Proposed Regs Aim to Modify Substantiation Rules for Certain Emergency-Use Vehicles

(Parker Tax Publishing December 2024)

The IRS issued proposed regulations amending the definition of qualified nonpersonal use vehicles to provide that certain unmarked vehicles used by firefighters or members of a rescue squad or ambulance crew now qualify as a special type of qualified nonpersonal use vehicles such that they are not subject to the normal vehicle substantiation requirements. The proposed regulations would affect (1) governmental units that provide firefighter or rescue squad or ambulance crew members with unmarked qualified nonpersonal use vehicles, and (2) the employees who use those vehicles. REG-106595-22 (12/3/24).

Background

Under Code Sec. 274(d), a taxpayer cannot take a deduction or credit for certain expenses unless the expenses are substantiated by adequate records or by sufficient evidence corroborating the taxpayer's own statement as to the amount, time and place, business purposes of the expenditure, and the business relationship to the taxpayer of the person receiving the benefit. These substantiation requirements apply to expenses incurred in the use of any listed property, as defined in Code Sec. 280F(d)(4), which includes any passenger automobile, and any other property used as a means of transportation.

However, there is an exception in Code Sec. 274(i) from the substantiation requirements for qualified nonpersonal use vehicles, the use of which are excluded from the employee's income as a working condition fringe benefit under Code Sec. 132(d). The legislative history to Code Sec. 274(i) includes as examples of qualified nonpersonal use vehicles school buses, qualified specialized utility repair trucks, qualified moving vans, clearly marked police and fire vehicles, and unmarked law enforcement vehicles. The legislative history indicates that Congress intended the IRS to expand the list to include other vehicles that, by reason of their nature, are highly unlikely to be used more than a very minimal amount for personal purposes.

In 2010, final regulations were published adding clearly marked public safety officer vehicles to the list of qualified nonpersonal use vehicles. As a result, emergency responders who are provided a clearly marked vehicle receive the same tax treatment whether they work for the police department, fire department, or other governmental unit, or any agency or instrumentality thereof.

Subsequently, the IRS became aware that certain emergency responders not covered by the current regulations are provided unmarked vehicles by a governmental unit or an agency or instrumentality thereof (governmental unit). Such emergency responders include fire chiefs or members of rescue squads or ambulance crews who, when not on a regular shift, need to be on call at all times to respond to emergencies and who will often be assigned unmarked command vehicles to travel safely and quickly to a scene and perform emergency services. While the authorized use of unmarked vehicles by law enforcement officers employed on a full-time basis satisfies the current regulations governing qualified nonpersonal use vehicles, the use of unmarked vehicles provided to firefighters or members of a rescue squad or ambulance crew does not satisfy the current regulations.

Historically, firefighters and rescue squad and ambulance crew members were provided with vehicles that had markings to indicate their status as emergency response vehicles. More recently, the IRS said that it has become aware that some governmental units are assigning these emergency responders unmarked vehicles due to increased incidents of harassment of first responders and vandalism of clearly marked fire and emergency vehicles and equipment. Because these vehicles are generally outfitted with specialized equipment, any personal use of these vehicles is likely to be minimal. Thus, the IRS concluded that it was appropriate to add unmarked firefighter, rescue squad or ambulance crew vehicles as a new category of qualified nonpersonal use vehicle and that adding such vehicles is consistent with the underlying intent of Code Sec. 274(i).

Proposed Regulations

On December 3, the IRS published REG-106595-22 which sets forth proposed regulations relating to the definition of qualified nonpersonal use vehicles that are excepted from the substantiation requirements that apply to certain listed property. The proposed regulations (1) add unmarked vehicles used by firefighters or members of a rescue squad or ambulance crew as a new type of qualified nonpersonal use vehicle, and (2) affect governmental units that provide firefighter or rescue squad or ambulance crew member employees with unmarked qualified nonpersonal use vehicles and the employees who use those vehicles.

Specifically, Prop. Reg. Sec. 1.274-5(k)(7) provides that the substantiation requirements of Code Sec. 274(d) do not apply to an unmarked firefighter, rescue squad, or ambulance crew vehicle required to be used for commuting by the firefighter or member of a rescue squad or ambulance crew, who, when not on a regular shift, is always on call. Personal use (other than commuting) of the vehicle outside the firefighter's or rescue squad or ambulance crew member's obligation to respond to an emergency must be prohibited by the governmental unit, or any agency or instrumentality thereof, that owns or leases the vehicle and employs the firefighter, rescue squad, or ambulance crew member.

Under the proposed regulations, an unmarked firefighter, rescue squad, or ambulance crew vehicle is an unmarked vehicle used by a firefighter, or member of a rescue squad or ambulance crew, that is owned or leased by a governmental unit, or any agency or instrumentality thereof, and that is specially outfitted to allow firefighters or members of rescue squads and ambulance crews to travel safely and efficiently to the scene of an emergency and provide emergency services.

Example: Joe is an emergency medical technician and a member of a rescue squad employed by a local city. Joe is provided with an unmarked vehicle (equipped with sirens and medical equipment) for use in responding to emergencies. Joe, along with other members of the rescue squad, is ordinarily on duty for a regular shift, and on call during the other hours of the day. Joe is required to use the unmarked rescue squad vehicle to commute to his home in the same city. The rescue squad's official policy regarding unmarked rescue squad vehicles prohibits personal use (other than commuting) of the vehicles outside the city limits. When not using the vehicle on the job, Joe uses the vehicle only for commuting, personal errands on the way between work and home, and personal errands within the city. All use of the vehicle by Joe conforms to the proposed regulation's requirements and, therefore, the value of that use is excluded from Joe's gross income as a working condition fringe and the vehicle is not subject to the substantiation requirements of Code Sec. 274(d).

Prop. Reg. Sec. 1.274-5(k)(7) is proposed to apply to tax years ending on or after the date the final regulations are published but, until that time, taxpayers may rely on the guidance provided in the proposed regulations.

Observation: The proposed regulations address vehicle use by "employees" but does not address such use by "volunteers."

For a discussion of the exclusion from income for working condition fringe benefits, see Parker Tax ¶123,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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