November 13, 2012
Leave-Based Donation Programs
As it did with 9/11 and Katrina, the IRS has issued Notice 2012-69 granting favorable treatment to certain vacation/leave donation programs run by employers. In summary, it appears that an employee may release vacation or similar leave back to the employer. In return, the employer makes a cash donation to charity. Under the Notice, the payments from the employer must be made to Section 170(c) organizations "for the relief of victims of Hurrican Sandy" and must be made before January 1, 2014. (The Sandy Notice is almost exactly the same as the Katrina Notice and the revised 9/11 Notice).
If a program is structured appropriately, then the IRS will not treat the payments as income to the employee or take the position that the employee was in constructive receipt of funds. Of course, that means the employee cannot take a Section 170 deduction for the donation, since the value of the leave time will be fully excluded from his or her income - allowing the deduction would be double counting!
Interestingly, the Notice indicates that the the IRS "will not assert that an employer will only be permitted to deduct these cash payments" under Section 170 rather than Section 162. Thus, it appears that the employer may fully deduct the value of any foregone leave, even if Section 170's limitations might otherwise disallow part of the deduction.
I'm curious why the benefit to the employer - I'm also curious as to why there is no requirement that the value given to charity be somehow equal to the value of the leave surrendered. It seems like a potential "win-win-win" for employers. They get employees to release their vacation time, potentially for less than a cash out would be worth, and they get to take a deduction for it, without regard to Section 170 limits - as if it were still compensation paid under Section 162. Wondering outloud, it appears from the language of the Notice that an employer could get a full charitable contribution for other donations, and then take these donations on top. And they get the good PR to boot. That seems like a really good deal! (Don't get me wrong - I think such a program, and anything else that gets funds to our friends on the East Coast, is a good thing).
Finally, I wonder what an employer would have to do to demonstrate that the recipient charity is "for the relief of victims of Hurricane Sandy." If one gave a grant to the Red Cross for general operating expenses (or with a partial allocation to general operating expenses), would that be sufficent?
Okay - I'm not done wondering outloud quite yet. It seems like it is well within bounds of authority for the IRS to act on the assignment of income issue - after all, that's a pretty mushy, facts-and- circumstancy-type test. But what about the Section 162/170 determination? (I know,I know... say thank you, IRS.. and move along. Nothing to see here!)
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