The fringe benefit rules applicable to protecting executives.

• Author: Dyson, Marianna G.

Heightened concern about the personal safety of employees following the events of September 11 has caused many employers to reexamine their corporate security policies. Realizing that security in the United States must be enhanced to deal with domestic terrorism, corporate executives are now more open to accepting the full range of protective measures determined to be necessary by security professionals. In conjunction with upgrading their security programs, employers may want to consider developing an "overall security program" that qualifies for the special valuation rules in the working condition fringe benefit regulations. This article reviews the tax requirements applicable to employees of non-governmental employers when using employer-provided transportation for security reasons. If the employer's security program meets these requirements, the value of any additional security protection provided to transport those employees, with respect to whom a bona fide business-oriented security concern exists, may be excluded from income under section 132(d) of the Internal Revenue Code. Moreover, a special safe harbor rule for valuing flights on the corporate aircraft for security concerns permits the employer to value any personal flights at a rate that is generally more favorable than the rate provided under the rules used by companies to value flights on noncommercial aircraft.

1. Overview of the Transportation-Related Security Rules

   The working condition fringe benefit regulations permit employers to exclude from income a significant portion of the value of security protection provided to employees, when transporting them for personal purposes in company cars or on corporate aircraft. To take advantage of these rules, the non-governmental employer must prove that:

   * a "bona fide business-oriented security concern" with respect to the employee existed at the time the security protection was provided; and

   * if security protection is provided on a less-than-24hour basis to the employee, the employer has obtained and consistently complied with the recommendations of a study prepared by an independent security consultant, who objectively and reasonably assessed the type of security protection needed in each particular case.

   A "bona fide business-oriented security concern" exists only if the facts and circumstances establish a specific basis for concern regarding the employee's safety. The examples given by the regulations are: (1) threats of death or kidnapping of, or serious bodily harm to, the employee receiving the protection or to a "similarly situated employee," or (2) a recent history of violent terrorist activity (such as bombings) in the geographic area in which the transportation is provided. In other words, the regulations contemplate a bona fide business-oriented security concern arising from specific threats to the employee's or a similarly situated employee's safety, as well as from the known existence of terrorist activity in the area in which the employee travels. Even though the World Trade Center was bombed in 1993, before the events of September 11, most Americans did not view the threat of terrorism as a significant risk factor to consider when traveling within the United States. Certainly, the IRS did not consider it to be the primary risk that employers would have to worry about.

2. Establishment of an Overall Security Program

   Even if the employer is able to demonstrate a factual basis for concern regarding the employee's safety, no bona fide business-oriented security concern will be deemed to exist unless the employer is also able to demonstrate that an "overall security program" has been provided to protect the employee. This can be accomplished by either protecting the employee on a 24-hour basis or by providing security pursuant to the recommendations of an "independent security study." Protection on a 24-hour basis means that that employee must be protected while at home and work and while traveling for both business and personal reasons (including commuting). The bodyguard/chauffeur must be trained in evasive driving techniques and the car must be specifically equipped with security devices. Access to both the employee's home and the workplace must be controlled through the use of guards, metal detectors, alarms, or similar devices. Finally, in appropriate cases, air travel should be on the corporate aircraft for both business and personal purposes.

   1. Independent Security Study

      Because most executives reject the notion of living with 24-hour protection, the implementation of an "independent security study" is usually the more viable alternative. To qualify as such a study, the following conditions must be satisfied:

      1. The security study must be performed with respect to the employer and employee (or a similarly situated employee of the employer) by an independent security consultant.

      2. The security study must be based on an objective assessment of all the facts and circumstances.

      3. The security study must recommend that 24-hour protection of the employee is not necessary and the recommendation must be reasonable under the circumstances.

      4. The employer must apply the recommendations contained in the study to the employee on a consistent basis.

      The regulations do not give specifics on how an independent consultant should go about evaluating the employee's need for security. The IRS has not issued any other guidance on the security exclusion rules, not even in the form of private letter rulings or technical advice memoranda, which could provide any insight into what the IRS might view as a sufficient evaluation. Before September 11, the IRS was adamant, in informal conversations, that there must be concrete proof of specific personal threats against the executive receiving protection. Thus, whenever possible, references to specific threats that may have been received either by the executive who is the subject of the study, or by...