IRS Provides Guidance on Treatment of Employer Leave-Based Donation Programs to Aid Victims of Hurricanes Harvey and Irma
In response to the extreme need for relief for victims of Hurricanes and Tropical Storms Harvey and Irma – each designated as a “major disaster” by President Trump -- the IRS has released guidance on the treatment of leave-based donation programs adopted by employers. Under these programs, employees can forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to qualifying charities.
Specifically, in Notices 2017-48 and 2017-52 (the “2017 Notices”), the IRS has announced the following:
- It will not assert that cash payments an employer makes to qualifying charities (“IRC Sec. 170(c) organizations”) in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are: (1) made to the IRC Sec. 170(c) organizations for the relief of victims of Harvey and Irma; and (2) are paid to the IRC Sec. 170(c) organizations before January 1, 2019.
- It will not assert that the opportunity to make such an election results in constructive receipt of gross income or wages for employees. Electing employees may not claim a charitable contribution deduction with respect to the value of foregone leave excluded from compensation and wages.
- It will not assert that an employer is permitted to deduct these cash payments exclusively under the charitable contribution provisions (IRC Sec. 170) rather than the business expense provisions (IRC Sec. 162).
- Cash payments to which the guidance applies need not be included as wages on Form W-2.
As context to the positions taken in the 2017 Notices, the IRS had previously provided guidance in Notice 2006-59 on the federal tax consequences of certain leave sharing plans that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who had been adversely affected by a major disaster as declared by the president. The guidance provided in the 2017 Notices is generally consistent with that earlier guidance.
Subsequently, the taxpayer in Private Letter Ruling 200720017 requested rulings, in part, with respect to a leave-donation policy under which employees were allowed to surrender accrued hours of paid leave for the benefit of other employees who experienced “catastrophic casualty losses” due to terrorist attack, fire or other natural disaster (i.e., hurricane, flood, tornado or other highly destructive storm), including severe damage or destruction of the employee’s primary residence. However, that plan was not designed to be limited specifically to aid the victims of a presidentially declared major disaster. Accordingly, unlike the positions contained in the 2017 Notices, the tax consequences to donor employees were governed by the “assignment of income” doctrine, under which a taxpayer’s assignment to another person of his or her right to receive compensation for personal services does not relieve the taxpayer of the tax liability on the assigned income. Thus, the cash value of the surrendered paid leave in connection with that non-qualifying leave-donation plan was includable in the donor employee’s gross income and treated as wages of the donor employee for employment tax purposes.