subchapter a—income tax - constitution society a—income tax part 1—income taxes computation of...

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SUBCHAPTER A—INCOME TAX

PART 1—INCOME TAXES

COMPUTATION OF TAXABLE INCOME

Definition of Gross Income, Adjusted GrossIncome, and Taxable Income

Sec.1.61–1 Gross income.1.61–2 Compensation for services, including

fees, commissions, and similar items.1.61–2T Taxation of fringe benefits—1985

through 1988 (temporary).1.61–3 Gross income derived from business.1.61–4 Gross income of farmers.1.61–5 Allocations by cooperative associa-

tions; per-unit retain certificates—taxtreatment as to cooperatives and pa-trons.

1.61–6 Gains derived from dealings in prop-erty.

1.61–7 Interest.1.61–8 Rents and royalties.1.61–9 Dividends.1.61–10 Alimony and separate maintenance

payments; annuities; income from life in-surance and endowment contracts.

1.61–11 Pensions.1.61–12 Income from discharge of indebted-

ness.1.61–13 Distributive share of partnership

gross income; income in respect of a de-cedent; income from an interest in an es-tate or trust.

1.61–14 Miscellaneous items of gross income.1.61–15 Options received as payment of in-

come.1.61–21 Taxation of fringe benefits.1.62–1 Adjusted gross income.1.62–1T Adjusted gross income (temporary).1.62–2 Reimbursements and other expense

allowance arrangements.1.62–2T Reimbursement and other expense

allowance arrangements (temporary).1.63–1 Change of treatment with respect to

the zero bracket amount and itemizeddeductions.

1.63–2 Cross reference.1.67–1T 2-percent floor on miscellaneous

itemized deductions (temporary).1.67–2T Treatment of pass-through entities

(temporary).1.67–3 Allocation of expenses by real estate

mortgage investment conduits.1.67–3T Allocation of expenses by real es-

tate mortgage investment conduits (tem-porary).

1.67–4T Allocation of expenses by non-grantor trusts and estates (temporary).[Reserved]

ITEMS SPECIFICALLY INCLUDED IN GROSSINCOME

1.71–1 Alimony and separate maintenancepayments; income to wife or former wife.

1.71–1T Alimony and separate maintenancepayments (temporary).

1.71–2 Effective date; taxable years endingafter March 31, 1954, subject to the Inter-nal Revenue Code of 1939.

1.72–1 Introduction.1.72–2 Applicability of section.1.72–3 Excludable amounts not income.1.72–4 Exclusion ratio.1.72–5 Expected return.1.72–6 Investment in the contract.1.72–7 Adjustment in investment where a

contract contains a refund feature.1.72–8 Effect of certain employer contribu-

tions with respect to premiums or otherconsideration paid or contributed by anemployee.

1.72–9 Tables.1.72–10 Effect of transfer of contracts on in-

vestment in the contract.1.72–11 Amounts not received as annuity

payments.1.72–12 Effect of taking an annuity in lieu of

a lump sum upon the maturity of a con-tract.

1.72–13 Special rule for employee contribu-tions recoverable in three years.

1.72–14 Exceptions from application of prin-ciples of section 72.

1.72–15 Applicability of section 72 to acci-dent or health plans.

1.72–16 Life insurance contracts purchasedunder qualified employee plans.

1.72–17 Special rules applicable to owner-employees.

1.72–17A Special rules applicable to em-ployee annuities and distributions underdeferred compensation plans to self-em-ployed individuals and owner-employees.

1.72–18 Treatment of certain total distribu-tions with respect to self-employed indi-viduals.

1.72(e)–1T Treatment of distributions wheresubstantially all contributions are em-ployee contributions (temporary).

1.73–1 Services of child.1.74–1 Prizes and awards.1.75–1 Treatment of bond premiums in case

of dealers in tax-exempt securities.1.77–1 Election to consider Commodity

Credit Corporation loans as income.1.77–2 Effect of election to consider com-

modity credit loans as income.1.78–1 Dividends received from certain for-

eign corporations by certain domesticcorporations choosing the foreign taxcredit.

1.79–0 Group-term life insurance—defini-tions of certain terms.

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26 CFR Ch. I (4–1–99 Edition)Pt. 1

1.79–1 Group-term life insurance—generalrules.

1.79–2 Exceptions to the rule of inclusion.1.79–3 Determination of amount equal to

cost of group-term life insurance.1.79–4T Questions and answers relating to

the nondiscrimination requirements forgroup-term life insurance (temporary).

1.82–1 Payments for or reimbursements ofexpenses of moving from one residence toanother residence attributable to em-ployment or self-employment.

1.83–1 Property transferred in connectionwith the performance of services.

1.83–2 Election to include in gross income inyear of transfer.

1.83–3 Meaning and use of certain terms.1.83–4 Special rules.1.83–5 Restrictions that will never lapse.1.83–6 Deduction by employer.1.83–7 Taxation of nonqualified stock op-

tions.1.83–8 Applicability of section and transi-

tional rules.1.84–1 Transfer of appreciated property to

political organizations.1.85–1 Unemployment compensation.1.88–1 Nuclear decommissioning costs.

ITEMS SPECIFICALLY EXCLUDED FROM GROSSINCOME

1.101–1 Exclusion from gross income of pro-ceeds of life insurance contracts payableby reason of death.

1.101–2 Employees’ death benefits.1.101–3 Interest payments.1.101–4 Payment of life insurance proceeds

at a date later than death.1.101–5 Alimony, etc., payments.1.101–6 Effective date.1.101–7 Mortality table used to determine

exclusion for deferred payments of lifeinsurance proceeds.

1.102–1 Gifts and inheritances.1.103–1 Interest upon obligations of a State,

territory, etc.1.103–2 Dividends from shares and stock of

Federal agencies or instrumentalities.1.103–3 Interest upon notes secured by mort-

gages executed to Federal agencies or in-strumentalities.

1.103–4 Interest upon United States obliga-tions.

1.103–5 Treasury bond exemption in the caseof trusts or partnerships.

1.103–6 Interest upon United States obliga-tions in the case of nonresident aliensand foreign corporations, not engaged inbusiness in the United States.

1.103–7 Industrial development bonds.1.103–8 Interest on bonds to finance certain

exempt facilities.1.103–9 Interest on bonds to finance indus-

trial parks.1.103–10 Exemption for certain small issues

of industrial development bonds.1.103–11 Bonds held by substantial users.

1.103–16 Obligations of certain volunteer firedepartments.

1.103(n)–1T Limitation on aggregate amountof private activity bonds (temporary).

1.103(n)–2T Private activity bond defined(temporary).

1.103(n)–3T Private activity bond limit(temporary).

1.103(n)–4T Elective carryforward of unusedprivate activity bond limit (temporary).

1.103(n)–5T Certification of no considerationfor allocation (temporary).

1.103(n)–6T Determinations of population(temporary).

1.103(n)–7T Election to allocate State ceil-ing to certain facilities for local fur-nishing of electricity (temporary).

1.103A–2 Qualified mortgage bond.1.104–1 Compensation for injuries or sick-

ness.1.105–1 Amounts attributable to employer

contributions.1.105–2 Amounts expended for medical care.1.105–3 Payments unrelated to absence from

work.1.105–4 Wage continuation plans.1.105–5 Accident and health plans.1.105–6 Special rules for employees retired

before January 27, 1975.1.105–11 Self-insured medical reimburse-

ment plan.1.106–1 Contributions by employer to acci-

dent and health plans.1.107–1 Rental value of parsonages.1.108–1 Stock-for-debt exception not to

apply in de minimis cases.1.108–2 Acquisition of indebtedness by a per-

son related to the debtor.1.108–3 Intercompany losses and deductions.1.108–4 Election to reduce basis of depre-

ciable property under section 108(b)(5) ofthe Internal Revenue Code .

1.108–5 Time and manner for making elec-tion under the Omnibus Budget Rec-onciliation Act of 1993.

1.108–6 Limitations on the exclusion of in-come from the discharge of qualified realproperty business indebtedness.

1.108(c)–1T [Reserved]1.109–1 Exclusion from gross income of les-

sor of real property of value of improve-ments erected by lessee.

1.111–1 Recovery of certain items previouslydeducted or credited.

1.112–1 Combat zone compensation of mem-bers of the Armed Forces.

1.113–1 Mustering-out payments for mem-bers of the Armed Forces.

1.117–1 Exclusion of amounts received as ascholarship or fellowship grant.

1.117–2 Limitations.1.117–3 Definitions.1.117–4 Items not considered as scholarships

or fellowship grants.1.117–5 Federal grants requiring future serv-

ice as a Federal employee.


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Internal Revenue Service, Treasury Pt. 1

1.118–1 Contributions to the capital of a cor-poration.

1.119–1 Meals and lodging furnished for theconvenience of the employer.

1.120–1 Statutory subsistence allowance re-ceived by police.

1.120–3 Notice of application for recognitionof status of qualified group legal servicesplan.

1.121–1 Gain from sale or exchange of resi-dence of individual who has attained age55.

1.121–2 Limitations.1.121–3 Definitions.1.121–4 Election.1.121–5 Special rules.1.122–1 Applicable rules relating to certain

reduced uniformed services retirementpay.

1.123–1 Exclusion of insurance proceeds forreimbursement of certain living ex-penses.

1.125–2T Question and answer relating tothe benefits that may be offered under acafeteria plan (temporary).

1.125–4T Permitted election changes (tem-porary).

1.127–1 Amounts received under a qualifiededucational assistance program.

1.127–2 Qualified educational assistance pro-gram.

1.132–0 Outline of regulations under section132.

1.132–1 Exclusion from gross income for cer-tain fringe benefits.

1.132–1T Exclusion from gross income ofcertain fringe benefits—1985 through 1988(temporary).

1.132-2 No-additional-cost services.1.132-2T No-additional-cost service—1985

through 1988 (temporary).1.132–3 Qualified employee discounts.1.132–3T Qualified employee discount—1985

through 1988 (temporary).1.132–4 Line of business limitation.1.132–4T Line of business limitation—1985

through 1988 (temporary).1.132–5 Working condition fringes.1.132–5T Working condition fringe—1985

through 1988 (temporary).1.132–6 De minimis fringes.1.132–6T De minimis fringe—1985 through

1988 (temporary).1.132–7 Employer-operated eating facilities.1.132–7T Treatment of employer-operated

eating facilities—1985 through 1988 (tem-porary).

1.132–8 Fringe benefit nondiscriminationrules.

1.132–8T Nondiscrimination rules—1985through 1988 (temporary).

1.133–1T Questions and answers relating tointerest on certain loans used to acquireemployer securities (temporary).

1.141–0 Table of contents.

TAX EXEMPTION REQUIREMENTS FOR STATEAND LOCAL BONDS

1.141–1 Definitions and rules of general ap-plication.

1.141–2 Private activity bond tests.1.141–3 Definition of private business use.1.141–4 Private security or payment test.1.141–5 Private loan financing test.1.141–6 Allocation and accounting rules.1.141–7T Special rules for output facilities

(temporary).1.141–8T $15 million limitation for output

facilities (temporary).1.141–9 Unrelated or disproportionate use

test.1.141–10 Coordination with volume cap. [Re-

served]1.141–11 Acquisition of nongovernmental

output property. [Reserved]1.141–12 Remedial actions.1.141–13 Refunding issues. [Reserved]1.141–14 Anti-abuse rules.1.141–15 Effective dates.1.141–15T Effective dates (temporary).1.141–16 Effective dates for qualified private

activity bond provisions.1.142–0 Table of contents.1.142–1 Exempt facility bonds.1.142–2 Remedial actions.1.142–3 Refunding issues. [Reserved]1.142–4 Use of proceeds to provide a facility.1.142(a)(5)–1 Exempt facility bonds: Sewage

facilities.1.142(f)(4)–1T Manner of making election to

terminate tax-exempt bond financing(temporary).

1.144–0 Table of contents.1.144–1 Qualified small issue bonds, quali-

fied student loan bonds, and qualified re-development bonds.

1.144–2 Remedial actions.1.144–3 Standard deduction for individuals

choosing income averaging. [Reserved]1.145–0 Table of contents.1.145–1 Qualified 501(c)(3) bonds.1.145–2 Application of private activity bond

regulations.1.147–0 Table of contents.1.147–1 Other requirements applicable to

certain private activity bonds.1.147–2 Remedial actions.1.147(b)–1 Bond maturity limitation treat-

ment of working capital.1.148–0 Scope and table of contents.1.148–1 Definitions and elections.1.148–2 General arbitrage yield restriction

rules.1.148–3 General arbitrage rebate rules.1.148–4 Yield on an issue of bonds.1.148–5 Yield and valuation of investments.1.148–6 General allocation and accounting

rules.1.148–7 Spending exceptions to the rebate

requirement.1.148–8 Small issuer exception to rebate re-

quirement.


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26 CFR Ch. I (4–1–99 Edition)Pt. 1

1.148–9 Arbitrage rules for refunding issues.1.148–10 Anti-abuse rules and authority of

Commissioner.1.148–11 Effective dates.1.149(b)–1 Federally guaranteed bonds.1.149(d)–1 Limitations on advance

refundings.1.149(e)–1 Information reporting require-

ments for tax–exempt bonds.1.149(g)–1 Hedge bonds.1.150–1 Definitions.1.150–2 Proceeds of bonds used for reim-

bursement.1.150–4 Change in use of facilities financed

with tax-exempt private activity bonds.1.150–5T Filing notices and elections (tem-

porary).

REGULATIONS APPLICABLE TO CERTAIN BONDSSOLD PRIOR TO JULY 8, 1997

1.148–1A Definitions and elections.1.148–2A General arbitrage yield restriction

rules.1.148–3A General arbitrage rebate rules.1.148–4A Yield on an issue of bonds.1.148–5A Yield and valuation of invest-

ments.1.148–6A General allocation and accounting

rules.1.148–9A Arbitrage rules for refunding

issues.1.148–10A Anti-abuse rules and authority of

Commissioner.1.148–11A Effective dates.1.149(d)–1A Limitations on advance

refundings.1.150–1A Definitions.

DEDUCTIONS FOR PERSONAL EXEMPTIONS

1.151–1 Deductions for personal exemptions.1.151–2 Additional exemptions for depend-

ents.1.151–3 Definitions.1.151–4 Amount of deduction for each ex-

emption under section 151.1.152–1 General definition of a dependent.1.152–2 Rules relating to general definition

of dependent.1.152–3 Multiple support agreements.1.152–4 Support test in case of child of di-

vorced or separated parents.1.152.4T Dependency exemption in the case

of a child of divorced parents, etc. (tem-porary).

1.153–1 Determination of marital status.1.154 Statutory provisions; cross references.

ITEMIZED DEDUCTIONS FOR INDIVIDUALS ANDCORPORATIONS

1.161–1 Allowance of deductions.1.162–1 Business expenses.1.162–2 Traveling expenses.1.162–3 Cost of materials.1.162–4 Repairs.1.162–5 Expenses for education.1.162–6 Professional expenses.

1.162–7 Compensation for personal services.1.162–8 Treatment of excessive compensa-

tion.1.162–9 Bonuses to employees.1.162–10 Certain employee benefits.1.162–10T Questions and answers relating to

the deduction of employee benefits underthe Tax Reform Act of 1984; certain lim-its on amounts deductible (temporary).

1.162–11 Rentals.1.162–12 Expenses of farmers.1.162–13 Depositors’ guaranty fund.1.162–14 Expenditures for advertising or pro-

motion of good will.1.162–15 Contributions, dues, etc.1.162–16 Cross reference.1.162–17 Reporting and substantiation of

certain business expenses of employees.1.162–18 Illegal bribes and kickbacks.1.162–19 Capital contributions to Federal

National Mortgage Association.1.162–20 Expenditures attributable to lob-

bying, political campaigns, attempts toinfluence legislation, etc., and certainadvertising.

1.162–21 Fines and penalties.1.162–22 Treble damage payments under the

antitrust laws.1.162–25 Deductions with respect to noncash

fringe benefits.1.162–25T Deductions with respect to

noncash fringe benefits (temporary).1.162–27 Certain employee remuneration in

excess of $1,000,000.1.162–28 Allocation of costs to lobbying ac-

tivities.1.162–29 Influencing legislation.1.163–1 Interest deduction in general.1.163–2 Installment purchases where inter-

est charge is not separately stated.1.163–3 Deduction for discount on bond

issued on or before May 27, 1969.1.163–4 Deduction for original issue discount

on certain obligations issued after May27, 1969.

1.163–5 Denial of interest deduction on cer-tain obligations issued after December31, 1982, unless issued in registered form.

1.163–5T Denial of interest deduction on cer-tain obligations issued after December31, 1982, unless issued in registered form(temporary).

1.163–6T Reduction of deduction where sec-tion 25 credit taken (temporary).

1.163–7 Deduction for OID on certain debtinstruments.

1.163–8T Allocation of interest expenseamong expenditures (temporary).

1.163–9T Personal interest (temporary).1.163–10T Qualified residence interest (tem-

porary).1.163–12 Deduction of original issue discount

on instrument held by related foreignperson.

1.163–13 Treatment of bond issuance pre-mium.


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Internal Revenue Service, Treasury Pt. 1

1.163(d)–1 Time and manner for makingelection under the Omnibus Budget Rec-onciliation Act of 1993.

1.164–1 Deduction for taxes.1.164–2 Deduction denied in case of certain

taxes.1.164–3 Definitions and special rules.1.164–4 Taxes for local benefits.1.164–5 Certain retail sales taxes and gaso-

line taxes.1.164–6 Apportionment of taxes on real prop-

erty between seller and purchaser.1.164–7 Taxes of shareholder paid by cor-

poration.1.164–8 Payments for municipal services in

atomic energy communities.1.165–1 Losses.1.165–2 Obsolescence of nondepreciable prop-

erty.1.165–3 Demolition of buildings.1.165–4 Decline in value of stock.1.165–5 Worthless securities.1.165–6 Farming losses.1.165–7 Casualty losses.1.165–8 Theft losses.1.165–9 Sale of residential property.1.165–10 Wagering losses.1.165–11 Election in respect of losses attrib-

utable to a disaster.1.165–12 Denial of deduction for losses on

registration-required obligations not inregistered form.

1.165–13T Questions and answers relating tothe treatment of losses on certain strad-dle transactions entered into before theeffective date of the Economic RecoveryTax Act of 1981, under section 108 of theTax Reform Act of 1984 (temporary).

1.166–1 Bad debts.1.166–2 Evidence of worthlessness.1.166–3 Partial or total worthlessness.1.166–4 Reserve for bad debts.1.166–5 Nonbusiness debts.1.166–6 Sale of mortgaged or pledged prop-

erty.1.166–7 Worthless bonds issued by an indi-

vidual.1.166–8 Losses of guarantors, endorsers, and

indemnitors incurred on agreementsmade before January 1, 1976.

1.166–9 Losses of guarantors, endorsers, andindemnitors incurred, on agreementsmade after December 31, 1975, in taxableyears beginning after such date.

1.166–10 Reserve for guaranteed debt obliga-tions.

1.167(a)–1 Depreciation in general.1.167(a)–2 Tangible property.1.167(a)–3 Intangibles.1.167(a)–4 Leased property.1.167(a)–5 Apportionment of basis.1.167(a)–5T Application of section 1060 to

section 167 (temporary).1.167(a)–6 Depreciation in special cases.1.167(a)–7 Accounting for depreciable prop-

erty.1.167(a)–8 Retirements.

1.167(a)–9 Obsolescence.1.167(a)–10 When depreciation deduction is

allowable.1.167(a)–11 Depreciation based on class lives

and asset depreciation ranges for prop-erty placed in service after December 31,1970.

1.167(a)–12 Depreciation based on class livesfor property first placed in service beforeJanuary 1, 1971.

1.167(a)–13T Certain elections for intangibleproperty (temporary).

1.167(b)–0 Methods of computing deprecia-tion.

1.167(b)–1 Straight line method.1.167(b)–2 Declining balance method.1.167(b)–3 Sum of the years-digits method.1.167(b)–4 Other methods.1.167(c)–1 Limitations on methods of com-

puting depreciation under section 167(b)(2), (3), and (4).

1.167(d)–1 Agreement as to useful life andrates of depreciation.

1.167(e)–1 Change in method.1.167(f)–1 Reduction of salvage value taken

into account for certain personal prop-erty.

1.167(g)–1 Basis for depreciation.1.167(h)–1 Life tenants and beneficiaries of

trusts and estates.1.167(i)–1 Depreciation of improvements in

the case of mines, etc.1.167(l)–1 Limitations on reasonable allow-

ance in case of property of certain publicutilities.

1.167(l)–2 Public utility property; electionas to post-1969 property representinggrowth in capacity.

1.167(l)–3 Multiple regulation, asset acquisi-tions, reorganizations, etc.

1.167(l)–4 Public utility property; electionto use asset depreciation range system.

1.167(m)–1 Class lives.1.168–5 Special rules.1.168(d)–0 Table of contents for the applica-

ble convention rules.1.168(d)–1 Applicable convention—Half-year

and mid-quarter conventions.1.168(f)(8)–1T Safe-harbor lease information

returns concerning qualified mass com-muting vehicles (temporary).

1.168(h)–1 Like–kind exchanges involvingtax-exempt use property.

1.168(i)–0 Table of contents for the generalasset account rules.

1.168(i)–1 General asset accounts.1.168(i)–2 Lease term.1.168(j)–1T Questions and answers con-

cerning tax-exempt entity leasing rules(temporary).

1.168A–1 Amortization of emergency facili-ties; general rule.

1.168A–2 Election of amortization.1.168A–3 Election to discontinue amortiza-

tion.1.168A–4 Definitions.


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–1

1.168A–5 Adjusted basis of emergency facil-ity.

1.168A–6 Depreciation of portion of emer-gency facility not subject to amortiza-tion.

1.168A–7 Payment by United States ofunamortized cost of facility.

1.169–1 Amortization of pollution control fa-cilities.

1.169–2 Definitions.1.169–3 Amortizable basis.1.169–4 Time and manner of making elec-

tions

AUTHORITY: 26 U.S.C. 7805, unless otherwisenoted.Section 1.61–2T also issued under 26 U.S.C. 61.Section 1.61–21 also issued under 26 U.S.C. 61.Sections 1.62–1T and 1.62–2 also issued under

26 U.S.C. 62;Sections 1.67–2T and 1.67–3T also issued under

26 U.S.C. 67(c);Section 1.67–3 also issued under 26 U.S.C.

67(c).Sections 1.72–4, 1.72–5, 1.72–6, 1.72–7, 1.72–8,

and 1.72–11 also issued under 26 U.S.C. 72(c).Section 1.101–7 also issued under 26 U.S.C.

101(d)(2)(B)(ii);Section 1.103–10 also issued under 26 U.S.C.

103(b)(6);Section 1.103A–2 also issued under 26 U.S.C.

103A(j);Section 1.108–1 also issued under 26 U.S.C.

108(e)(8) and 108(e)(10(B);Section 1.108–2 also issued under 26 U.S.C.

108;Section 1.108–3 also issued under 26 U.S.C.

108, 267, and 1502.Section 1.108–4 also issued under 26 U.S.C.

108.Section 1.108–5 also issued under 26 U.S.C.

108.Section 1.108(c)–1 also issued under the au-

thority of 26 U.S.C. 108(d)(9);Sections 1.132–0 through 1.132–8T also issued

under 26 U.S.C. 132;Sections 1.148–0 through 1.148–11 also issued

under 26 U.S.C. 148 (f), (g), and (i);Sections 1.148–6 also issued under 26 U.S.C.

148 (f), (g), and (i);Section 1.149(b)–1 also issued under 26 U.S.C.

149(b)(3)(B) (v);Section 1.149(d)–1 also issued under 26 U.S.C.

149(d)(7);Section 1.149(e)–1 also issued under 26 U.S.C.

149(e);Section 1.149(g)–1 also issued under 26 U.S.C.

149(g)(5);Sections 1.150–4 also issued under 26 U.S.C.

150 (c)(5);Section 1.163–8T also issued under 26 U.S.C.

469(k)(4);Section 1.163–9T also issued under 26 U.S.C.

163(h)(3)(D);Section 1.163–11T is also issued under 26

U.S.C. 163(h);Section 1.165–12 also issued under 26 U.S.C.

165(j)(3);

Section 1.166–10 also issued under 26 U.S.C.166(f);

Section 1.168(d)–1 also issued under 26 U.S.C.168(d)(3);

Section 1.168(f)(8)–1T also added under sec.112(c), Black Lung Benefits Revenue Act of1981 (Pub. L. 97–119);

Section 1.168(h)–1 also issued under 26 U.S.C.168.

Section 1.168(i)–1 also issued under 26 U.S.C.168(i)(4).

Section 1.168(i)–2 also issued under 26 U.S.C.168.

Section 1.168(j)–1T also added under 26 U.S.C.168(j)(10);

SOURCE: T.D. 6500, 25 FR 11402, Nov. 26, 1960;25 FR 14021, Dec. 21, 1960, unless otherwisenoted.

COMPUTATION OF TAXABLEINCOME

DEFINITION OF GROSS INCOME, ADJUSTEDGROSS INCOME, AND TAXABLE INCOME

§ 1.61–1 Gross income.

(a) General definition. Gross incomemeans all income from whateversource derived, unless excluded by law.Gross income includes income realizedin any form, whether in money, prop-erty, or services. Income may be real-ized, therefore, in the form of services,meals, accommodations, stock, orother property, as well as in cash. Sec-tion 61 lists the more common items ofgross income for purposes of illustra-tion. For purposes of further illustra-tion, § 1.61–14 mentions several mis-cellaneous items of gross income notlisted specifically in section 61. Grossincome, however, is not limited to theitems so enumerated.

(b) Cross references. Cross referencesto other provisions of the Code are tobe found throughout the regulationsunder section 61. The purpose of thesecross references is to direct attentionto the more common items which areincluded in or excluded from gross in-come entirely, or treated in some spe-cial manner. To the extent that an-other section of the Code or of the reg-ulations thereunder, provides specifictreatment for any item of income, suchother provision shall apply notwith-standing section 61 and the regulationsthereunder. The cross references do notcover all possible items.


11

Internal Revenue Service, Treasury § 1.61–2

(1) For examples of items specificallyincluded in gross income, see Part II(section 71 and following), SubchapterB, Chapter 1 of the Code.

(2) For examples of items specificallyexcluded from gross income, see partIII (section 101 and following), Sub-chapter B, Chapter 1 of the Code.

(3) For general rules as to the taxableyear for which an item is to be in-cluded in gross income, see section 451and the regulations thereunder.

§ 1.61–2 Compensation for services, in-cluding fees, commissions, and simi-lar items.

(a) In general. (1) Wages, salaries,commissions paid salesmen, compensa-tion for services on the basis of a per-centage of profits, commissions on in-surance premiums, tips, bonuses (in-cluding Christmas bonuses), termi-nation or severance pay, rewards, juryfees, marriage fees and other contribu-tions received by a clergyman for serv-ices, pay of persons in the military ornaval forces of the United States, re-tired pay of employees, pensions, andretirement allowances are income tothe recipients unless excluded by law.Several special rules apply to membersof the Armed Forces, National Oceanicand Atmospheric Administration, andPublic Health Service of the UnitedStates; see paragraph (b) of this sec-tion.

(2) The Code provides special rules in-cluding the following items in gross in-come:

(i) Distributions from employees’trusts, see sections 72, 402, and 403, andthe regulations thereunder;

(ii) Compensation for child’s services(in child’s gross income), see section 73and the regulations thereunder;

(iii) Prizes and awards, see section 74and the regulations thereunder.

(3) Similarly, the Code provides spe-cial rules excluding the following itemsfrom gross income in whole or in part:

(i) Gifts, see section 102 and the regu-lations thereunder;

(ii) Compensation for injuries orsickness, see section 104 and the regu-lations thereunder;

(iii) Amounts received under accidentand health plans, see section 105 andthe regulations thereunder;

(iv) Scholarship and fellowshipgrants, see section 117 and the regula-tions thereunder;

(v) Miscellaneous items, see section122.

(b) Members of the Armed Forces, Na-tional Oceanic and Atmospheric Adminis-tration, and Public Health Service. (1)Subsistence and uniform allowancesgranted commissioned officers, chiefwarrant officers, warrant officers, andenlisted personnel of the ArmedForces, National Oceanic and Atmos-pheric Administration, and PublicHealth Service of the United States,and amounts received by them as com-mutation of quarters, are excludedfrom gross income. Similarly, thevalue of quarters or subsistence fur-nished to such persons is excluded fromgross income.

(2) For purposes of this section, quar-ters or subsistence includes the fol-lowing allowances for expenses in-curred after December 31, 1993, bymembers of the Armed Forces, mem-bers of the commissioned corps of theNational Oceanic and Atmospheric Ad-ministration, and members of the com-missioned corps of the Public HealthService, to the extent that the allow-ances are not otherwise excluded fromgross income under another provisionof the Internal Revenue Code: a dis-location allowance, authorized by 37U.S.C. 407; a temporary lodging allow-ance, authorized by 37 U.S.C. 405; atemporary lodging expense, authorizedby 37 U.S.C. 404a; and a move-in hous-ing allowance, authorized by 37 U.S.C.405. No deduction is allowed under thischapter for any expenses reimbursed bysuch excluded allowances. For the ex-clusion from gross income of—

(i) Disability pensions, see section104(a)(4) and the regulations there-under;

(ii) Miscellaneous items, see section122.

(3) The per diem or actual expense al-lowance, the monetary allowance inlieu of transportation, and the mileageallowance received by members of theArmed Forces, National Oceanic andAtmospheric Administration, and thePublic Health Service, while in a travelstatus or on temporary duty away fromtheir permanent stations, are included


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2

in their gross income except to the ex-tent excluded under the accountableplan provisions of § 1.62–2.

(c) Payment to charitable, etc., organi-zation on behalf of person rendering serv-ices. The value of services is not includ-ible in gross income when such servicesare rendered directly and gratuitouslyto an organization described in section170(c). Where, however, pursuant to anagreement or understanding, servicesare rendered to a person for the benefitof an organization described in section170(c) and an amount for such servicesis paid to such organization by the per-son to whom the services are rendered,the amount so paid constitutes incometo the person performing the services.

(d) Compensation paid other than incash—(1) In general. Except as other-wise provided in paragraph (d)(6)(i) ofthis section (relating to certain prop-erty transferred after June 30, 1969), ifservices are paid for in property, thefair market value of the propertytaken in payment must be included inincome as compensation. If services arepaid for in exchange for other services,the fair market value of such otherservices taken in payment must be in-cluded in income as compensation. Ifthe services are rendered at a stipu-lated price, such price will be presumedto be the fair market value of the com-pensation received in the absence ofevidence to the contrary. For specialrules relating to certain options re-ceived as compensation, see §§ 1.61–15,1.83–7, and section 421 and the regula-tions thereunder. For special rules re-lating to premiums paid by an em-ployer for an annuity contract which isnot subject to section 403(a), see sec-tion 403(c) and the regulations there-under and § 1.83–8(a). For special rulesrelating to contributions made to anemployees’ trust which is not exemptunder section 501, see section 402(b) andthe regulations thereunder and § 1.83–8(a).

(2) Property transferred to employee orindependent contractor. (i) Except asotherwise provided in section 421 andthe regulations thereunder and § 1.61–15(relating to stock options), and para-graph (d)(6)(i) of this section, if prop-erty is transferred by an employer toan employee or if property is trans-ferred to an independent contractor, as

compensation for services, for anamount less than its fair market value,then regardless of whether the transferis in the form of a sale or exchange, thedifference between the amount paid forthe property and the amount of its fairmarket value at the time of the trans-fer is compensation and shall be in-cluded in the gross income of the em-ployee or independent contractor. Incomputing the gain or loss from thesubsequent sale of such property, itsbasis shall be the amount paid for theproperty increased by the amount ofsuch difference included in gross in-come

(ii)(a) Cost of life insurance on the lifeof the employee. Generally, life insur-ance premiums paid by an employer onthe life of his employee where the pro-ceeds of such insurance are payable tothe beneficiary of such employee arepart of the gross income of the em-ployee. However, the amount includiblein the employee’s gross income is de-termined with regard to the provisionsof section 403 and the regulationsthereunder in the case of an individualcontract issued after December 31, 1962,or a group contract, which provides in-cidental life insurance protection andwhich satisfies the requirements of sec-tion 401(g) and § 1.401–9, relating to thenontransferability of annuity con-tracts. For the special rules relating tothe includibility in an employee’s grossincome of an amount equal to the costof certain group term life insurance onthe employee’s life which is carried di-rectly or indirectly by his employer,see section 79 and the regulationsthereunder. For special rules relatingto the exclusion of contributions by anemployer to accident and health plansfor the employee, see section 106 andthe regulations thereunder.

(b) Cost of group-term life insurance onthe life of an individual other than an em-ployee. The cost (determined underparagraph (d)(2) of § 1.79–3) of group-term life insurance on the life of an in-dividual other than an employee (suchas the spouse or dependent of the em-ployee) provided in connection with theperformance of services by the em-ployee is includible in the gross incomeof the employee.

(3) Meals and living quarters. Thevalue of living quarters or meals which


13

Internal Revenue Service, Treasury § 1.61–2T

an employee receives in addition to hissalary constitutes gross income unlessthey are furnished for the convenienceof the employer and meet the condi-tions specified in section 119 and theregulations thereunder. For the treat-ment of rental value of parsonages orrental allowance paid to ministers, seesection 107 and the regulations there-under; for the treatment of statutorysubsistence allowances received by po-lice, see section 120 and the regulationsthereunder.

(4) Stock and notes transferred to em-ployee or independent contractor. Exceptas otherwise provided by section 421and the regulations thereunder and§ 1.61–15 (relating to stock options), andparagraph (d)(6)(i) of this section, if acorporation transfers its own stock toan employee or independent contractoras compensation for services, the fairmarket value of the stock at the timeof transfer shall be included in thegross income of the employee or inde-pendent contractor. Notes or other evi-dences of indebtedness received in pay-ment for services constitute income inthe amount of their fair market valueat the time of the transfer. A taxpayerreceiving as compensation a note re-garded as good for its face value at ma-turity, but not bearing interest, shalltreat as income as of the time of re-ceipt its fair discounted value com-puted at the prevailing rate. As pay-ments are received on such a note,there shall be included in income thatportion of each payment which rep-resents the proportionate part of thediscount originally taken on the entirenote.

(5) Property transferred on or beforeJune 30, 1969, subject to restrictions. Not-withstanding paragraph (d) (1), (2), or(4) of this section, if any property istransferred after September 24, 1959, byan employer to an employee or inde-pendent contractor as compensationfor services, and such property is sub-ject to a restriction which has a sig-nificant effect on its value at the timeof transfer, the rules of § 1.421–6(d)(2)shall apply in determining the timeand the amount of compensation to beincluded in the gross income of the em-ployee or independent contractor. This(5) is also applicable to transfers sub-ject to a restriction which has a sig-

nificant effect on its value at the timeof transfer and to which § 1.83–8(b) (re-lating to transitional rules with re-spect to transfers of restricted prop-erty) applies. For special rules relatingto options to purchase stock or otherproperty which are issued as compensa-tion for services, see § 1.61–15 and sec-tion 421 and the regulations there-under.

(6) Certain property transferred, pre-miums paid, and contributions made inconnection with the performance of serv-ices after June 30, 1969—(i) Exception.Paragraph (d) (1), (2), (4), and (5) of thissection and § 1.61–15 do not apply to thetransfer of property (as defined in§ 1.83–3(e)) after June 30, 1969, unless§ 1.83–8 (relating to the applicability ofsection 83 and transitional rules) ap-plies. If section 83 applies to a transferof property, and the property is notsubject to a restriction that has a sig-nificant effect on the fair market valueof such property, then the rules con-tained in paragraph (d) (1), (2), and (4)of this section and § 1.61–15 shall alsoapply to such transfer to the extentsuch rules are not inconsistent withsection 83.

(ii) Cross references. For rules relatingto premiums paid by an employer foran annuity contract which is not sub-ject to section 403(a), see section 403(c)and the regulations thereunder. Forrules relating to contributions made toan employees’ trust which is not ex-empt under section 501(a), see section402(b) and the regulations thereunder.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, asamended by T.D. 6696, 28 FR 13450, Dec. 12,1963; T.D. 6856, 30 FR 13316, Oct. 20, 1965; T.D.7544, 43 FR 31913, July 24, 1978; T.D. 7623, 44FR 28800, May 17, 1979; T.D. 8256, 54 FR 28582,July 6, 1989; T.D. 8607, 60 FR 40076, Aug. 7,1995]

§ 1.61–2T Taxation of fringe benefits—1985 through 1988 (temporary).

(a) Fringe benefits—(1) In general. Sec-tion 61(a)(1) provides that, except asotherwise provided in subtitle A, grossincome includes compensation for serv-ices, including fees, commissions,fringe benefits, and similar items. Ex-amples of fringe benefits include: anemployer-provided automobile, a flighton an employer-provided aircraft, anemployer-provided free or discounted


14

26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

commercial airline flight, an employer-provided vacation, and employer-pro-vided discount on property or services,and emkployer-provided membership ina country club or other social club, andan employer-provided ticket to an en-tertainment or sporting event.

(2) Fringe benefits excluded from in-come. To the extent that a particularfringe benefit is specifically excludedfrom gross income pursuant to anothersection of subtitle A, that section shallgovern the treatment of the fringe ben-efit. Thus, if the requirements of thegoverning section are satisfied, thefringe benefits may be excludable fromgross income. Examples of excludablefringe benefits are qualified tuition re-ductions provided to an employee (sec-tion 177(d)); meals and lodging fur-nished to an employee for the conven-ience of the employer (section 119); andbenefits provided under a dependentcare assistance program (section 129).Similarly, the value of the use by anemployee of an employer-provided ve-hicle or a flight provided to an em-ployee on an employer-provided air-craft may be excludable from incomeunder section 105 (because, for example,the trnsportation is provided for med-ical reasons) if and to the extent thatthe requirements of that section aresatisfied. Section 61 and the regula-tions thereunder shall apply, however,to the extent that they are not incon-sistent with such other section. For ex-ample, many fringe benefits specifi-cally addressed in other sections ofsubtitle A are excluded from gross in-come only to the extent that they donot exceed specific dollar or percentagelimits, or only if certain other require-ments are met. If the limits are exceed-ed or the requirements are not met,some or all of the fringe benefit may beincludible in gross income. See para-graph (b)(3) of this section.

(3) Compensation for services. A fringebenefit provided in connection with theperformance of services shall be consid-ered to have been provided as com-pensation for servcies. Refraining fromthe performance of services (such aspursuant to a covenant not to compete)is deemed to be the performance ofservices for purposes of this section.

(4) Recipient of a fringe benefit—(i)Definition. A fringe benefit is includedin the income of the ‘‘recipient’’ of thefringe benefit. The recipient of a fringebenefit is the person performing theservices in connection with which thefringe benefit is provided. Thus, a per-son may be considered to be a recipi-ent, even though that person did notactually receive the fringe benefit. Forexample, a fringe benefit provided toany person is connection with the per-formance of services by another personis considered to have been provided tothe person who performs the servicesand not the person who receives thefringe benefit. In addition, if a fringebenefit is provided to a person, but tax-able to a second person as the recipi-ent, such benefit is referred to as pro-vided to the second person and use bythe first person is considered use bythe second person. For example, provi-sion of an automobile to an employee’sspouse by the employer is taxable tothe employee as the recipient. Theautomobile is referred to as availableto the employee and use by the em-ployee’s spouse is considered use by theemployee.

(ii) Recipient may be other than an em-ployee. The recipient of a fringe benefitneed not be an employee of the pro-vider of the fringe benefit, but may bea partner, director, or an independentcontractor. For convenience, the term‘‘employee’’ includes a reference to anyrecipient of a fringe benefit, unlessotherwise specifically provided in thissection.

(5) Provider of a fringe benefit. The‘‘provider’’ of a fringe benefit is thatperson for whom the services are per-formed, regardless of whether that per-son actually provides the fringe benefitto the recipient. The provider of afringe benefit need not be the employerof the recipient of the fringe benefit,but may be, for example, a client orcustomer of an independent contractor.For convenience, the term ‘‘employer’’includes a reference to any provider ofa fringe benefit, unless otherwise spe-cifically provided in this section.

(6) Effective date. This section is effec-tive from January 1, 1985, to December31, 1988, with respect to fringe benefits


15


furnished before January 1, 1989. No in-ference may be drawn from the promul-gation or terms of this section con-cerning the application of law in effectprior to January 1, 1985.

(b) Valuation of fringe benefits—(1) Ingeneral. An employee must include ingross income the amount by which thefair market value of the fringe benefitexceeds the sum of (i) the amount, ifany, paid for the benefit, and (ii) theamount, if any, specifically excludedfrom gross income by some other sec-tion of subtitle A. Therefore, for exam-ple, if the employee pays fair marketvalue for what is received, no amountis includible in the gross income of theemployee.

(2) Fair market value. In general, fairmarket value is determined on thebasis of all the facts and cir-cumstances. Specifically, the fair mar-ket value of a fringe benefit is thatamount a (hypothetical person wouldhave to pay a hypothetical third partyto obtain (i.e., purchase or lease) theparticular fringe benefit. Thus, for ex-ample, the effect of any special rela-tionship that may exist between theemployer and the employee must bedisregarded. This also means that anemployee’s subjective perception of thevalue of a fringe benefit is not relevantto the determination of a fringe bene-fit’s fair market value. In addition, thecost incurred by the employer is notdeterminative of the fair market valueof the fringe benefit. For special rulesrelating to the valuation of certainfringe benefits, see paragraph (c) ofthis section.

(3) Exclusion from income based on cost.If a statutory exclusion phrased interms of cost applies to the provisionof a fringe benefit, section 61 does notrequire the inclusion in the recipient’sgross income of the difference betweenthe fair market value and the exclud-able cost of that fringe benefit. For ex-ample, section 129 provides an exclu-sion from an employee’s gross incomefor amounts paid or incurred by an em-ployer to provide dependent care as-sistance to employees. Even if the fairmarket value of the dependent care as-sistance exceeds the employer’s cost,the excess is not subject to inclusionunder section 61 and this section. If thestatutory cost exclusion is a limited

amount, however, then the fair marketvalue of the fringe benefit attributableto any excess cost is subject to inclu-sion.

(4) Fair market value of the availabilityof an employer-provided vehicle. If thevehicle special valuation rules of para-graph (d), (e), or (f) of this section arenot used by a taxpayer entitled to usesuch rules, the value of the availabilityof an employer-provided vehicle is de-termined under the general valuationprinciples set forth in this section. Ingeneral, such valuation must be deter-mined by reference to the cost to a hy-pothetical person of leasing from a hy-pothetical third party the same orcomparable vehicle on the same orcomparable terms in the geographicarea in which the vehicle is availablefor use. Unless the employee can sub-stantiate that the same or comparablevehicle could have been leased on acents-per-mile basis, the value of theavailability of the vehicle cannot bedetermined by reference to a cents-per-mile rate applied to the number ofmiles the vehicle is driven. An exampleof a comparable lease term is theamount of time that the vehicle isavailable to the employee for use, e.g.,a one-year period.

(5) Fair market value of a flight on anemployer-provided aircraft. If the non-commercial flight special valuationrule of paragraph (g) of this section isnot used (or is not properly used) by ataxpayer entitled to use such rule, thevalue of a flight on an employer-pro-vided aircraft is determined under thegeneral valuation principles set forthin this section. An example of how thegeneral valuation principles wouldapply is that if an employee whoseflight is primarily personal controlsthe use of an aircraft with respect tosuch flight, such flight is valued by ref-erence to how much it would cost a hy-pothetical person to charter the sameor comparable aircraft for the same orcomparable flight. The cost to charterthe aircraft must be allocated amongall employees on board the aircraftbased on all the facts and cir-cumstances, including which employ-ees controlled the use of the aircraft.Notwithstanding the allocation re-quired by the preceding sentence, noadditional amount shall be included in


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

the income of any employee whoseflight is properly valued under the spe-cial valuation rule of paragraph (g) ofthis section.

(c) Special valuation rules—(1) In gen-eral. Paragraphs (d) through (j) of thissection provide special valuation rulesthat may be used under certain cir-cumstances for certain commonly pro-vided fringe benefits. Paragraph (d)provides a lease valuation rule relatingto employer-provided automobiles.Paragraph (e) provides a cents-per-milevaluation rule relating to employer-provided vehicles. Paragraph (f) pro-vides a commuting valuation rule re-lating to employer-provided vehicles.Paragraph (g) provides a flight valu-ation rule relating to flights on em-ployer-provided aircraft. Paragraph (h)provides a flight valuation rule relat-ing to flights on commercial airlines.Paragraph(i) is reserved. Paragraph (j)provides a meal valuation rule relatingto employer-operated eating facilitiesfor employees. For general rules relat-ing to the valuation of fringe benefitsnot eligible for valuation under thespecial valuation rules, see paragraph(d) of this section.

(2) Use of the special valuation rules—(i) In general. The Special valuationrules may be used for income, employ-ment tax, and reporting purposes. Useof any of the special valuation rules isoptional. An employer need not use thesame vehicle special valuation rule forall vehicles provided to all employees.For example, an employer may use theautomobile lease valuation rule forautomobiles provided to some employ-ees, and the commuting and vehiclecents-per-mile valuation rules for auto-mobiles provided to other employees.Except as otherwise provided, however,if either the commercial flight valu-ation rule or the noncommercial flightvaluation rule is used, such rule mustbe used by an employer to value allflights taken by employees in a cal-endar year. Effective January 1, 1986, ifan employer uses one of the specialrules to value the benefit provided toan employee, the employee may notuse another special rule to value thatbenefit. The employee may, however,use general valuation rules based onfacts and circumstances (see paragraph(b) of this section). Effective January 1,

1986, an employee may only use a spe-cial valuation rule if the employer usesthe rule. If a special rule is used, itmust be used for all purposes. If an em-ployer properly uses a special rule andthe employee uses the special rule, theemployee must include in gross incomethe amount determined by the em-ployer under the special rule less anyamount reimbursed by the employee tothe employer. The employer and theemployee may use the special rules todetermine the amount of the reim-bursement due the employer by theemployee. If an employer properly usesa special rule and properly determinesthe amount of an employee’s workingcondition fringe under section 132 and§ 1.132–1T (under the general rule orunder a special rule), and the employeeuses the special valuation rule, the em-ployee must include in gross incomethe amount determined by the em-ployer less any amount reimbursed bythe employee to the employer.

(ii) Transitional rules—(A) Use of vehi-cle special valuation rules for 1985 and1986. For purposes of valuing the use oravailability of a vehicle, the consist-ency rules provided in paragraphs (d)(6)and (e)(5) of this section (relating tothe automobile lease valuation ruleand the vehicle cents-per-mile valu-ation rule, respectively) apply for 1987and thereafter. Therefore, for 1985 and1986 an employer (and employee, sub-ject to paragraph (c)(2)(i) of this sec-tion) may use any applicable specialvaluation rule (or no special valuationrule) to value the use or availability ofa vehicle, subject to paragraph(c)(2)(ii)(B) of this section.

(B) Consistency Rules for 1985 and 1986.If an employer uses the automobilelease valuation rule of paragraph (d) ofthis section in 1985 or 1986 with respectto an automobile, such rule must beused for the entire calendar year withrespect to the automobile except forany period during which the com-muting valuation rule of paragraph (f)of this section is properly used. If anemployer uses the vehicle cents-per-mile valuation rule of pararaph (e) ofthis section in 1985 or 1986 with respectto a vehicle, such rule must be used forthe entire calendar year with respectto the vehicle except for any periodduring which the commuting valuation


17


rule of paragraph (f) of this section isproperly used. The rules of this para-graph (c)(2)(ii)(B) also apply to employ-ees using the special valuation rules ofparagraphs (d) or (e) of this section.

(C) Employee’s use of special valuationrules for 1985. An employee may use aspecial valuation rule (other than therule in paragraph (e) of this section re-lating to the vehicle cents-per-milevaluation rule) during 1985 even if theemployer does not use the same specialvaluation rule during 1985. An employ-ee’s use of a special valuation rule in1986 and thereafter must be consistentwith his employer’s use of the rule asrequired under paragraph (c)(2)(i) ofthis section.

(D) Examples. The following examplesillustrate the rules of paragraph(c)(2)(ii) of this section:

Example (1). Assume that an employerproperly uses the automobile lease valuationrule in 1985. The employer may use the vehi-cle cents-per-mile valuation rule in 1986 ifthe requirements of the vehicle cents-per-mile valuation rule are satisfied.

Example (2). Assume that an employer doesnot use a special valuation rule to value theavailability of an automobile in 1985. Theemployer may use any of the special valu-ation rules in 1986 if the requirements of therule chosen are satisfied. The same appliesfor 1987.

Example (3). Assume that an employerproperly uses the vehicle cents-per-milevaluation rule in 1985. The employer maycontinue to use to the rule or use any of theother special valuation rules to value thebenefit provided in 1986 if the requirementsof the rule chosen are satisfied. Alter-natively, the employer may use none of thespecial valuation rules in 1986 but use any ofthe rules in 1987 if the requirements of therule chosen are satisfied.

Example (4). Assume that an employeeproperly uses the automobile lease valuationrule in 1985. In 1986 and thereafter the em-ployee may use a special valuation rule onlyif the employee’s employer uses the samespecial valuation rule. The employee mayuse general valuation principles to value thebenefit provided in 1986 and thereafter.

(3) Election to use the special valuationrules—A particular special valuationrule is deemed to have been elected bythe employer (and, if applicable, by theemployee), if the employer (and, if ap-plicable, the employee) determines thevalue of the fringe benefit provided byapplying the special valuation rule andtreats such value as the fair market

value of the fringe benefit for income,employment tax, and reporting pur-poses. Neither the employer nor theemployee is required to notify the In-ternal Revenue Service of the election.

(4) Application of section 414 to employ-ers. For purposes of paragraphs (c)through (j) of this section, except asotherwise provided therein, the term‘‘employer’’ includes all entities re-quired to be treated as a single em-ployer under section 414 (b), (c), or (m).

(5) Valuation formulas contained in thespecial valuation rules. The valuationformulas contained in the special valu-ation rules are provided only for use inconnection with such rules. Thus, whena special valuation rule is properly ap-plied to a fringe benefit, the Commis-sioner will accept the value calculatedpursuant to the rule as the fair marketvalue of that fringe benefit. However,when a special valuation rule is notproperly applied to a fringe benefit(see, for example, paragraph (g)(11) ofthis section), or when a special valu-ation rule is not used to value a fringebenefit by a taxpayer entitled to usethe rule, the fair market value of thatfringe benefit may not be determinedby reference to any value calculatedunder any special valuation rule. Underthe circumstances described in the pre-ceding sentence, the fair market valueof the fringe benefit must be deter-mined pursuant to paragraph (b) of thissection.

(6) Modification of the special valuationrules. The Commissioner may, if hedeems it necessary, add, delete, ormodify the special valuation rules, in-cluding the valuation formulas con-tained herein, on a prospective basis.

(7) Special Accounting Period. If theemployer is using the special account-ing rule provided in Announcement 85–113 (1985–31 I.R.B., August 5, 1985) (re-lating to the reporting of and with-holding on the value of noncash fringebenefits), benefits which are deemedprovided in a subsequent calendar yearpursuant to such rule are considered asprovided in such subsequent calendaryear for purposes of the special valu-ation rules. Thus, if a particular spe-cial valuation rule is in effect for a cal-endar year, it applies to benefitsdeemed provided during such calendaryear under the special accounting rule.


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

(d) Automobile lease valuation rule—(1)In general—(i) Annual Lease Value.Under the special valuation rule of thisparagraph (d), if an employer providesan employee with an automobile thatis available to the employee for an en-tire calendar year, the value of thebenefit provided in the Annual LeaseValue (determined under paragraph(d)(2) of this section) of that auto-mobile. Except as otherwise provided,for an automobile that is available toan employee for less than an entire cal-endar year, the value of the benefitprovided is either a pro-rated AnnualLease Value or the Daily Lease Value(as defined in paragraph (d)(4) of thissection), whichever is applicable. Ab-sent any statutory exclusion relatingto the employer-provided automobile(see, for example, section 132(a)(3) and§ 1.132–5T(b)), the amount of the AnnualLease Value (or a pro-rated AnnualLease Value or the Daily Lease Value,as applicable) is included in the grossincome of the employee.

(ii) Definition of automobile. For pur-poses of this paragraph (d), the term‘‘automobile’’ means any four-wheeledvehicle manufactured primarily for useon public streets, roads, and highways.

(2) Calculation of Annual Lease Value—(i) In general. The Annual LeaseValue of a particular automobile is cal-culated as follows:

(A) Determine the fair market valueof the automobile as of the first dateon which the automobile is made avail-able to any employee of the employerfor personal use. For an automobilefirst made available to any employeefor personal use prior to January 1,1985, determine the fair market valueas of January 1, 1985. For rules relatingto determination of the fair marketvalue of an automobile for purposes ofthis paragraph (d), see paragraph (d)(5)of this section.

(B) Select the dollar range in column1 of the Annual Lease Value Table, setforth in paragraph (d)(2)(iii) of this sec-tion, corresponding to the fair marketvalue of the automobile. Except as oth-erwise provided in paragraphs (d)(2) (iv)and (v) of this section, the AnnualLease Value for each year of avail-ability of the automobile is the cor-responding amount in column 2 of theTable.

(ii) Use by employee only in 1985. If theemployee, but not the employer, isusing the special rule of this paragraph(d), the employee may calculate theAnnual Lease Value in the same man-ner as described in paragraph(d)(2)(i)(A) of this section, except thatthe fair market value of the auto-mobile is determined as of the firstdate on which the automobile is madeavailable to the employee for personaluse or, for an automobile made avail-able to the employee for personal useprior to January 1, 1985, by deter-mining the fair market value as of Jan-uary 1, 1985. If the employer is alsousing the special rule of this paragraph(d), however, then the employee towhom the automobile is made avail-able must use the special rule, if at all,by using the Annual Lease Value cal-culated by the employer. The rules ofthis paragraph (d)(2)(ii) apply only for1985.

(iii) Annual Lease Value Table.

Automobile fair market valueAnnualleasevalue

(1) (2)

$0 to $999 ............................................................. $600$1,000 to $1,999 ................................................... 850$2,000 to $2,999 ................................................... 1,100$3,000 to $3,999 ................................................... 1,350$4,000 to $4,999 ................................................... 1,600$5,000 to $5,999 ................................................... 1,850$6,000 to $6,999 ................................................... 2,100$7,000 to $7,999 ................................................... 2,350$8,000 to $8,999 ................................................... 2,600$9,000 to $9,999 ................................................... 2,850$10,000 to $10,999 ............................................... 3,100$11,000 to $11,999 ............................................... 3,350$12,000 to $12,999 ............................................... 3,600$13,000 to $13,999 ............................................... 3,850$14,000 to $14,999 ............................................... 4,100$15,000 to $15,999 ............................................... 4,350$16,000 to $16,999 ............................................... 4,600$17,000 to $17,999 ............................................... 4,850$18,000 to $18,999 ............................................... 5,100$19,000 to $19,999 ............................................... 5,350$20,000 to $20,999 ............................................... 5,600$21,000 to $21,999 ............................................... 5,580$22,000 to $22,999 ............................................... 6,100$23,000 to $23,999 ............................................... 6,350$24,000 to $24,999 ............................................... 6,600$25,000 to $25,999 ............................................... 6,850$26,000 to $27,999 ............................................... 7,250$28,000 to $29,999 ............................................... 7,750$30,000 to $31,999 ............................................... 8,250$32,000 to $33,999 ............................................... 8,750$34,000 to $35,999 ............................................... 9,250$36,000 to $37,999 ............................................... 9,750$38,000 to $39,999 ............................................... 10,250$40,000 to $41,999 ............................................... 10,750$42,000 to $43,999 ............................................... 11,250$44,000 to $45,999 ............................................... 11,750$46,000 to $47,999 ............................................... 12,250


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Automobile fair market valueAnnualleasevalue

(1) (2)

$48,000 to $49,999 ............................................... 12,750$50,000 to $51,999 ............................................... 13,250$52,000 to $53,999 ............................................... 13,750$54,000 to $55,999 ............................................... 14,250$56,000 to $57,999 ............................................... 14,750$58,000 to $59,999 ............................................... 15,250

For vehicles having a fair marketvalue in excess of $59,999, the AnnualLease Value is equal to: (.25 X the fairmarket value of the automobile) + $500.

(iv) Recalculation of annual leasevalue. The Annual Lease Values deter-mined under the rules of this para-graph (d) are based on a four-year leaseterm. Therefore, except as otherwiseprovided in paragraph (d)(2)(v) of thissection, the Annual Lease Value cal-culated by applying paragraph (d)(2) (i)or (ii) of this section shall remain in ef-fect for the period that begins with thefirst date the special valuation rule ofparagraph (d) of this section is appliedby the employer to the automobile andends on December 31 of the fourth fullcalendar year following that date. TheAnnual Lease Value for each subse-quent four-year period is calculated bydetermining the fair market value ofthe automobile as of the January 1 fol-lowing the period described in the pre-vious sentence and selecting theamount in column 2 of the AnnualLease Value Table corresponding to theappropriate dollar range in column 1 ofthe Table. If, however, the employer isusing the special accounting rule pro-vided in Announcement 85–113 (1985–31I.R.B., August 5, 1985) (relating to thereporting of and withholding on thevalue of noncash fringe benefits), theemployer may calculate the AnnualLease Value for each subsequent four-year period as of the beginning of thespecial accounting period that beginsimmediately prior to the January 1 de-scribed in the previous sentence. Forexample, assume that pursuant to An-nouncement 85–113, an employer usesthe special accounting rule. Assumefurther that beginning on November 1,1985, the special accounting period isNovember 1 to October 31 and that theemployer elects to use the special valu-ation rule of this paragraph (d) as of

January 1, 1985. The employer may re-calculate the Annual Lease Value as ofNovember 1, 1988, rather than as ofJanuary 1, 1989.

(v) Transfer of the automobile to an-other employee. Unless the primary pur-pose of the transfer is to reduce Fed-eral taxes, if an employer transfers anautomobile from one employee to an-other employee, the employer may re-calculate the Annual Lease Valuebased on the fair market value of theautomobile as of January 1 of the yearof transfer. If, however, the employer isusing the special accounting rule pro-vided in Announcement 85–113 (1985–31I.R.B., August 5, 1985) (relating to thereporting of and withholding on thevalue of noncash fringe benefits), theemployer may recalculate the AnnualLease Value based on the fair marketvalue of the automobile as of the begin-ning of the special accounting period inwhich the transfer occurs. If the em-ployer does not recalculate the AnnualLease Value, and the employee towhom the automobile is transferreduses the special valuation rule, the em-ployee may not recalculate the AnnualLease Value.

(3) Services included in, or excludedfrom, the Annual Lease Value Table—(i)Maintenance and insurance included.The Annual Lease Values contained inthe Annual Lease Value Table includethe fair market value of maintenanceof, and insurance for, the automobile.Neither an employer nor an employeemay reduce the Annual Lease Value bythe fair market value of any service in-cluded in the Annual Lease Value thatis not provided by the employer, suchas reducing the Annual Lease Value bythe fair market value of a maintenanceservice contract or insurance. An em-ployer or employee may take into ac-count the services actually providedwith respect to the automobile by val-uing the availability of the automobileunder the general valuation rules ofparagraph (b) of this section.

(ii) Fuel excluded—(A) In general. TheAnnual Lease Values do not includethe fair market value of fuel providedby the employer, regardless of whetherfuel is provided in kind or its cost is re-imbursed by or charged to the em-ployer.


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

(B) Valuation of fuel provided in kind.The provision of fuel in kind may bevalued at fair market value based onall the facts and circumstances or, inthe alternative, it may be valued at 5.5cents per mile for all miles driven bythe employee. However, the provisionof fuel in kind may not be valued at 5.5cents per mile for miles driven outsidethe United States, Canada, and Mexico.For purposes of this section, the UnitedStates includes the United States andits territories.

(C) Valuation of fuel where cost reim-bursed by or charged to employer. Thefair market value of fuel, the cost ofwhich is reimbursed by or charged toan employer, is generally the amountof the actual reimbursement or theamount charged, provided the purchaseof the fuel is at arm’s length. If an em-ployer with a fleet of at least 20 auto-mobiles that meet the requirements ofparagraph (d)(5)(v)(C) of this section re-imburses employees for the cost of fuelor allows employees to charge the em-ployer for the cost of the fuel, however,the fair market value of fuel providedto those automobiles may be deter-mined by reference to the employer’sfleet-average cents-per-mile fuel cost.The fleet-average cents-per-mile fuelcost in equal to the fleet-average per-gallon fuel cost divided by the fleet-av-erage miles-per-gallon rate. The aver-ages described in the preceding sen-tence must be determined by averagingthe per-gallon fuel costs and miles-per-gallon rates of a representative sampleof the automobiles in the fleet equal tothe greater of ten percent of the auto-mobiles in the fleet or 20 automobilesfor a representative period, such as atwo month period.

(iii) All other services excluded. Thefair market value of any service notspecifically identified in paragraph(d)(3)(i) of this section that is providedby the employer with respect to anautomobile (such as the services of achauffeur) must be added to the AnnualLease Value of the automobile in deter-mining the fair market value of thebenefit provided.

(4) Availability of an automobile for lessthan an entire calendar year—(i) Pro-rated Annual Lease Value used for con-tinuous availability of 30 or more days.Except as otherwise provided in para-

graph (d)(4)(iv) of this section, for peri-ods of continuous availability of 30 ormore days, but less than an entire cal-endar year, the value of the avail-ability of the employer-provided auto-mobile is the pro-rated Annual LeaseValue. The pro-rated Annual LeaseValue is calculated by multiplying theapplicable Annual Lease Value by afraction, the numerator of which is thenumber of days of availability and thedenominator of which is 365.

(ii) Daily Lease Value used for contin-uous availability of less than 30 days. Ex-cept as otherwise provided in para-graph (d)(4)(iii) of this section, for peri-ods of continuous availability of one ormore but less than 30 days, the value ofthe availability of the employer-pro-vided automobile is the Daily LeaseValue. The Daily Lease Value is cal-culated by multiplying the applicableAnnual Lease Value by a fraction, thenumerator of which is four times thenumber of days of availability and thedenominator of which is 365.

(iii) Election to treat all periods as peri-ods of at least 30 days. A pro-rated An-nual Lease Value may be applied withrespect to a period of continuous avail-ability of less than 30 days, by treatingthe automobile as if it had been avail-able for 30 days, if to do so would resultin a lower valuation than applying theDaily Lease Value to the shorter periodof actual availability.

(iv) Periods of unavailability—(A) Gen-eral rule. In general, a pro-rated AnnualLease Value (as provided in paragraph(d)(4)(i) of this section) is used to valuethe availability of an employer-pro-vided automobile when the automobileis available to an employee for a periodof continuous availability of at least 30days but less than the entire calendaryear. Neither an employer nor an em-ployee may use a pro-rated AnnualLease Value when the reduction of Fed-eral taxes is the primary reason theautomobile is unavailable to an em-ployee during the calendar year.

(B) Unavailability for personal reasonsof the employee. If an automobile is un-available to an employee because ofpersonal reasons of the employee, suchas while the employee is on vacation, apro-rated Annual Lease Value may not


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be used. For example, assume an auto-mobile is available to an employee dur-ing the first five months of the yearand during the last five months of theyear. Assume further that the period ofunavailability occurs because the em-ployee is on vacation. The AnnualLease Value, if it is applied, must beapplied with respect to the entire 12month period. The Annual Lease Valuemay not be pro-rated to take into ac-count the two-month period of unavail-ability.

(5) Fair market value—(i) In general.For purposes of determining the An-nual Lease Value of an automobileunder the Annual Lease Value Table,the fair market value of an automobileis that amount a hypothetical personwould have to pay a hypothetical thirdparty to purchase the particular auto-mobile provided. Thus, for example,any special relationship that may existbetween the employee and the em-ployer must be disregarded. Also, theemployee’s subjective perception of thevalue of the automobile is not relevantto the determination of the auto-mobile’s fair market value. In addition,except as provided in paragraph (d)(5)(ii) of this section, the cost incurred bythe employer of either purchasing ofleasing the automobile is not deter-minative of the fair market value ofthe automobile.

(ii) Safe-harbor valuation rule. Forpurposes of calculating the AnnualLease Value of an automobile underthis paragraph (d), the safe-harborvalue of the automobile may be used asthe fair market value of the auto-mobile For an automobile owned bythe employer, the safe-harbor value ofthe automobile is the employer’s costof purchasing the automobile, providedthe purchase is made at arm’s length.For an automobile leased by the em-ployer, the safe-harbor value of theautomobile is the value determinedunder paragraph (d)(5)(iii) of this sec-tion.

(iii) Use of nationally recognized pric-ing guides. The fair market value of anautomobile that is (A) provided to anemployee prior to January 1, 1985, (B)being revalued pursuant to paragraphs(d)(2) (iv) or (v) of this section, or (C) isa leased automobile being valued pur-suant to paragraph (d)(5)(ii) of this sec-

tion, may be determined by using theretail value of such automobile as re-ported in a nationally recognized publi-cation that regularly reports new orused automobile retail values, which-ever is applicable. The values con-tained in (and obtained from) the pub-lication must be reasonable with re-spect to the automobile being valued.

(iv) Fair market value of special equip-ment—(A) Certain equipment excluded.The fair market value of an automobiledoes not include the fair market valueof any telephone or any specializedequipment that is added to or carriedin the automobile if the presence ofsuch equipment is necessitated by, andattributable to, the business needs ofthe employer.

(B) Use of specialized equipment outsideof employer’s business. The value of spe-cialized equipment must be included,however, if the employee to whom theautomobile is available uses the spe-cialized equipment in a trade of busi-ness of the employee other than theemployee’s trade or business of beingan employee of the employer.

(C) Equipment susceptible to personaluse. The exclusion rule provided in thisparagraph (d)(5)(iv) does not apply tospecialized equipment susceptible topersonal use.

(v) Fleet-average valuation rule—(A) Ingeneral. An employer with a fleet of 20or more automobiles may use a fleet-average value for purposes of calcu-lating the Annual Lease Values of theautomobiles in the fleet. The fleet-av-erage value is the average of the fairmarket values of each automobile inthe fleet. The fair market value of eachautomobile in the fleet shall be deter-mined, pursuant to the rules of para-graphs (d)(5) (i) through (iv) of this sec-tion, as of the later of January 1, 1985,or the first date on which the auto-mobile is made available to any em-ployee of the employer for personaluse.

(B) Period for use of rule. The fleet-av-erage valuation rule of this paragraph(d)(5)(v) may be used by an employer asof January 1 of any calendar year fol-lowing the calendar year in which theemployer acquires a fleet of 20 or moreautomobiles. The Annual Lease Valuecalculated for the automobiles in thefleet, based on the fleet-average value,


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

shall remain in effect for the periodthat begins with the first January 1 thefleet-average valuation rule of thisparagraph (d)(5)(v) is applied by theemployer to the automobiles in thefleet and ends on December 31 of thesubsequent calendar year. The AnnualLease Value for each subsequent twoyear period is calculated by deter-mining the fleet-average value of theautomobiles in the fleet as of the firstJanuary 1 of such period. An employermay cease using the fleet-average valu-ation rule as of any January 1. Thefleet-average valuation rule does notapply as of January 1 of the year inwhich the number of automobiles inthe employer’s fleet declines to fewerthan 20. If, however, the employer isusing the special accounting rule pro-vided in Announcement 85–113 (I.R.B.No. 31, August 5, 1985), the employermay apply the rules of this paragraph(d)(5)(v)(B) on the basis of the specialaccounting period rather than the cal-endar year. (This is accomplished bysubstituting (1) the beginning of thespecial accounting period that beginsimmediately prior to the January 1 de-scribed in this paragraph (d)(5)(v)(B)for January 1 wherever it appears inthis paragraph (d)(5)(v)(B) and (2) theend of such accounting period for De-cember 31.) The revaluation rules ofparagraph (d)(2) (iv) and (v) of this sec-tion do not apply to automobiles val-ued under this paragraph (d)(5)(v).

(C) Limitations on use of fleet-averagerule. The rule provided in this para-graph (d)(5)(v) may not be used for anyautomobile whose fair market value(determined pursuant to paragraphs(d)(5) (i) through (iv) of this section asof either the first date on which theautomobile is made available to anyemployee of the employer for personaluse or, if later, January 1, 1985) exceeds$16,500. In addition, the rule provided inthis paragraph (d)(5)(v) may only beused for automobiles that the employerreasonably expects will regularly beused in the employer’s trade or busi-ness. Infrequent use of the vehicle,such as for trips to the airport or be-tween the employer’s multiple businesspremises, does not constitute regularuse of the vehicle in the employer’strade or business.

(D) Additional automobiles added to thefleet. If the rule provided in this para-graph (d)(5)(v) is used by an employer,it must be used for every automobileincluded in or added to the fleet thatmeets the requirements of paragraph(d)(5)(v)(C) of this section. The fleet-av-erage value in effect at the time anautomobile is added to the fleet istreated as the fair market value of theautomobile for purposes of determiningthe Annual Lease Value of the auto-mobile until the fleet-average valuechanges pursuant to paragraph(d)(5)(v)(B) of this section.

(E) Use of the fleet-average rule by em-ployees. An employee can only use thefleet-average value if it is used by theemployer. If an employer uses thefleet-average value, and the employeeuses the special valuation rule of para-graph (d) of this section, the employeemust use the fleet-average value.

(6) Consistency rules—(i) Use of theautomobile lease valuation rule by an em-ployer. Except as provided in paragraph(d)(5) (v)(B) of this section, an em-ployer may adopt the automobile leasevaluation rule of this paragraph (d) foran automobile only if the rule is adopt-ed with respect to the later of the pe-riod that begins on January 1, 1987, orthe first period in which the auto-mobile is made available to an em-ployee of the employer for personal useor, if the commuting valuation rule ofparagraph (f) of this section is usedwhen the automobile is first madeavailable to an employee of the em-ployer for personal use, the first periodin which the commuting valuation ruleis not used.

(ii) An employer must use the auto-mobile lease valuation rule for all subse-quent periods. Once the automobilelease valuation rule has been adoptedfor an automobile by an employer, therule must be used by the employer forall subsequent periods in which the em-ployer makes the automobile availableto any employee, except that the em-ployer may, for any period duringwhich use of the automobile qualifiesfor the commuting valuation rule ofparagraph (f) of this section, use thecommuting valuation rule with respectto the automobile.


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(iii) Use of the automobile lease valu-ation rule by an employee. Except as pro-vided in paragraph (c)(2)(ii)(C) of thissection, an employee may adopt theautomobile lease valuation rule for anautomobile only if the rule is adopted(A) by the employer and (B) with re-spect to the first period in which theautomobile for which the employer(consistent with paragraph (d)(6)(i) ofthis section) adopted the rule is madeavailable to that employee for personaluse, or, if the commuting valuationrule of paragraph (f) of this section isused when the automobile is first madeavailable to that employee for personaluse, the first period in which the com-muting valuation rule is not used.

(iv) An employee must use the auto-mobile lease valuation rule for all subse-quent periods. Once the automobilelease valuation rule has been adoptedfor an automobile by an employee, therule must be used by the employee forall subsequent periods in which theautomobile for which the rule is used isavailable to the employee, except thatthe employee may, for any period dur-ing which use of the automobile quali-fies for use of the commuting valuationrule of paragraph (f) of this section andfor which the employer uses the rule,use the commuting valuation rule withrespect to the automobile.

(v) Replacement automobiles. Notwith-standing anything in this paragraph(D)(6) to the contrary, if the auto-mobile lease valuation rule is used byan employer, or by an employer and anemployee, with respect to a particularautomobile, and a replacement auto-mobile is provided to the employee forthe primary purpose of reducing Fed-eral taxes, then the employer, or theemployer and the employee, using therule must continue to use the rule withrespect to the replacement automobile.

(e) Vehicle cents-per-mile valuationrule—(1) In general—(i) General rule.Under the vehicle cents-per-mile valu-ation rule of this paragraph (e), if anemployer provides an employee withthe use of a vehicle that (A) the em-ployer reasonably expects will be regu-larly used in the employer’s trade orbusiness throughout the calendar year(or such shorter period as the vehiclemay be owned or leased by the em-ployer) or (B) satisfies the require-

ments of paragraph (e)(1)(ii) of this sec-tion, the value of the benefit providedin the calendar year is the standardmileage rate provided in the applicableRevenue Ruling or Revenue Procedure(‘‘cents-per-mile rate’’) multiplied bythe total number of miles the vehicle isdriven by the employee for personalpurposes. For 1985, the standard mile-age rate is 21 cents per mile for thefirst 15,000 miles and 11 cents per milefor all miles over 15,000. See Rev. Proc.85–49. The standard mileage rate mustbe applied to personal miles inde-pendent of business miles. Thus, for ex-ample, if an employee drives 20,000 per-sonal miles and 35,000 business miles in1985, the value of the personal use ofthe vehicle is $3,700(15,000×$.21+5,000×$.11). For purposes ofthis section, the use of a vehicle forpersonal purposes is any use of the ve-hicle other than use in the employee’strade or business of being an employeeof the employer. Infrequent use of thevehicle, such as for trips to the airportor between the employer’s multiplebusiness premises, does not constituteregular use of the vehicle in the em-ployer’s trade or business.

(ii) Mileage rule. A vehicle satisfiesthe requirements of this paragraph(e)(1)(ii) in a calendar year if (A) it isactually driven at least 10,000 miles inthe year, and (B) use of the vehicle dur-ing the year is primarily by employees.For example, if a vehicle is used byonly one employee during the year andthat employee drives a vehicle at least10,000 miles in a calendar year, such ve-hicle satisfies the requirements of thisparagraph (e)(1)(ii) even if all milesdriven by the employee are personal.The requirements of this paragraph(e)(1)(ii), however, will not be satisfiedif during the year the vehicle is trans-ferred among employees in such a waywhich enables an employee whose usewas at a rate significantly less that10,000 miles per year to meet the 10,000mile threshold. Assume that an em-ployee uses a vehicle for the first sixmonths of the year and drives 2,000miles, and that vehicle is then used byother employees who drive the vehicle8,000 miles in the last six months of theyear. Because the rate at which mileswere driven in the first six months ofthe year would result in only 4,000


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26 CFR Ch. I (4–1–99 Edition)§ 1.61–2T

miles being driven in the year, and be-cause the first employee did not usethe vehicle during the last six monthsof the year, the requirements of thisparagraph (e)(1)(ii) are not satisfied.The requirement of paragraph(e)(1)(ii)(B) of this section is deemedsatisfied if employees use the vehicleon a consistent basis for commuting. Ifthe employer does not own or lease thevehicle during a portion of the year,the 10,000 mile threshold is to be re-duced proportionately to reflect the pe-riods when the employer owned orleased the vehicle. For purposes of thisparagraph (e)(1)(i

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