IRS finds a tax loophole and drives on through

February 19, 1994|By David E. Rosenbaum | David E. Rosenbaum,New York Times News Service

WASHINGTON -- If anyone knows how to take advantage of wrinkles in the tax rules, it is the bean counters at the IRS. So it should come as no surprise that they have figured out how the top officials at the agency can avoid paying hundreds of dollars in extra taxes this year to cover the value of parking free in the IRS garage.

To do so, the agency had to violate principles it laid down eight years ago on how the value of taxable fringe benefits should be calculated. It wrote a one-year grace period into the enforcement rules of a new law and then figured the worth of IRS parking in such a favorable way that the executives who use it owe no additional taxes.

Taking their cue from the tax authorities, the payroll managers at most other departments and agencies in Washington are telling their officials that they too do not have to pay additional taxes this April ontheir free parking spaces.

Congress is in something of a dither, uncertain what to do. So, the architect of the Capitol, George M. White, has retained the accounting firm Arthur Andersen & Co. to conduct a study and report next month on the worth of the free parking spaces available to all members of Congress and thousands of their staff members.

At issue is an obscure provision of a 1992 energy policy law that requires workers who receive free or subsidized parking from their employers to pay income taxes on the value above $155 a month, beginning with their 1993 tax returns.

The purpose of the provision, according to its sponsor, Rep. Robert T. Matsui, D-Calif., is to raise a small amount of revenue and at the same time conserve energy and reduce pollution by discouraging commuters from driving to work.

The tax change was never debated or voted on separately in Congress, and few people in or out of the government knew of its existence.

It apparently never occurred to those who did know about it that government officials might be affected, even though commercial parking rates in Washington are among the highest in the country and subsidized parking is much more prevalent here than it is in other big cities.

Then, between last Christmas and New Year's Day, more than a year after the law was enacted, the tax agency issued a ruling on how the value should be calculated.

This regulation is important because without official guidance, many people have no idea how to figure what their subsidized parking is worth.

When an employer pays a commercial lot for the space workers use, then the value is reasonably clear.

But when the employer owns the building and allows employees to park there at no cost, as is often the case in the government, then the value is in doubt.

The new rules specified that beginning with 1994 taxes, the value should be determined by what the IRS called the fair market value, or the price a taxpayer would have paid for the parking space in a commercial transaction at the same location or one nearby.

It is up to employers to tell their workers what they owe and to include the sum on W-2 forms, the forms that show how much income was earned each year and how much tax was withheld.

The IRS left little wiggle room: The monthly rate must be applied if the space is available all month, even if the employee uses it only part of the time.

If several employees commute together, one of them must be designated the "prime member" of the car pool and bear the tax consequences.

If someone is driven to work in a limousine, as are some Cabinet officers and congressional leaders, taxes are still due on the value of space where it parks.

This follows the general IRS regulation, in effect since 1986, on the proper way to assess the value of employer-paid fringe benefits. That regulation states: "The fair market value of a fringe benefit is the amount that an individual would have to pay for the particular fringe benefit in an arm's-length transaction. . . . An employee's subjective perception of the value of a fringe benefit is not relevant."

But the regulation on parking issued in December contained what in tax jargon is known as a transition rule -- and what others might call a one-year escape hatch.

For 1993 taxes, the ones due this April 15, employers can apply any "reasonable good faith" method of calculating what the parking they provide their employees is worth.

In the case of the government, the rules left it up to each department and agency to determine the value of the parking it provides for its workers.

Lawyers and consultants who advise clients on taxation of fringe benefits say that private employers in the few large cities in the country where parking runs higher than $155 a month are scrambling to take advantage of the escape clause.

At IRS headquarters on Constitution Avenue, 79 officials enjoy -- free indoor reserved parking spaces.

For taxes due this year, the agency has decided not to follow in the case of its own employees what it has proclaimed in the 1986 regulation to be the proper way to calculate the value of parking or any other fringe benefit.

Instead, said IRS spokesman Frank Keith, the agency figured the worth of parking spaces on the basis of the rent the agency pays the General Services Administration, the government's landlord.

The Justice Department, which enforces the laws, the General Accounting Office, which audits the government's books, and many other departments and agencies followed the lead of the IRS and used a similar method to figure the worth of parking last year to their employees.

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