Furnishing products for employee testing.

• Author: Elinsky, Peter I.

In Letter Ruling (TAM) 9401002, the IRS has ruled that a program under which a group of employees--only 7.03% of whom were nonhighly compensated employees--received and tested several of the employer's products during the year, and were required to purchase one of the tested products during the year, did not qualify as a product testing program under Temp. Regs. Sec. 1.132-5T(n). Therefore, the value of the use of the products was income to the employees. The Service also tentatively concluded that the employer should have withheld for the value of the products, but left the employer a chance to develop further evidence that it reasonably believed that use of the products was excludible from the employees' income.

Because this ruling arose in 1987 and involved products tested in 1985, the IRS applied Temp. Regs. Sec. 1.132-5T(n) (which was effective for 1985 through 1988) rather than the final regulations (which became effective as of Jan. 1, 1989). However, final Regs. Sec. 1.132-5(n) (dealing with product testing) is substantially the same as Temp. Regs. Sec. 1.132-5T(n).

Employers that currently provide big-ticket items--cars, computers, etc.--only to upper level employees for testing should be aware of this ruling. At a minimum, they should be able to provide the evidence TAM 9401002 suggests is required to have a testing program that satisfies the requirements of the regulations.

Income inclusion

Temp. Regs. Sec. 1.132-5T(n)(1) provides that the value of the use of consumer goods provided to employees under a product testing program may be excluded from gross income as a working condition fringe if all of the following conditions are met:

1. Consumer testing and evaluation of the product is an ordinary and necessary business expense of the employer.

2. Business reasons necessitate that the testing and evaluation of the product be performed off the employer's business premises by employees (i.e., the testing and evaluation cannot be carried out adequately in the employer's office or in laboratory testing facilities).

3. The product is furnished to the employee for purposes of testing and evaluation.

4. The product is made available to the employee for no longer than necessary to test and evaluate its performance, and must be returned to the employer at completion of the testing and evaluation period.

5. The employer imposes limitations on the employee's use of the product which significantly reduce the value of any personal benefit to the...