REVENUE RULE 92-69

1992-2 C.B. 51, 1992-36 I.R.B. 5.

Internal Revenue Service
Revenue Ruling

EMPLOYER-PROVIDED OUTPLACEMENT COUNSELING

Published: August 20, 1992

26 CFR 1.132-5: Working Condition Fringe.

(See Also Sections 61, 125, 162, 451, 3121, 3306, and 3401)

Employer-provided outplacement counseling. The Service has ruled on the income tax and employment tax treatment in three situations where an employer provides outplacement services to its employees based on their individual needs and each affected employee is seeking new employment within the employee's same trade or business.

ISSUE

Does the value of the employer-provided outplacement services described in the situations below constitute gross income for income tax purposes, or wages for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or income tax withholding?

FACTS

Situation (1). X, an employer, informed 300 of its employees that they would be terminated as part of a reduction in force--215 clerical employees, 70 mid- level managers, and 15 executives. Concerned about promoting a positive corporate image, maintaining the remaining employees' morale, and avoiding wrongful termination suits, X contracted with an outplacement firm to help the affected employees develop skills to obtain new employment.

X and the outplacement firm assessed the affected employees' abilities to determine whether and to what extent each of them needed outplacement services. Of the 300 employees, 250 were determined to need outplacement services--170 clerical employees, 65 mid-level managers, and 15 executives. Of these 250 employees, 222 accepted the offer of outplacement services--150 clerical employees, 60 mid-level managers, and 12 executives. Each clerical employee, mid-level manager, and executive was seeking new employment within the same trade or business of being a clerical employee, manager, and executive, respectively.

X and the outplacement firm also reviewed the affected employees' abilities to determine what level of outplacement services each of them needed. Based on this review, 110 clerical employees and 15 mid-level managers participated in a 2-day seminar on X's premises, during which they listened to motivational speakers and received instructions on resume preparation. Of the remaining employees, 40 clerical employees, 35 mid-level managers, and 3 executives participated in a 1-week seminar on X's premises, during which they received in-depth instructions on resume writing, interviewing, networking, and negotiating. The remaining 10 mid-level managers and 9 executives required more extensive one-on-one counseling to assess and develop their individual job goals, interviewing skills, and networking skills. After these individual assessments, the outplacement firm helped each of the individuals develop a resume and initiate an actual job search. These 19 employees were also offered secretarial support, ongoing- individual counseling, and the use of private offices on the outplacement firms's premises.

Situation (2). Y, an employer, normally experiences moderate levels of turnover due to retirements, terminations, and voluntary separations. Y generally provides outplacement services to those employees it has decided to terminate whom it determines need help in obtaining new employment. Y has determined that this policy fosters a positive work atmosphere and helps attract quality employees.

In the course of one year, Y decided to terminate 22 employees--20 data processors and 2 executives. Each data processor and executive was seeking new employment within the same trade or business of being a data processor or executive, respectively. Y and the outplacement firm assessed the affected employees' abilities to determine whether and to what extent each of them needed outplacement services to help them obtain new employment. Seventeen of the 20 data processors were determined not to need any outplacement services, because their ages, their work experiences, and the local availability of data processing positions, were such that they could readily obtain comparable employment. Although the remaining data processors and one of the executives also had readily transferable technical skills, it was determined that they all needed outplacement services because each either had poor interviewing skills or had not actively participated in the job market for many years. These 4 employees received classroom instruction at the outplacement firm on interviewing, networking, and resume preparation. Y and the outplacement firm determined that the skills of the remaining executive, who had developed a unique niche within Y, were non-transferable within the local job market. Thus, to assist the executive's national job search, the outplacement firm provided the executive with extensive one-on-one counseling and the use of a private office and a secretarial staff.

Situation (3). The facts are the same as in Situation (1), except that X also maintained a severance pay plan. Under the plan, employees who were to be terminated could elect to receive a specified percentage of their annual salary, or, if they had been offered and elected to receive outplacement services, a reduced percentage of their annual salary.

LAW

Section 61(a) of the Internal Revenue Code defines "gross income" as, unless otherwise excluded, all income from whatever source derived, including (but not limited to) compensation for services such as fees, commissions, fringe benefits, and similar items.

Section 132(a)(3) of the Code excludes from gross income any fringe benefit that qualifies as a working condition fringe. Section 132(d) defines "working condition fringe" as any property or services provided by an employer to an employee to the extent that, if the employee paid for the property or services, the payment would be allowable as a deduction under section 162 (concerning trade or business expenses) or 167 (concerning depreciation).

Section 1.132-1(b)(2) of the Income Tax Regulations provides that, for working condition fringe benefit purposes, the term "employee" includes any individual who is currently employed by the employer providing the benefits.

Section 1.132-5(a)(2)(i) of the regulations provides that, if a hypothetical payment for the property or service would be allowable as a deduction with respect to a trade or business of an employee other than the employee's trade or business of being an employee of the employer, it cannot be taken into account for purposes of determining the amount, if any, of the working condition fringe.

Examples (3) and (4) of section 1.132-5(a)(2)(ii) of the regulations illustrate the application of this rule. Example (3) describes a situation in which a corporate employee sits on a charitable organization's board of directors. The corporation provides the employee air transportation to attend board meetings. The facts state that the service as a director is substantially related to the corporation's trade or business. Therefore, the air transportation may be excluded from gross income as a working condition fringe. Example (4) assumes the same facts as in example (3), except that the corporation also allows the employee to use its conference room for the charitable organization's monthly meetings. In addition, the employee uses the corporation's copier and word processor each month in connection with the charitable organization's functions. The value of the property's use is excluded from the employee's gross income as a working condition fringe because of the substantial business benefit that the corporation derives from the employee's service on the charitable organization's board.

Whether the employer's payment for outplacement services would be excludable from the employee's income under section 132(d) of the Code is determined in part under section 162. Section 162(a) allows a deduction for all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on a trade or business. Neither section 162 nor the regulations thereunder specifically address whether an employee's payment for outplacement services or other expenses associated with looking for new employment would be allowed as a deduction under that section.

In Primuth v. Commissioner, 54 T.C. 374, 378 (1970), a corporate executive hired an executive search firm to help him obtain new employment. The firm provided numerous services, including individual job counseling, career assessment, career planning, resume preparation, and interviews with prospective employers. The Tax Court concluded that an employee is engaged in the trade or business of performing services as an employee separate and apart from the performance of those services for the employee's existing employer. It therefore held that the executive could deduct under section 162 of the Code the fees that he paid to the firm as ordinary and necessary business expenses paid in carrying on his trade or business of being a corporate executive.

Rev. Rul. 75-120, 1975-1 C.B. 55, addresses the issue of whether expenses paid or incurred by an employee in seeking new employment are allowed as a deduction under section 162 of the Code. The ruling holds that bona fide expenses incurred in seeking new employment in the same trade or business in which an employee is presently engaged are allowed as a deduction under section 162 if they are directly connected with that trade or business as determined by all the objective facts and circumstances, even though new employment is not obtained.

Rev. Rul. 78-93, 1978-1 C.B. 38, addresses the issue of whether an individual taxpayer's payments to an agency specializing in career counseling are allowed as a deduction under section 162 or 212 of the Code. The counseling agency described in the ruling offered assistance with job counseling, career assessment, resumes, interview preparation, and negotiating techniques. The ruling holds that the expenses are allowed as a deduction under section 162, since the counseling directly assisted the taxpayer's efforts to obtain new employment in the same trade or business.

ANALYSIS

In order for employer-provided property or services to qualify as a working condition fringe, section 1.132-5(a)(2)(i) of the regulations requires that a hypothetical payment for the property or services be allowable as a deduction with respect to the employee's specific trade or business of being an employee of the employer, rather than the employee's general trade or business of performing services as an employee. This requirement is generally satisfied if, under all the facts and circumstances, the employer derives a substantial business benefit from the provision of the property or services that is distinct from the benefit that it would derive from the mere payment of additional compensation, and the employee's hypothetical payment for the property or services would otherwise be allowable as a deduction by the employee under section 162 of the Code. In such a situation, the substantial business benefit to the employer establishes a relationship between the provision of the property or services and the employee's trade or business of being an employee of that employer. See Examples (3) and (4) of section 1.132- 5(a)(2)(ii) of the regulations.

Under Primuth, Rev. Rul. 75-120, and Rev. Rul. 78-93, a hypothetical payment for outplacement services made by an employee in seeking new employment in the same trade or business would generally be treated as paid or incurred in carrying on that trade or business, and would thus be allowed as a deduction under section 162 of the Code. Under the foregoing analysis, if the employer also derives a substantial business benefit from the provision of such outplacement services that is distinct from the benefit that it would derive from the mere payment of additional compensation, such as promoting a positive corporate image, maintaining employee morale, and avoiding wrongful termination suits, the services may generally be treated as a working condition fringe.

Section 451(a) of the Code may also affect the exclusion of outplacement services under section 132. Section 451(a) generally provides that the amount of any item of gross income shall be included in gross income for the taxable year in which received by the taxpayer. Section 1.451-1(a) of the regulations provides that, under the cash receipts and disbursements method of accounting, an amount is includable in gross income when it is actually or constructively received. Section 1.451-2(a) provides that income, although not actually reduced to a taxpayer's possession, is generally constructively received in the taxable year in which it is made available to the taxpayer so that the taxpayer may draw upon it at any time. Under these provisions, if an employee may elect to receive cash or other taxable benefits in lieu of otherwise excludable outplacement services, the value of any outplacement services received cannot be excluded from gross income under section 132 as a working condition fringe. See Rev. Rul. 75-539, 1975-2 C.B. 45. Moreover, the application of these provisions is not affected by section 125, since under section 125(g) and section 1.125-2T, A- 1(a), of the temporary regulations working condition fringes are not a qualified benefit that may be offered under a cafeteria plan.

The value of any employer-provided outplacement services that fail to qualify as a working condition fringe under section 132(d) of the Code is included in the employee's gross in-come, but, as previously stated, may still be able to be deducted under section 162 as an ordinary and necessary business expense incurred in carrying on the employee's trade or business of being an employee. Except for certain reimbursed employee business expenses, an employee's trade or business expenses are allowed as a deduction only if the employee itemizes deductions pursuant to section 63(e). Section 67 provides that an individual's miscellaneous itemized deductions are allowed as a deduction only to the extent that the aggregate amount of those deductions exceeds 2 percent of adjusted gross income under section 62. Section 67(b) defines "miscellaneous itemized deductions" as itemized deductions other than those specifically listed therein. A business expense deduction attributable to the trade or business of performing services as an employee is a miscellaneous itemized deduction subject to the 2-percent limitation, since it is not one of the deductions specifically listed in section 67(b).

Sections 3121(a) and 3306(b) of the Code define the term "wages" for FICA and FUTA purposes, respectively, as all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain specified exceptions. Section 3401(a) contains a similar definition for purposes of income tax withholding. Sections 3121(a)(20), 3306(b)(16), and 3401(a)(19), provide for purposes of FICA, FUTA, and income tax withholding, respectively, that the definition of "wages" does not include any benefit provided to or on behalf of an employee if, at the time such benefit is provided, it is reasonable to believe that the employee will be able to exclude such benefit from income under section 132.

HOLDINGS

Employer-provided outplacement services provided in the situations described above are treated as follows:

Situation (1). X derives a substantial business benefit from the outplacement services that is distinct from the benefit that it would derive from the payment of additional compensation, because the services help promote a positive corporate image, maintain employee morale, and decrease the likelihood of wrongful termination suits in connection with the reduction in force. if the employees had paid for the outplacement services, the payments would be allowable as a deduction by the employees under section 162 of the Code. These hypothetical payments may therefore be treated as if they would be allowable as a deduction in the employees' trades or businesses of being employees of X. The outplacement services may be excluded from gross income as a working condition fringe under section 132(d). The benefits do not constitute wages for FICA, FUTA, and income tax withholding purposes.

Situation (2). Same result as in Situation (1).

Situation (3). The services provided in Situation (3) are offered in lieu of higher severance payments. Thus, each employee who is offered outplacement services constructively receives gross income equal to the difference between the unreduced severance payment and the reduced severance payment. However, such an employee may deduct the value of any outplacement services the employee receives (up to the amount of income constructively received) as a miscellaneous itemized deduction, but only if the employee itemizes deductions, and only to the extent that the aggregate of such deductions exceeds 2 percent of the employee's adjusted gross income. The difference between the unreduced severance payment and the reduced severance payment constitutes wages for purpose of FICA, FUTA, and income tax withholding.

For purposes of this revenue ruling, if the ruling's requirements are otherwise satisfied concerning outplacement services, the requirement that an individual be currently employed when the individual receives the services will be treated as continuing to be satisfied with respect to the outplacement services during the period the services are provided.

Rev. Rul. 92-69, 1992-2 C.B. 51, 1992-36 I.R.B. 5.