Question

Sparrow Corporation would like you to review its employee fringe benefits program with regard to the tax consequences of the plan for the company's president (Polly), who is also the majority shareholder. For the following items, indicate what amount, if any, is included in Polly's gross income. If an amount is zero, enter "0".

a. The company has a qualified retirement plan. The company pays the cost of employees attending a retirement planning seminar. The employee must be within 10 years of retirement, and the cost of the seminar is $1,500 per attendee.

b. The company owns a parking garage that is used by customers, employees, and the general public. Only the general public is required to pay for parking. The charge to the general public for Polly's parking for the year would have been $3,600 (a $300 monthly rate).

c. All employees are allowed to use the company's fixed charge long-distance telephone services, as long as the privilege is not abused. Although no one has kept track of the actual calls, Polly's use of the telephone had a value (what she would have paid on her personal telephone) of approximately $600.

d. The company owns a condominium at the beach, which it uses to entertain customers. Employees are allowed to use the facility without charge when the company has no scheduled events. Polly used the facility 10 days during the year. Her use had a rental value of $1,000.

e. The company is in the household moving business. Employees are allowed to ship goods without charge whenever there is excess space on a truck. Polly purchased a dining room suite for her daughter. Company trucks delivered the furniture to the daughter. Normal freight charges would have been $750.

f. The company has a storage facility for household goods. Officers are allowed a 20% discount on charges for storing their goods. All other employees are allowed a 10% discount. Polly's discounts for the year totaled $900.

Answer 1

Polly is both an employee and a controlling shareholder in the corporation. Therefore, benefits she receives that are not excludible from gross income may be characterized as a dividend. This would mean that she might enjoy the lower tax rate applicable to dividends as compared to compensation; however, the corporation will not be allowed to deduct any amount that is considered a dividend.

a.         The $1,500 cost of the retirement planning seminar can be excluded from Polly’s gross income since it is provided on a nondiscriminatory basis.

b.         Employee parking is specifically excluded from gross income. However, the value of Polly’s free parking of $3,060 ($3,060/12 = $255 per month) exceeds the permitted exclusion amount of $3,000 ($3,000/12 = $250 per month). So Polly must include $60 ($3,060 – $3,000) in her gross income. Note that parking can be provided on a discriminatory basis.

c.         The use of the phone is excluded from Polly’s gross income as a no-additional-cost benefit. It also may fit the requirements for a de minimis fringe benefit.

d.         The value of the use of the condominium is a no-additional-cost fringe benefit that Polly can exclude from gross income.

e.         The freight is a no-additional-cost benefit made available to all employees (nondiscriminatory). The $750 can be excluded from Polly’s gross income.

f.          The plan is discriminatory. Therefore, the highly compensated employees must pay tax on all of their discounts. Polly includes $900 in her gross income.