Over at PostEverything, Professors Daniel Hemel and David Herzig argue that Scott Pruitt, the administrator of the Environmental Protection Agency, “could be in tax trouble on top of his ethical and political problems.” Hemel & Herzig, “Scott Pruitt’s travel could leave him with a big tax bill,” (April 16, 2018). The authors note that Pruitt’s employer (the federal government) provides him with an extensive security detail, and that employees who receive such details must ordinarily recognize income for this fringe benefit. See Section 61(a)(1).

Hemel and Herzig acknowledge that Section 132(a)(3) excludes some working condition fringes from gross income, but they do not believe Pruitt’s security detail so qualifies.[FN1] Under the relevant regulations, employees may exclude security detail services from income only if a “bona fide business-oriented security concern exists,” such as those raised by death or kidnapping threats. See Treas. Reg. §§ 1.132-5(m)(2)(i) & (ii). If that threshold standard is satisfied, then a further “overall security program” requirement applies. According to Hemel and Herzig, this requirement will be satisfied only if the program protects “the employee on a 24-hour basis” and the employer relies on an “independent security study” for an employee. They then posit that “Pruitt has not obtained the independent study required under IRS rules,” and that some portion of his security detail “would appear to be income on which the EPA administrator owes tax.”

The authors misstate the relevant law, however. The security study rules operate as a safe harbor to the “overall security program” requirement, and do not establish an independent test. That is, the provision of an independent study is just one way that a security arrangement may comply with the regulations. Thus, Hemel and Herzig err when they rely on the purported absence of a security study to establish Pruitt’s failure to comply with the regulations.

Under the regulations’ general rule, an overall security program generally exists where an employee receives 24-hour protection. See Treas. Reg. § 1.132-5(m)(2)(iii)(A). Among other things, the regulations require that the employee receive protection both at home and while away, and while conducting business or personal activities. See id. Thus, the general rules for establishing an overall security program are quite strict.

However, under the security study safe harbor, 24-hour protection need not be provided. Rather, an employer may follow the recommendations of a security study, and that study may properly conclude that 24-hour protection “is not necessary” and that an alternate approach is “reasonable under the circumstances.” See Treas. Reg. §§ 1.132-5(m)(2)(iv)(C) & (D). See also Treas. Reg. § 1.132-5(m)(2)(v) (providing specific security study rules for government employees, which also allow protection for less than 24 hours). This regulatory framework makes clear that the security study rule operates as an exception to the general 24-hour protection rule and is not a universal requirement. An IRS private letter ruling confirms the plain language of the regulations.[FN2]  

Hemel and Herzig also express concern that some of Pruitt’s trips included family members and were made for purely personal purposes. They note, for example, that Pruitt’s family trip to a Disney theme park was not for business purposes, “even though some of his statements on climate change might suggest that he is running the EPA from Fantasyland.” However, under the regulations’ general rule, an overall security program must provide protection to an employee anywhere he or she goes. Additionally, if a bona fide business-oriented security exists for an employee, that concern generally will be deemed to exist for his spouse and dependents. See Treas. Reg. § 1.132-5(m)(3).

From the outside, it is impossible to determine whether the federal government has provided Pruitt with an overall security program under Treas. Reg. § 1.132-5(m)(2)(iii)(A). Media outlets have reported that Pruitt receives 24-hour protection but, as noted above, the IRS regulations set forth detailed requirements on the quality of that protection. See Daniel Politi, “Expanded 24-Hour Security for EPA Chief Scott Pruitt Has Cost Taxpayers $3 Million,” Slate (Apr. 7, 2018). Additionally, as noted earlier, the regulations contemplate an exclusion only when “bona fide business-oriented security concerns” exist for an employee, and it is unclear whether such concerns exist for Pruitt. See Eilperin & Dennis, “EPA documents question justification for Pruitt’s 24/7 security detail, first-class travel,” Washington Post (Apr. 10, 2018). Nonetheless, insofar as the tax aspects of the arrangement go, it is critical to set forth the correct regulatory framework before analyzing the issues or alleging that a public official may have omitted income from his tax return.

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FN1: Although an employer’s provision of services to an employee usually creates gross income, Sections 132(a)(3) & (d) properly indicate that no income arises where the employee would enjoy a deduction under Sections 162 or 167, had she paid for those services directly. With this limitation in mind, the regulations generally do not offer a complete exclusion for employer-provided security details and instead segregate the business and personal elements. See Treas. Reg. § 1.132-5(m)(1) (“[I]f an employee travels on a personal trip in an employer-provided aircraft for bona fide business-oriented security concerns, the employee may exclude the excess, if any, of the value of the flight over the amount the employee would have paid for the same mode of transportation, but for the bona fide business-oriented security concerns.”).

FN2: See P.L.R. 200705010 (Feb. 2, 2007) (“An ‘overall security program’ is one in which security is provided to protect the employee on a 24-hour basis. Treas. Reg. § 1.132-5(m)(2)(iii). However, an overall security program will be deemed to exist in situations where the employer conducts and implements an ‘independent security study’ with respect to the employee. Treas. Reg. § 1.132-5(m)(2)(iv).”).