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Principle Subject Matter Expert: Jack McCann
IRS Sec 1.122-0 Executive Fringe Benefits: Security Services and Use of Corporate Aircraft
In the past few years, the IRS has paid increased attention to Executive Compensation-Fringe Benefits. For the executive who operates in a high profile, high risk position, this means that the Board of Directors and or insurance requirements that they use corporate/private aircraft for all travel or have 24/7 armed security, may be deemed a taxable benefit.
For most executives, simply complying with the Board and or Insurance can leave them open to Audits and Fines by the IRS. In order to address this risk, the IRS requires that an experienced third party analyze the security risk for the company and executive and validate the use of the private aircraft and other security measures. McCann Global has the experience to provide the security study and have performed the security and helped scores of clients with audits relating to the “security fringe benefit. “
Without independent verification and analysis the executive could face a taxable event years later for material amounts of money. Recent press of the IRS reviewing the use of corporate aircraft by executives and members of the Board of Directors make the lack of preparation for this scrutiny an unnecessary oversight.
Additional Sources of Information:
From Alvin Brown and Associates:
Security-related Transportation - Regulations § 1.132-5(m)(1) provides that if a bona fide business-oriented security concern exists, and an overall security program exists, then the employee may exclude the excess of the value of the transportation provided by the employer over the amount that the employee would have paid for the same mode of transportation absent the bona fide security concern. With respect to air transportation, the phrase “same mode of transportation” means comparable air transportation.
A bona fide business-oriented security concern exists only if the facts and circumstances establish a specific basis for concern regarding the safety of the executive (§1.132-5(m)(2)(i)). A generalized concern for the executive’s safety will not trigger application of the security exclusion (§1.132-5(m)(2)(i)). Under § 1.132-5(m)(2)(i), the employer must demonstrate the existence of a bona fide security concern. A bona fide security concern exists if the facts and circumstances demonstrate a specific basis for concern regarding the safety of the employee. Examples of specific bases for a bona fide security concern include a specific threat to harm the employee or a recent history of violent terrorist activity in the geographic area in which the transportation is provided.
Section 1.132-5(m)(2)(ii) provides that an overall security program must be established. In order to establish the existence of an overall security program, the employer must generally establish that security is provided to the employee on a 24-hour basis.
However, under §1.132-5(m)(2)(iv), an overall security program is deemed to exist if the following conditions are satisfied:
The expenses incurred for security services will normally be deducted under “Other Deductions”. A review of the W-2/1099 forms and employment agreements may provide information related to security services.
Upon examination it has been found that homes of executives have been fortified with special rooms or other security devises. It is important to evaluate the level of security afforded top executives and their families to determine that security studies are being followed.
IRS Sec 1.122-0 Executive Fringe Benefits: Security Services and Use of Corporate Aircraft
In the past few years, the IRS has paid increased attention to Executive Compensation-Fringe Benefits. For the executive who operates in a high profile, high risk position, this means that the Board of Directors and or insurance requirements that they use corporate/private aircraft for all travel or have 24/7 armed security, may be deemed a taxable benefit.
For most executives, simply complying with the Board and or Insurance can leave them open to Audits and Fines by the IRS. In order to address this risk, the IRS requires that an experienced third party analyze the security risk for the company and executive and validate the use of the private aircraft and other security measures. McCann Global has the experience to provide the security study and have performed the security and helped scores of clients with audits relating to the “security fringe benefit. “
Without independent verification and analysis the executive could face a taxable event years later for material amounts of money. Recent press of the IRS reviewing the use of corporate aircraft by executives and members of the Board of Directors make the lack of preparation for this scrutiny an unnecessary oversight.
Additional Sources of Information:
From Alvin Brown and Associates:
Security-related Transportation - Regulations § 1.132-5(m)(1) provides that if a bona fide business-oriented security concern exists, and an overall security program exists, then the employee may exclude the excess of the value of the transportation provided by the employer over the amount that the employee would have paid for the same mode of transportation absent the bona fide security concern. With respect to air transportation, the phrase “same mode of transportation” means comparable air transportation.
A bona fide business-oriented security concern exists only if the facts and circumstances establish a specific basis for concern regarding the safety of the executive (§1.132-5(m)(2)(i)). A generalized concern for the executive’s safety will not trigger application of the security exclusion (§1.132-5(m)(2)(i)). Under § 1.132-5(m)(2)(i), the employer must demonstrate the existence of a bona fide security concern. A bona fide security concern exists if the facts and circumstances demonstrate a specific basis for concern regarding the safety of the employee. Examples of specific bases for a bona fide security concern include a specific threat to harm the employee or a recent history of violent terrorist activity in the geographic area in which the transportation is provided.
Section 1.132-5(m)(2)(ii) provides that an overall security program must be established. In order to establish the existence of an overall security program, the employer must generally establish that security is provided to the employee on a 24-hour basis.
However, under §1.132-5(m)(2)(iv), an overall security program is deemed to exist if the following conditions are satisfied:
- A security study is performed with respect to the employer and the employee (or a similarly situated employee of the employer) by an independent security consultant;
- The security study is based on an objective assessment of all facts and circumstances;
- The recommendation of the security study is that an overall security program (as defined in paragraph (m)(2)(iii) of this section) is not necessary and the recommendation is reasonable under the circumstances; and
- The employer applies the specific security recommendations contained in the security study to the employee on a consistent basis.
The expenses incurred for security services will normally be deducted under “Other Deductions”. A review of the W-2/1099 forms and employment agreements may provide information related to security services.
Upon examination it has been found that homes of executives have been fortified with special rooms or other security devises. It is important to evaluate the level of security afforded top executives and their families to determine that security studies are being followed.
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