prop-erty) applies. For special rules
relatingto options to purchase stock or otherproperty which are
issued as compensa-tion for services, see § 1.61–15 and sec-tion
421 and the regulations there-under.
(6) Certain property transferred, pre-miums paid, and
contributions made inconnection with the performance of serv-ices
after June 30, 1969—(i) Exception.Paragraph (d) (1), (2), (4), and
(5) of thissection and § 1.61–15 do not apply to thetransfer of
property (as defined in§ 1.83–3(e)) after June 30, 1969, unless§
1.83–8 (relating to the applicability ofsection 83 and transitional
rules) ap-plies. If section 83 applies to a transferof property,
and the property is notsubject to a restriction that has a
sig-nificant effect on the fair market valueof such property, then
the rules con-tained in paragraph (d) (1), (2), and (4)of this
section and § 1.61–15 shall alsoapply to such transfer to the
extentsuch rules are not inconsistent withsection 83.
(ii) Cross references. For rules relatingto premiums paid by an
employer foran annuity contract which is not sub-ject to section
403(a), see section 403(c)and the regulations thereunder. Forrules
relating to contributions made toan employees’ trust which is not
ex-empt under section 501(a), see section402(b) and the regulations
thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, asamended by T.D. 6696,
28 FR 13450, Dec. 12,1963; T.D. 6856, 30 FR 13316, Oct. 20, 1965;
T.D.7544, 43 FR 31913, July 24, 1978; T.D. 7623, 44FR 28800, May
17, 1979; T.D. 8256, 54 FR 28582,July 6, 1989; T.D. 8607, 60 FR
40076, Aug. 7,1995]
§ 1.61–2T Taxation of fringe benefits—1985 through 1988
(temporary).
(a) Fringe benefits—(1) In general. Sec-tion 61(a)(1) provides
that, except asotherwise provided in subtitle A, grossincome
includes compensation for serv-ices, including fees,
commissions,fringe benefits, and similar items. Ex-amples of fringe
benefits include: anemployer-provided automobile, a flighton an
employer-provided aircraft, anemployer-provided free or
discounted
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
commercial airline flight, an employer-provided vacation, and
employer-pro-vided discount on property or services,and
emkployer-provided membership ina country club or other social
club, andan employer-provided ticket to an en-tertainment or
sporting event.
(2) Fringe benefits excluded from in-come. To the extent that a
particularfringe benefit is specifically excludedfrom gross income
pursuant to anothersection of subtitle A, that section shallgovern
the treatment of the fringe ben-efit. Thus, if the requirements of
thegoverning section are satisfied, thefringe benefits may be
excludable fromgross income. Examples of excludablefringe benefits
are qualified tuition re-ductions provided to an employee (sec-tion
177(d)); meals and lodging fur-nished to an employee for the
conven-ience of the employer (section 119); andbenefits provided
under a dependentcare assistance program (section 129).Similarly,
the value of the use by anemployee of an employer-provided ve-hicle
or a flight provided to an em-ployee on an employer-provided
air-craft may be excludable from incomeunder section 105 (because,
for example,the trnsportation is provided for med-ical reasons) if
and to the extent thatthe requirements of that section
aresatisfied. Section 61 and the regula-tions thereunder shall
apply, however,to the extent that they are not incon-sistent with
such other section. For ex-ample, many fringe benefits
specifi-cally addressed in other sections ofsubtitle A are excluded
from gross in-come only to the extent that they donot exceed
specific dollar or percentagelimits, or only if certain other
require-ments are met. If the limits are exceed-ed or the
requirements are not met,some or all of the fringe benefit may
beincludible in gross income. See para-graph (b)(3) of this
section.
(3) Compensation for services. A fringebenefit provided in
connection with theperformance of services shall be consid-ered to
have been provided as com-pensation for servcies. Refraining
fromthe performance of services (such aspursuant to a covenant not
to compete)is deemed to be the performance ofservices for purposes
of this section.
(4) Recipient of a fringe benefit—(i)Definition. A fringe
benefit is includedin the income of the ‘‘recipient’’ of thefringe
benefit. The recipient of a fringebenefit is the person performing
theservices in connection with which thefringe benefit is provided.
Thus, a per-son may be considered to be a recipi-ent, even though
that person did notactually receive the fringe benefit. Forexample,
a fringe benefit provided toany person is connection with the
per-formance of services by another personis considered to have
been provided tothe person who performs the servicesand not the
person who receives thefringe benefit. In addition, if a
fringebenefit is provided to a person, but tax-able to a second
person as the recipi-ent, such benefit is referred to as pro-vided
to the second person and use bythe first person is considered use
bythe second person. For example, provi-sion of an automobile to an
employee’sspouse by the employer is taxable tothe employee as the
recipient. Theautomobile is referred to as availableto the employee
and use by the em-ployee’s spouse is considered use by
theemployee.
(ii) Recipient may be other than an em-ployee. The recipient of
a fringe benefitneed not be an employee of the pro-vider of the
fringe benefit, but may bea partner, director, or an
independentcontractor. For convenience, the term‘‘employee’’
includes a reference to anyrecipient of a fringe benefit,
unlessotherwise specifically provided in thissection.
(5) Provider of a fringe benefit. The‘‘provider’’ of a fringe
benefit is thatperson for whom the services are per-formed,
regardless of whether that per-son actually provides the fringe
benefitto the recipient. The provider of afringe benefit need not
be the employerof the recipient of the fringe benefit,but may be,
for example, a client orcustomer of an independent contractor.For
convenience, the term ‘‘employer’’includes a reference to any
provider ofa fringe benefit, unless otherwise spe-cifically
provided in this section.
(6) Effective date. This section is effec-tive from January 1,
1985, to December31, 1988, with respect to fringe benefits
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Internal Revenue Service, Treasury § 1.61–2T
furnished before January 1, 1989. No in-ference may be drawn
from the promul-gation or terms of this section con-cerning the
application of law in effectprior to January 1, 1985.
(b) Valuation of fringe benefits—(1) Ingeneral. An employee must
include ingross income the amount by which thefair market value of
the fringe benefitexceeds the sum of (i) the amount, ifany, paid
for the benefit, and (ii) theamount, if any, specifically
excludedfrom gross income by some other sec-tion of subtitle A.
Therefore, for exam-ple, if the employee pays fair marketvalue for
what is received, no amountis includible in the gross income of
theemployee.
(2) Fair market value. In general, fairmarket value is
determined on thebasis of all the facts and cir-cumstances.
Specifically, the fair mar-ket value of a fringe benefit is
thatamount a (hypothetical person wouldhave to pay a hypothetical
third partyto obtain (i.e., purchase or lease) theparticular fringe
benefit. Thus, for ex-ample, the effect of any special
rela-tionship that may exist between theemployer and the employee
must bedisregarded. This also means that anemployee’s subjective
perception of thevalue of a fringe benefit is not relevantto the
determination of a fringe bene-fit’s fair market value. In
addition, thecost incurred by the employer is notdeterminative of
the fair market valueof the fringe benefit. For special
rulesrelating to the valuation of certainfringe benefits, see
paragraph (c) ofthis section.
(3) Exclusion from income based on cost.If a statutory exclusion
phrased interms of cost applies to the provisionof a fringe
benefit, section 61 does notrequire the inclusion in the
recipient’sgross income of the difference betweenthe fair market
value and the exclud-able cost of that fringe benefit. For
ex-ample, section 129 provides an exclu-sion from an employee’s
gross incomefor amounts paid or incurred by an em-ployer to provide
dependent care as-sistance to employees. Even if the fairmarket
value of the dependent care as-sistance exceeds the employer’s
cost,the excess is not subject to inclusionunder section 61 and
this section. If thestatutory cost exclusion is a limited
amount, however, then the fair marketvalue of the fringe benefit
attributableto any excess cost is subject to inclu-sion.
(4) Fair market value of the availabilityof an employer-provided
vehicle. If thevehicle special valuation rules of para-graph (d),
(e), or (f) of this section arenot used by a taxpayer entitled to
usesuch rules, the value of the availabilityof an employer-provided
vehicle is de-termined under the general valuationprinciples set
forth in this section. Ingeneral, such valuation must be
deter-mined by reference to the cost to a hy-pothetical person of
leasing from a hy-pothetical third party the same orcomparable
vehicle on the same orcomparable terms in the geographicarea in
which the vehicle is availablefor use. Unless the employee can
sub-stantiate that the same or comparablevehicle could have been
leased on acents-per-mile basis, the value of theavailability of
the vehicle cannot bedetermined by reference to a cents-per-mile
rate applied to the number ofmiles the vehicle is driven. An
exampleof a comparable lease term is theamount of time that the
vehicle isavailable to the employee for use, e.g.,a one-year
period.
(5) Fair market value of a flight on anemployer-provided
aircraft. If the non-commercial flight special valuationrule of
paragraph (g) of this section isnot used (or is not properly used)
by ataxpayer entitled to use such rule, thevalue of a flight on an
employer-pro-vided aircraft is determined under thegeneral
valuation principles set forthin this section. An example of how
thegeneral valuation principles wouldapply is that if an employee
whoseflight is primarily personal controlsthe use of an aircraft
with respect tosuch flight, such flight is valued by ref-erence to
how much it would cost a hy-pothetical person to charter the sameor
comparable aircraft for the same orcomparable flight. The cost to
charterthe aircraft must be allocated amongall employees on board
the aircraftbased on all the facts and cir-cumstances, including
which employ-ees controlled the use of the aircraft.Notwithstanding
the allocation re-quired by the preceding sentence, noadditional
amount shall be included in
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
the income of any employee whoseflight is properly valued under
the spe-cial valuation rule of paragraph (g) ofthis section.
(c) Special valuation rules—(1) In gen-eral. Paragraphs (d)
through (j) of thissection provide special valuation rulesthat may
be used under certain cir-cumstances for certain commonly pro-vided
fringe benefits. Paragraph (d)provides a lease valuation rule
relatingto employer-provided automobiles.Paragraph (e) provides a
cents-per-milevaluation rule relating to employer-provided
vehicles. Paragraph (f) pro-vides a commuting valuation rule
re-lating to employer-provided vehicles.Paragraph (g) provides a
flight valu-ation rule relating to flights on em-ployer-provided
aircraft. Paragraph (h)provides a flight valuation rule relat-ing
to flights on commercial airlines.Paragraph(i) is reserved.
Paragraph (j)provides a meal valuation rule relatingto
employer-operated eating facilitiesfor employees. For general rules
relat-ing to the valuation of fringe benefitsnot eligible for
valuation under thespecial valuation rules, see paragraph(d) of
this section.
(2) Use of the special valuation rules—(i) In general. The
Special valuationrules may be used for income, employ-ment tax, and
reporting purposes. Useof any of the special valuation rules
isoptional. An employer need not use thesame vehicle special
valuation rule forall vehicles provided to all employees.For
example, an employer may use theautomobile lease valuation rule
forautomobiles provided to some employ-ees, and the commuting and
vehiclecents-per-mile valuation rules for auto-mobiles provided to
other employees.Except as otherwise provided, however,if either the
commercial flight valu-ation rule or the noncommercial
flightvaluation rule is used, such rule mustbe used by an employer
to value allflights taken by employees in a cal-endar year.
Effective January 1, 1986, ifan employer uses one of the
specialrules to value the benefit provided toan employee, the
employee may notuse another special rule to value thatbenefit. The
employee may, however,use general valuation rules based onfacts and
circumstances (see paragraph(b) of this section). Effective January
1,
1986, an employee may only use a spe-cial valuation rule if the
employer usesthe rule. If a special rule is used, itmust be used
for all purposes. If an em-ployer properly uses a special rule
andthe employee uses the special rule, theemployee must include in
gross incomethe amount determined by the em-ployer under the
special rule less anyamount reimbursed by the employee tothe
employer. The employer and theemployee may use the special rules
todetermine the amount of the reim-bursement due the employer by
theemployee. If an employer properly usesa special rule and
properly determinesthe amount of an employee’s workingcondition
fringe under section 132 and§ 1.132–1T (under the general rule
orunder a special rule), and the employeeuses the special valuation
rule, the em-ployee must include in gross incomethe amount
determined by the em-ployer less any amount reimbursed bythe
employee to the employer.
(ii) Transitional rules—(A) Use of vehi-cle special valuation
rules for 1985 and1986. For purposes of valuing the use
oravailability of a vehicle, the consist-ency rules provided in
paragraphs (d)(6)and (e)(5) of this section (relating tothe
automobile lease valuation ruleand the vehicle cents-per-mile
valu-ation rule, respectively) apply for 1987and thereafter.
Therefore, for 1985 and1986 an employer (and employee, sub-ject to
paragraph (c)(2)(i) of this sec-tion) may use any applicable
specialvaluation rule (or no special valuationrule) to value the
use or availability ofa vehicle, subject to paragraph(c)(2)(ii)(B)
of this section.
(B) Consistency Rules for 1985 and 1986.If an employer uses the
automobilelease valuation rule of paragraph (d) ofthis section in
1985 or 1986 with respectto an automobile, such rule must beused
for the entire calendar year withrespect to the automobile except
forany period during which the com-muting valuation rule of
paragraph (f)of this section is properly used. If anemployer uses
the vehicle cents-per-mile valuation rule of pararaph (e) ofthis
section in 1985 or 1986 with respectto a vehicle, such rule must be
used forthe entire calendar year with respectto the vehicle except
for any periodduring which the commuting valuation
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Internal Revenue Service, Treasury § 1.61–2T
rule of paragraph (f) of this section isproperly used. The rules
of this para-graph (c)(2)(ii)(B) also apply to employ-ees using the
special valuation rules ofparagraphs (d) or (e) of this
section.
(C) Employee’s use of special valuationrules for 1985. An
employee may use aspecial valuation rule (other than therule in
paragraph (e) of this section re-lating to the vehicle
cents-per-milevaluation rule) during 1985 even if theemployer does
not use the same specialvaluation rule during 1985. An employ-ee’s
use of a special valuation rule in1986 and thereafter must be
consistentwith his employer’s use of the rule asrequired under
paragraph (c)(2)(i) ofthis section.
(D) Examples. The following examplesillustrate the rules of
paragraph(c)(2)(ii) of this section:
Example (1). Assume that an employerproperly uses the automobile
lease valuationrule in 1985. The employer may use the vehi-cle
cents-per-mile valuation rule in 1986 ifthe requirements of the
vehicle cents-per-mile valuation rule are satisfied.
Example (2). Assume that an employer doesnot use a special
valuation rule to value theavailability of an automobile in 1985.
Theemployer may use any of the special valu-ation rules in 1986 if
the requirements of therule chosen are satisfied. The same
appliesfor 1987.
Example (3). Assume that an employerproperly uses the vehicle
cents-per-milevaluation rule in 1985. The employer maycontinue to
use to the rule or use any of theother special valuation rules to
value thebenefit provided in 1986 if the requirementsof the rule
chosen are satisfied. Alter-natively, the employer may use none of
thespecial valuation rules in 1986 but use any ofthe rules in 1987
if the requirements of therule chosen are satisfied.
Example (4). Assume that an employeeproperly uses the automobile
lease valuationrule in 1985. In 1986 and thereafter the em-ployee
may use a special valuation rule onlyif the employee’s employer
uses the samespecial valuation rule. The employee mayuse general
valuation principles to value thebenefit provided in 1986 and
thereafter.
(3) Election to use the special valuationrules—A particular
special valuationrule is deemed to have been elected bythe employer
(and, if applicable, by theemployee), if the employer (and, if
ap-plicable, the employee) determines thevalue of the fringe
benefit provided byapplying the special valuation rule andtreats
such value as the fair market
value of the fringe benefit for income,employment tax, and
reporting pur-poses. Neither the employer nor theemployee is
required to notify the In-ternal Revenue Service of the
election.
(4) Application of section 414 to employ-ers. For purposes of
paragraphs (c)through (j) of this section, except asotherwise
provided therein, the term‘‘employer’’ includes all entities
re-quired to be treated as a single em-ployer under section 414
(b), (c), or (m).
(5) Valuation formulas contained in thespecial valuation rules.
The valuationformulas contained in the special valu-ation rules are
provided only for use inconnection with such rules. Thus, whena
special valuation rule is properly ap-plied to a fringe benefit,
the Commis-sioner will accept the value calculatedpursuant to the
rule as the fair marketvalue of that fringe benefit. However,when a
special valuation rule is notproperly applied to a fringe
benefit(see, for example, paragraph (g)(11) ofthis section), or
when a special valu-ation rule is not used to value a fringebenefit
by a taxpayer entitled to usethe rule, the fair market value of
thatfringe benefit may not be determinedby reference to any value
calculatedunder any special valuation rule. Underthe circumstances
described in the pre-ceding sentence, the fair market valueof the
fringe benefit must be deter-mined pursuant to paragraph (b) of
thissection.
(6) Modification of the special valuationrules. The Commissioner
may, if hedeems it necessary, add, delete, ormodify the special
valuation rules, in-cluding the valuation formulas con-tained
herein, on a prospective basis.
(7) Special Accounting Period. If theemployer is using the
special account-ing rule provided in Announcement 85–113 (1985–31
I.R.B., August 5, 1985) (re-lating to the reporting of and
with-holding on the value of noncash fringebenefits), benefits
which are deemedprovided in a subsequent calendar yearpursuant to
such rule are considered asprovided in such subsequent calendaryear
for purposes of the special valu-ation rules. Thus, if a particular
spe-cial valuation rule is in effect for a cal-endar year, it
applies to benefitsdeemed provided during such calendaryear under
the special accounting rule.
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
(d) Automobile lease valuation rule—(1)In general—(i) Annual
Lease Value.Under the special valuation rule of thisparagraph (d),
if an employer providesan employee with an automobile thatis
available to the employee for an en-tire calendar year, the value
of thebenefit provided in the Annual LeaseValue (determined under
paragraph(d)(2) of this section) of that auto-mobile. Except as
otherwise provided,for an automobile that is available toan
employee for less than an entire cal-endar year, the value of the
benefitprovided is either a pro-rated AnnualLease Value or the
Daily Lease Value(as defined in paragraph (d)(4) of thissection),
whichever is applicable. Ab-sent any statutory exclusion relatingto
the employer-provided automobile(see, for example, section
132(a)(3) and§ 1.132–5T(b)), the amount of the AnnualLease Value
(or a pro-rated AnnualLease Value or the Daily Lease Value,as
applicable) is included in the grossincome of the employee.
(ii) Definition of automobile. For pur-poses of this paragraph
(d), the term‘‘automobile’’ means any four-wheeledvehicle
manufactured primarily for useon public streets, roads, and
highways.
(2) Calculation of Annual Lease Value—(i) In general. The Annual
LeaseValue of a particular automobile is cal-culated as
follows:
(A) Determine the fair market valueof the automobile as of the
first dateon which the automobile is made avail-able to any
employee of the employerfor personal use. For an automobilefirst
made available to any employeefor personal use prior to January
1,1985, determine the fair market valueas of January 1, 1985. For
rules relatingto determination of the fair marketvalue of an
automobile for purposes ofthis paragraph (d), see paragraph
(d)(5)of this section.
(B) Select the dollar range in column1 of the Annual Lease Value
Table, setforth in paragraph (d)(2)(iii) of this sec-tion,
corresponding to the fair marketvalue of the automobile. Except as
oth-erwise provided in paragraphs (d)(2) (iv)and (v) of this
section, the AnnualLease Value for each year of avail-ability of
the automobile is the cor-responding amount in column 2 of
theTable.
(ii) Use by employee only in 1985. If theemployee, but not the
employer, isusing the special rule of this paragraph(d), the
employee may calculate theAnnual Lease Value in the same man-ner as
described in paragraph(d)(2)(i)(A) of this section, except thatthe
fair market value of the auto-mobile is determined as of the
firstdate on which the automobile is madeavailable to the employee
for personaluse or, for an automobile made avail-able to the
employee for personal useprior to January 1, 1985, by deter-mining
the fair market value as of Jan-uary 1, 1985. If the employer is
alsousing the special rule of this paragraph(d), however, then the
employee towhom the automobile is made avail-able must use the
special rule, if at all,by using the Annual Lease Value cal-culated
by the employer. The rules ofthis paragraph (d)(2)(ii) apply only
for1985.
(iii) Annual Lease Value Table.
Automobile fair market valueAnnualleasevalue
(1) (2)
$0 to $999
.............................................................
$600$1,000 to $1,999
................................................... 850$2,000 to
$2,999 ...................................................
1,100$3,000 to $3,999
................................................... 1,350$4,000 to
$4,999 ...................................................
1,600$5,000 to $5,999
................................................... 1,850$6,000 to
$6,999 ...................................................
2,100$7,000 to $7,999
................................................... 2,350$8,000 to
$8,999 ...................................................
2,600$9,000 to $9,999
................................................... 2,850$10,000 to
$10,999 ...............................................
3,100$11,000 to $11,999
............................................... 3,350$12,000 to
$12,999 ...............................................
3,600$13,000 to $13,999
............................................... 3,850$14,000 to
$14,999 ...............................................
4,100$15,000 to $15,999
............................................... 4,350$16,000 to
$16,999 ...............................................
4,600$17,000 to $17,999
............................................... 4,850$18,000 to
$18,999 ...............................................
5,100$19,000 to $19,999
............................................... 5,350$20,000 to
$20,999 ...............................................
5,600$21,000 to $21,999
............................................... 5,580$22,000 to
$22,999 ...............................................
6,100$23,000 to $23,999
............................................... 6,350$24,000 to
$24,999 ...............................................
6,600$25,000 to $25,999
............................................... 6,850$26,000 to
$27,999 ...............................................
7,250$28,000 to $29,999
............................................... 7,750$30,000 to
$31,999 ...............................................
8,250$32,000 to $33,999
............................................... 8,750$34,000 to
$35,999 ...............................................
9,250$36,000 to $37,999
............................................... 9,750$38,000 to
$39,999 ...............................................
10,250$40,000 to $41,999
............................................... 10,750$42,000 to
$43,999 ...............................................
11,250$44,000 to $45,999
............................................... 11,750$46,000 to
$47,999 ............................................... 12,250
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Internal Revenue Service, Treasury § 1.61–2T
Automobile fair market valueAnnualleasevalue
(1) (2)
$48,000 to $49,999
............................................... 12,750$50,000 to
$51,999 ...............................................
13,250$52,000 to $53,999
............................................... 13,750$54,000 to
$55,999 ...............................................
14,250$56,000 to $57,999
............................................... 14,750$58,000 to
$59,999 ............................................... 15,250
For vehicles having a fair marketvalue in excess of $59,999, the
AnnualLease Value is equal to: (.25 X the fairmarket value of the
automobile) + $500.
(iv) Recalculation of annual leasevalue. The Annual Lease Values
deter-mined under the rules of this para-graph (d) are based on a
four-year leaseterm. Therefore, except as otherwiseprovided in
paragraph (d)(2)(v) of thissection, the Annual Lease Value
cal-culated by applying paragraph (d)(2) (i)or (ii) of this section
shall remain in ef-fect for the period that begins with thefirst
date the special valuation rule ofparagraph (d) of this section is
appliedby the employer to the automobile andends on December 31 of
the fourth fullcalendar year following that date. TheAnnual Lease
Value for each subse-quent four-year period is calculated
bydetermining the fair market value ofthe automobile as of the
January 1 fol-lowing the period described in the pre-vious sentence
and selecting theamount in column 2 of the AnnualLease Value Table
corresponding to theappropriate dollar range in column 1 ofthe
Table. If, however, the employer isusing the special accounting
rule pro-vided in Announcement 85–113 (1985–31I.R.B., August 5,
1985) (relating to thereporting of and withholding on thevalue of
noncash fringe benefits), theemployer may calculate the AnnualLease
Value for each subsequent four-year period as of the beginning of
thespecial accounting period that beginsimmediately prior to the
January 1 de-scribed in the previous sentence. Forexample, assume
that pursuant to An-nouncement 85–113, an employer usesthe special
accounting rule. Assumefurther that beginning on November 1,1985,
the special accounting period isNovember 1 to October 31 and that
theemployer elects to use the special valu-ation rule of this
paragraph (d) as of
January 1, 1985. The employer may re-calculate the Annual Lease
Value as ofNovember 1, 1988, rather than as ofJanuary 1, 1989.
(v) Transfer of the automobile to an-other employee. Unless the
primary pur-pose of the transfer is to reduce Fed-eral taxes, if an
employer transfers anautomobile from one employee to an-other
employee, the employer may re-calculate the Annual Lease Valuebased
on the fair market value of theautomobile as of January 1 of the
yearof transfer. If, however, the employer isusing the special
accounting rule pro-vided in Announcement 85–113 (1985–31I.R.B.,
August 5, 1985) (relating to thereporting of and withholding on
thevalue of noncash fringe benefits), theemployer may recalculate
the AnnualLease Value based on the fair marketvalue of the
automobile as of the begin-ning of the special accounting period
inwhich the transfer occurs. If the em-ployer does not recalculate
the AnnualLease Value, and the employee towhom the automobile is
transferreduses the special valuation rule, the em-ployee may not
recalculate the AnnualLease Value.
(3) Services included in, or excludedfrom, the Annual Lease
Value Table—(i)Maintenance and insurance included.The Annual Lease
Values contained inthe Annual Lease Value Table includethe fair
market value of maintenanceof, and insurance for, the
automobile.Neither an employer nor an employeemay reduce the Annual
Lease Value bythe fair market value of any service in-cluded in the
Annual Lease Value thatis not provided by the employer, suchas
reducing the Annual Lease Value bythe fair market value of a
maintenanceservice contract or insurance. An em-ployer or employee
may take into ac-count the services actually providedwith respect
to the automobile by val-uing the availability of the
automobileunder the general valuation rules ofparagraph (b) of this
section.
(ii) Fuel excluded—(A) In general. TheAnnual Lease Values do not
includethe fair market value of fuel providedby the employer,
regardless of whetherfuel is provided in kind or its cost is
re-imbursed by or charged to the em-ployer.
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
(B) Valuation of fuel provided in kind.The provision of fuel in
kind may bevalued at fair market value based onall the facts and
circumstances or, inthe alternative, it may be valued at 5.5cents
per mile for all miles driven bythe employee. However, the
provisionof fuel in kind may not be valued at 5.5cents per mile for
miles driven outsidethe United States, Canada, and Mexico.For
purposes of this section, the UnitedStates includes the United
States andits territories.
(C) Valuation of fuel where cost reim-bursed by or charged to
employer. Thefair market value of fuel, the cost ofwhich is
reimbursed by or charged toan employer, is generally the amountof
the actual reimbursement or theamount charged, provided the
purchaseof the fuel is at arm’s length. If an em-ployer with a
fleet of at least 20 auto-mobiles that meet the requirements
ofparagraph (d)(5)(v)(C) of this section re-imburses employees for
the cost of fuelor allows employees to charge the em-ployer for the
cost of the fuel, however,the fair market value of fuel providedto
those automobiles may be deter-mined by reference to the
employer’sfleet-average cents-per-mile fuel cost.The fleet-average
cents-per-mile fuelcost in equal to the fleet-average per-gallon
fuel cost divided by the fleet-av-erage miles-per-gallon rate. The
aver-ages described in the preceding sen-tence must be determined
by averagingthe per-gallon fuel costs and miles-per-gallon rates of
a representative sampleof the automobiles in the fleet equal tothe
greater of ten percent of the auto-mobiles in the fleet or 20
automobilesfor a representative period, such as atwo month
period.
(iii) All other services excluded. Thefair market value of any
service notspecifically identified in paragraph(d)(3)(i) of this
section that is providedby the employer with respect to
anautomobile (such as the services of achauffeur) must be added to
the AnnualLease Value of the automobile in deter-mining the fair
market value of thebenefit provided.
(4) Availability of an automobile for lessthan an entire
calendar year—(i) Pro-rated Annual Lease Value used for con-tinuous
availability of 30 or more days.Except as otherwise provided in
para-
graph (d)(4)(iv) of this section, for peri-ods of continuous
availability of 30 ormore days, but less than an entire cal-endar
year, the value of the avail-ability of the employer-provided
auto-mobile is the pro-rated Annual LeaseValue. The pro-rated
Annual LeaseValue is calculated by multiplying theapplicable Annual
Lease Value by afraction, the numerator of which is thenumber of
days of availability and thedenominator of which is 365.
(ii) Daily Lease Value used for contin-uous availability of less
than 30 days. Ex-cept as otherwise provided in para-graph
(d)(4)(iii) of this section, for peri-ods of continuous
availability of one ormore but less than 30 days, the value ofthe
availability of the employer-pro-vided automobile is the Daily
LeaseValue. The Daily Lease Value is cal-culated by multiplying the
applicableAnnual Lease Value by a fraction, thenumerator of which
is four times thenumber of days of availability and thedenominator
of which is 365.
(iii) Election to treat all periods as peri-ods of at least 30
days. A pro-rated An-nual Lease Value may be applied withrespect to
a period of continuous avail-ability of less than 30 days, by
treatingthe automobile as if it had been avail-able for 30 days, if
to do so would resultin a lower valuation than applying theDaily
Lease Value to the shorter periodof actual availability.
(iv) Periods of unavailability—(A) Gen-eral rule. In general, a
pro-rated AnnualLease Value (as provided in paragraph(d)(4)(i) of
this section) is used to valuethe availability of an
employer-pro-vided automobile when the automobileis available to an
employee for a periodof continuous availability of at least 30days
but less than the entire calendaryear. Neither an employer nor an
em-ployee may use a pro-rated AnnualLease Value when the reduction
of Fed-eral taxes is the primary reason theautomobile is
unavailable to an em-ployee during the calendar year.
(B) Unavailability for personal reasonsof the employee. If an
automobile is un-available to an employee because ofpersonal
reasons of the employee, suchas while the employee is on vacation,
apro-rated Annual Lease Value may not
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Internal Revenue Service, Treasury § 1.61–2T
be used. For example, assume an auto-mobile is available to an
employee dur-ing the first five months of the yearand during the
last five months of theyear. Assume further that the period
ofunavailability occurs because the em-ployee is on vacation. The
AnnualLease Value, if it is applied, must beapplied with respect to
the entire 12month period. The Annual Lease Valuemay not be
pro-rated to take into ac-count the two-month period of
unavail-ability.
(5) Fair market value—(i) In general.For purposes of determining
the An-nual Lease Value of an automobileunder the Annual Lease
Value Table,the fair market value of an automobileis that amount a
hypothetical personwould have to pay a hypothetical thirdparty to
purchase the particular auto-mobile provided. Thus, for example,any
special relationship that may existbetween the employee and the
em-ployer must be disregarded. Also, theemployee’s subjective
perception of thevalue of the automobile is not relevantto the
determination of the auto-mobile’s fair market value. In
addition,except as provided in paragraph (d)(5)(ii) of this
section, the cost incurred bythe employer of either purchasing
ofleasing the automobile is not deter-minative of the fair market
value ofthe automobile.
(ii) Safe-harbor valuation rule. Forpurposes of calculating the
AnnualLease Value of an automobile underthis paragraph (d), the
safe-harborvalue of the automobile may be used asthe fair market
value of the auto-mobile For an automobile owned bythe employer,
the safe-harbor value ofthe automobile is the employer’s costof
purchasing the automobile, providedthe purchase is made at arm’s
length.For an automobile leased by the em-ployer, the safe-harbor
value of theautomobile is the value determinedunder paragraph
(d)(5)(iii) of this sec-tion.
(iii) Use of nationally recognized pric-ing guides. The fair
market value of anautomobile that is (A) provided to anemployee
prior to January 1, 1985, (B)being revalued pursuant to
paragraphs(d)(2) (iv) or (v) of this section, or (C) isa leased
automobile being valued pur-suant to paragraph (d)(5)(ii) of this
sec-
tion, may be determined by using theretail value of such
automobile as re-ported in a nationally recognized publi-cation
that regularly reports new orused automobile retail values,
which-ever is applicable. The values con-tained in (and obtained
from) the pub-lication must be reasonable with re-spect to the
automobile being valued.
(iv) Fair market value of special equip-ment—(A) Certain
equipment excluded.The fair market value of an automobiledoes not
include the fair market valueof any telephone or any
specializedequipment that is added to or carriedin the automobile
if the presence ofsuch equipment is necessitated by,
andattributable to, the business needs ofthe employer.
(B) Use of specialized equipment outsideof employer’s business.
The value of spe-cialized equipment must be included,however, if
the employee to whom theautomobile is available uses the
spe-cialized equipment in a trade of busi-ness of the employee
other than theemployee’s trade or business of beingan employee of
the employer.
(C) Equipment susceptible to personaluse. The exclusion rule
provided in thisparagraph (d)(5)(iv) does not apply tospecialized
equipment susceptible topersonal use.
(v) Fleet-average valuation rule—(A) Ingeneral. An employer with
a fleet of 20or more automobiles may use a fleet-average value for
purposes of calcu-lating the Annual Lease Values of theautomobiles
in the fleet. The fleet-av-erage value is the average of the
fairmarket values of each automobile inthe fleet. The fair market
value of eachautomobile in the fleet shall be deter-mined, pursuant
to the rules of para-graphs (d)(5) (i) through (iv) of this
sec-tion, as of the later of January 1, 1985,or the first date on
which the auto-mobile is made available to any em-ployee of the
employer for personaluse.
(B) Period for use of rule. The fleet-av-erage valuation rule of
this paragraph(d)(5)(v) may be used by an employer asof January 1
of any calendar year fol-lowing the calendar year in which
theemployer acquires a fleet of 20 or moreautomobiles. The Annual
Lease Valuecalculated for the automobiles in thefleet, based on the
fleet-average value,
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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
shall remain in effect for the periodthat begins with the first
January 1 thefleet-average valuation rule of thisparagraph
(d)(5)(v) is applied by theemployer to the automobiles in thefleet
and ends on December 31 of thesubsequent calendar year. The
AnnualLease Value for each subsequent twoyear period is calculated
by deter-mining the fleet-average value of theautomobiles in the
fleet as of the firstJanuary 1 of such period. An employermay cease
using the fleet-average valu-ation rule as of any January 1.
Thefleet-average valuation rule does notapply as of January 1 of
the year inwhich the number of automobiles inthe employer’s fleet
declines to fewerthan 20. If, however, the employer isusing the
special accounting rule pro-vided in Announcement 85–113 (I.R.B.No.
31, August 5, 1985), the employermay apply the rules of this
paragraph(d)(5)(v)(B) on the basis of the specialaccounting period
rather than the cal-endar year. (This is accomplished
bysubstituting (1) the beginning of thespecial accounting period
that beginsimmediately prior to the January 1 de-scribed in this
paragraph (d)(5)(v)(B)for January 1 wherever it appears inthis
paragraph (d)(5)(v)(B) and (2) theend of such accounting period for
De-cember 31.) The revaluation rules ofparagraph (d)(2) (iv) and
(v) of this sec-tion do not apply to automobiles val-ued under this
paragraph (d)(5)(v).
(C) Limitations on use of fleet-averagerule. The rule provided
in this para-graph (d)(5)(v) may not be used for anyautomobile
whose fair market value(determined pursuant to paragraphs(d)(5) (i)
through (iv) of this section asof either the first date on which
theautomobile is made available to anyemployee of the employer for
personaluse or, if later, January 1, 1985) exceeds$16,500. In
addition, the rule provided inthis paragraph (d)(5)(v) may only
beused for automobiles that the employerreasonably expects will
regularly beused in the employer’s trade or busi-ness. Infrequent
use of the vehicle,such as for trips to the airport or be-tween the
employer’s multiple businesspremises, does not constitute
regularuse of the vehicle in the employer’strade or business.
(D) Additional automobiles added to thefleet. If the rule
provided in this para-graph (d)(5)(v) is used by an employer,it
must be used for every automobileincluded in or added to the fleet
thatmeets the requirements of paragraph(d)(5)(v)(C) of this
section. The fleet-av-erage value in effect at the time
anautomobile is added to the fleet istreated as the fair market
value of theautomobile for purposes of determiningthe Annual Lease
Value of the auto-mobile until the fleet-average valuechanges
pursuant to paragraph(d)(5)(v)(B) of this section.
(E) Use of the fleet-average rule by em-ployees. An employee can
only use thefleet-average value if it is used by theemployer. If an
employer uses thefleet-average value, and the employeeuses the
special valuation rule of para-graph (d) of this section, the
employeemust use the fleet-average value.
(6) Consistency rules—(i) Use of theautomobile lease valuation
rule by an em-ployer. Except as provided in paragraph(d)(5) (v)(B)
of this section, an em-ployer may adopt the automobile
leasevaluation rule of this paragraph (d) foran automobile only if
the rule is adopt-ed with respect to the later of the pe-riod that
begins on January 1, 1987, orthe first period in which the
auto-mobile is made available to an em-ployee of the employer for
personal useor, if the commuting valuation rule ofparagraph (f) of
this section is usedwhen the automobile is first madeavailable to
an employee of the em-ployer for personal use, the first periodin
which the commuting valuation ruleis not used.
(ii) An employer must use the auto-mobile lease valuation rule
for all subse-quent periods. Once the automobilelease valuation
rule has been adoptedfor an automobile by an employer, therule must
be used by the employer forall subsequent periods in which the
em-ployer makes the automobile availableto any employee, except
that the em-ployer may, for any period duringwhich use of the
automobile qualifiesfor the commuting valuation rule ofparagraph
(f) of this section, use thecommuting valuation rule with respectto
the automobile.
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Internal Revenue Service, Treasury § 1.61–2T
(iii) Use of the automobile lease valu-ation rule by an
employee. Except as pro-vided in paragraph (c)(2)(ii)(C) of
thissection, an employee may adopt theautomobile lease valuation
rule for anautomobile only if the rule is adopted(A) by the
employer and (B) with re-spect to the first period in which
theautomobile for which the employer(consistent with paragraph
(d)(6)(i) ofthis section) adopted the rule is madeavailable to that
employee for personaluse, or, if the commuting valuationrule of
paragraph (f) of this section isused when the automobile is first
madeavailable to that employee for personaluse, the first period in
which the com-muting valuation rule is not used.
(iv) An employee must use the auto-mobile lease valuation rule
for all subse-quent periods. Once the automobilelease valuation
rule has been adoptedfor an automobile by an employee, therule must
be used by the employee forall subsequent periods in which
theautomobile for which the rule is used isavailable to the
employee, except thatthe employee may, for any period dur-ing which
use of the automobile quali-fies for use of the commuting
valuationrule of paragraph (f) of this section andfor which the
employer uses the rule,use the commuting valuation rule withrespect
to the automobile.
(v) Replacement automobiles. Notwith-standing anything in this
paragraph(D)(6) to the contrary, if the auto-mobile lease valuation
rule is used byan employer, or by an employer and anemployee, with
respect to a particularautomobile, and a replacement auto-mobile is
provided to the employee forthe primary purpose of reducing
Fed-eral taxes, then the employer, or theemployer and the employee,
using therule must continue to use the rule withrespect to the
replacement automobile.
(e) Vehicle cents-per-mile valuationrule—(1) In general—(i)
General rule.Under the vehicle cents-per-mile valu-ation rule of
this paragraph (e), if anemployer provides an employee withthe use
of a vehicle that (A) the em-ployer reasonably expects will be
regu-larly used in the employer’s trade orbusiness throughout the
calendar year(or such shorter period as the vehiclemay be owned or
leased by the em-ployer) or (B) satisfies the require-
ments of paragraph (e)(1)(ii) of this sec-tion, the value of the
benefit providedin the calendar year is the standardmileage rate
provided in the applicableRevenue Ruling or Revenue
Procedure(‘‘cents-per-mile rate’’) multiplied bythe total number of
miles the vehicle isdriven by the employee for personalpurposes.
For 1985, the standard mile-age rate is 21 cents per mile for
thefirst 15,000 miles and 11 cents per milefor all miles over
15,000. See Rev. Proc.85–49. The standard mileage rate mustbe
applied to personal miles inde-pendent of business miles. Thus, for
ex-ample, if an employee drives 20,000 per-sonal miles and 35,000
business miles in1985, the value of the personal use ofthe vehicle
is $3,700(15,000×$.21+5,000×$.11). For purposes ofthis section, the
use of a vehicle forpersonal purposes is any use of the ve-hicle
other than use in the employee’strade or business of being an
employeeof the employer. Infrequent use of thevehicle, such as for
trips to the airportor between the employer’s multiplebusiness
premises, does not constituteregular use of the vehicle in the
em-ployer’s trade or business.
(ii) Mileage rule. A vehicle satisfiesthe requirements of this
paragraph(e)(1)(ii) in a calendar year if (A) it isactually driven
at least 10,000 miles inthe year, and (B) use of the vehicle
dur-ing the year is primarily by employees.For example, if a
vehicle is used byonly one employee during the year andthat
employee drives a vehicle at least10,000 miles in a calendar year,
such ve-hicle satisfies the requirements of thisparagraph
(e)(1)(ii) even if all milesdriven by the employee are personal.The
requirements of this paragraph(e)(1)(ii), however, will not be
satisfiedif during the year the vehicle is trans-ferred among
employees in such a waywhich enables an employee whose usewas at a
rate significantly less that10,000 miles per year to meet the
10,000mile threshold. Assume that an em-ployee uses a vehicle for
the first sixmonths of the year and drives 2,000miles, and that
vehicle is then used byother employees who drive the vehicle8,000
miles in the last six months of theyear. Because the rate at which
mileswere driven in the first six months ofthe year would result in
only 4,000
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24
26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T
miles being driven in the year, and be-cause the first employee
did not usethe vehicle during the last six monthsof the year, the
requirements of thisparagraph (e)(1)(ii) are not satisfied.The
requirement of paragraph(e)(1)(ii)(B) of this section is
deemedsatisfied if employees use the vehicleon a consistent basis
for commuting. Ifthe employer does not own or lease thevehicle
during a portion of the year,the 10,000 mile threshold is to be
re-duced proportionately to reflect the pe-riods when the employer
owned orleased the vehicle. For purposes of thisparagraph
(e)(1)(i