The IRS has issued Notice 2009-46, requesting comments on several proposals to simplify the substantiation rules for employer-provided cellular telephones and similar telecommunications equipment (”cell phones”). Cell phones are “listed property” under Code Section 280F, a classification that triggers strict substantiation requirements. If those substantiation requirements are met, business use of an employer-provided cell phone can be excluded from income as a working condition fringe benefit under Code Section 132(a)(3). If business use is not properly substantiated, however, the unsubstantiated business use (as well as all personal use) is treated as a taxable fringe benefit. Under the “listed property” substantiation rules, employees must, by adequate records or sufficient evidence corroborating the employee’s own statement, prove the amount of each expenditure, the amount of each business use, the date of each expenditure and use, and the business purpose of each expenditure or use.

To deal with the practical difficulties posed by the current substantiation rules, the IRS has suggested three alternative substantiation methods for cell phones. The IRS anticipates that an employer could choose to adopt one or more of these methods under a written policy requiring employees to carry cell phones for business and limiting their personal use.

• under one method, all use would be deemed business use if an employee had another cell phone for personal use during working hours, or if personal use of the business phone did not exceed a “minimal” amount designated by the employer (the minimal amount could be defined, for example, by reference to a number of minutes or by types of permitted personal use).
• Under a second method, employers would assume a specified percentage of business use–the IRS proposes 75% business use and 25% personal use.
• Under a third method, employers would use statistical sampling techniques–similar to those available for establishing the amount of certain meal and entertainment expenses–to measure the amount of personal use.

Comments on these proposals, and other suggestions for simplifying the substantiation rules, will be accepted through September 4, 2009. Comments are also requested on the methods currently being used by employers to determine the fair market value of employees’ use of employer-provided cell phones and on what simpler methodologies, if any, might be appropriate.

EBIA Comment: As the IRS has previously acknowledged, the “listed property” substantiation rules–especially the requirement that an employee prove the business purpose of each business use–are difficult to satisfy in the context of employer-provided cell phones. Notice 2009-46 represents a welcome first step toward making those substantiation rules more manageable. While this is encouraging news, employers should remember that, until substantiation guidance is actually issued and becomes effective, there are no special simplified substantiation methods for cell phones (as there currently are for employer-provided vehicles), so full compliance with the “listed property” substantiation rules is required. For more information, see EBIA’s Fringe Benefits manual at Section II.E.4 (”Employee Business Expense Reimbursements: Cellular Telephones”).

This whole article was taken from the EBIA web site as you can see from their comment. It would be great to hear how your company deals with this issue.