n-12-38.pdf

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Implementation of Rev. Rul. 2006-57—Issues for Public Comment
Notice 2012-38

PURPOSE
This Notice requests public comments on issues associated with Revenue Ruling
2006-57, 2006-2 C.B. 911, which became effective on January 1, 2012. Rev. Rul.
2006-57 provides guidance on the use of smartcards, debit or credit cards, or other
electronic media to provide qualified transportation fringes under sections 132(a)(5) and
(f) of the Internal Revenue Code (the Code). The Treasury Department and the Internal
Revenue Service have become aware of changes in technology that may give rise to
the need for additional guidance on the use of electronic media to provide transit
benefits.

BACKGROUND
Section 132(a)(5) of the Code provides that any fringe benefit that is a qualified
transportation fringe is excluded from gross income. Section 132(f)(1) provides that the
term "qualified transportation fringe" means, when provided by an employer to an
employee, (1) transportation in a commuter highway vehicle between home and work,
(2) any transit pass, (3) qualified parking, or (4) any qualified bicycle commuting
reimbursement.
Section 132(f)(5)(A) provides that a transit pass is any pass, token, farecard,
voucher or similar item entitling a person to transportation (or transportation at a
reduced price) if such transportation is on mass transit facilities or is provided by any

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person in the business of transporting persons for compensation or hire in a commuter
highway vehicle.
Section 132(f)(3) of the Code generally allows employers to use cash
reimbursement arrangements to provide employees with qualified transportation fringe
benefits. This section, however, prohibits use of such arrangements to provide transit
benefits “if a voucher or similar item which may be exchanged only for a transit pass” is
“readily available.” Section 1.132-9, Q/A-16(b) of the Regulations specifies that a
voucher or similar item is not readily available if the entity providing it imposes
restrictions that effectively prevent the employer from obtaining vouchers appropriate for
distribution to employees. Examples of such restrictions include:
(1) Excessive fare media charges: The term “fare media charges” refers to extra
fees that the voucher-provider requires employers to incur to furnish employees
with vouchers. Such fees are excessive if the average annual fare media
charges that the employer incurs to provide its employees with transit benefits via
vouchers are more than one percent of the average annual value of the vouchers
for a transit system.
(2) Advance purchase requirements: A voucher-provider imposes an excessive
advance purchase requirement if it “does not offer vouchers at regular intervals
or fails to provide the voucher within a reasonable period after receiving payment
for the voucher.” The regulations clarify that a requirement that employers
purchase vouchers only once per year is an excessive advance purchase
requirement, but a requirement that an employer purchase vouchers on a
monthly basis is not.

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(3) Purchase quantity requirements: A voucher is not readily available if the
voucher-provider requires the employer to purchase vouchers in quantities that
are not reasonably appropriate considering the number of employees who use
mass transit.
(4) Limitations on denominations of available vouchers: A voucher is not readily
available if the voucher-provider requires the employer to purchase vouchers in
denominations that are not appropriate for distribution to the employer’s
employees.
Section 1.132-9, Q/A-16 of the Regulations provides that a qualified
transportation fringe includes cash reimbursement for transit passes made under a
bona fide reimbursement arrangement that meets substantiation requirements specified
in the regulations. In discussing the application of Section 132(f) of the Code to
reimbursements, Section 1.132-9, Q/A-16(a) of the Regulations provides that a payment
made before the date an expense has been incurred or paid is not a reimbursement;
nor does a bona fide reimbursement arrangement include an arrangement that is
dependent solely upon an employee certifying in advance that the employee will incur
expenses at some future date. Employers must implement reasonable procedures to
ensure that employees have incurred expenses for transit passes in an amount equal to
the reimbursement. What constitutes a reasonable procedure depends on the facts and
circumstances of a particular arrangement. The Regulations further require employees
to provide any such substantiation within a “reasonable period of time.”
Rev. Rul. 2006-57 provides guidance on the use of smartcards, debit or credit
cards, or other electronic media to provide employees with transportation fringes. The

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ruling was originally scheduled to become effective January 1, 2008. However,
Treasury and the IRS delayed the effective date of the ruling several times in order to
give transit systems additional time to modify their technology to comply with the
requirements set forth in Revenue Ruling 2006-57, most recently in Notice 2010-94,
2010-52 I.R.B. 927, which delayed the effective date until January 1, 2012. There have
been no subsequent notices delaying the effective date of the revenue ruling. The
revenue ruling is therefore now effective.
The revenue ruling includes four situations that illustrate the tax treatment of
arrangements under which employers use electronic media to provide employees with
transportation benefits.
Employers in the first situation distribute “smartcards” to their employees.
Employees use the fare media value that is stored on these cards to pay for
transportation on the local transit system. The fare media value stored on the cards is
useable only to pay for transportation on the local transit system. The revenue ruling
therefore concludes that the smartcards qualify as transit system vouchers under
section 1.132-9(b) of the Regulations. The value of the fare media stored on the
smartcards, up to the applicable monthly limit, is excludable from an employee’s gross
income as a qualified transportation benefit. Under section 1.132-9(b) Q/A-18,
employees are not required to substantiate their use of the smartcards.
In the second situation, employers furnish employees with debit cards. These
debit cards are restricted for use only at merchant terminals at points of sale at which
only fare media for the local transit system is sold. Employers make monthly payments
to the debit card provider, which the debit card provider then allocates to each

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employee’s card. The revenue ruling concludes that these terminal-restricted debit
cards qualify as transit system vouchers under section 1.132-9(b) because, similar to
the smartcards in the first situation, they can be used only to purchase fare media on
the local transit system. Amounts stored on these debit cards are excludable from
employee’s gross incomes to the extent that they do not exceed the applicable monthly
limit and employees are not required to substantiate their use of the debit cards.
The revenue ruling’s third situation depicts an arrangement under which
employers provide employees with debit cards that employees can use to purchase
transit benefits under circumstances in which vouchers or similar items exchangeable
only for transit passes are not readily available. These debit cards are restricted for use
only at merchants that have been assigned a merchant category code (MCC-restricted)
indicating that the merchants sell fare media for the local transit system. The merchants
may or may not sell other merchandise. The revenue ruling concludes that these debit
cards do not qualify as transit system vouchers under section 1.132-9(b) because there
is nothing in the debit card technology that prevents the use of the cards to purchase
items other than fare media for the local transit system. However, because transit
passes are not readily available to the employers in these circumstances, the employers
are permitted to distribute transit benefits via bona fide cash reimbursement
arrangements. The revenue ruling concludes that the facts of this third situation result
in a bona fide cash reimbursement arrangement because employees are required to
pay for fare media with after-tax amounts during their first month of participation in the
transportation benefit program, the employees must substantiate the amount of their
monthly expenses to the employers, and the employers provide funds that the debit

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card provider allocates to each debit card in an amount that does not exceed the lesser
of the applicable monthly limit or the amount of the employee’s substantiated fare media
expenses for the prior month.
The facts in the fourth situation are the same as those in the third situation,
except that the employer provides employees with the MCC-restricted debit cards
before they begin work. Before using the MCC-restricted debit cards, employees must
certify that the card will be used only to purchase transit passes. Further, written on
each card is a statement that the card is to be used only for transit passes and, by using
the card, the employees certify that the card is being used only to purchase transit
passes. The revenue ruling concludes that the arrangement in the fourth situation does
not meet the requirements of a bona fide cash reimbursement arrangement because it
provides for advances rather than reimbursements and because it relies solely on
employee certifications provided before expenses are incurred. Those certifications,
standing alone, do not provide the substantiation of expenses incurred necessary for
there to be a bona fide reimbursement arrangement.
At the time Rev. Rul. 2006-57 was issued, the Treasury Department and the
Internal Revenue Service (IRS) lacked sufficient factual context to develop guidance
regarding whether terminal-restricted debit cards were “readily available”. The revenue
ruling indicates that the IRS intends “to issue guidance clarifying under what situations
the cards are considered to be readily available and thus preclude cash reimbursement
for transit benefits.” In the interim, employers may use bona fide cash reimbursement
arrangements when the only available voucher or similar item is a terminal-restricted
debit card.

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REQUESTS FOR COMMENT
Treasury and the IRS have become aware that changes in fare media and in
transit benefit administration may have created the need for guidance in addition to the
guidance issued concerning the specific situations described in Rev. Rul. 2006-57.
Developments in technology, an increase in the number of transit systems and third
parties providing electronic media for transit use, and the trend away from use of paper
fare media provide a basis for concluding that the four situations described in Rev. Rul.
2006-57 may not cover the full range of available electronic media for providing fare
media.
Treasury and the IRS request comments on how electronic media may meet the
statutory requirements under section 132(f) for providing transit benefits, either as
vouchers or transit passes or through bona fide cash reimbursement arrangements in a
manner other than those described in situations one through four in Rev. Rul. 2006-57.
Also, Treasury and the IRS request comments on the availability of terminal-restricted
cards and any other electronic media qualifying as vouchers or transit passes for
purposes of determining whether such items are readily available and, therefore, cash
reimbursement arrangements for providing transit benefits should be prohibited. Finally,
Treasury and the IRS request comments on challenges employers encounter in
transitioning from paper transit passes or vouchers to electronic media that qualify as
vouchers or transit passes, or from cash reimbursement arrangements to electronic
media qualifying as transit passes or vouchers.
1. Electronic Media other than those described in Revenue Ruling 2006-57

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Revenue Ruling 2006-57 distinguishes the tax-treatment of terminal-restricted
debit cards and MCC-restricted debit cards under the facts described in the situations.
Specifically, the revenue ruling concludes that under the facts described in those
situations. a terminal-restricted debit card qualifies as a transit pass under section 132(f)
of the Code, while MCC-restricted debit cards do not qualify as transit passes because
the holders may be able use the MCC-restricted debit cards to purchase items other
than fare media. Treasury and the IRS have become aware of technological advances
that may enable providers of MCC-restricted debit cards to limit the use of these cards
to such an extent that it is almost, if not entirely, impossible to use the cards to purchase
any items other than fare media. In light of these technological advances, Treasury and
the IRS request comments on circumstances in which the use of MCC-restricted debit
cards is sufficiently circumscribed so that the cards qualify as transit passes or vouchers
providing transit benefits.
2. Definition of “readily available”
As discussed in the Background section, employers may use bona fide cash
reimbursement arrangements to provide employees with qualified transportation fringe
benefits only if vouchers or similar items are not readily available. The regulations state
that a voucher or similar item is not readily available if the entity providing the item
imposes restrictions that effectively prevent employers from obtaining vouchers
appropriate for distribution to employees. Revenue Ruling 2006-57 did not provide
guidance on what constitutes “readily available” in the context of terminal-restricted
debit cards, but the revenue ruling indicated that this issue will be addressed in future
guidance. The IRS requests comments on whether terminal-restricted debit cards are

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widely used, the availability of terminal-restricted debit cards in areas where paper
vouchers are no longer accepted by the local transit system, the ease with which
employers can acquire terminal-restricted debit cards to distribute transit benefits, and
any issues that employers and/or employees are encountering in connection with the
use of such cards.
3. Transitions from paper transit system vouchers to electronic vouchers or
to bona fide cash reimbursement systems.
Treasury and the IRS have become aware of issues arising in locations in which
transit systems no longer accept paper transit passes. Some benefit providers in these
locations that previously provided transit benefits via paper vouchers now plan to
provide benefits via electronic media that qualify as transit passes or vouchers, or via
bona fide cash reimbursement arrangements because no other transit passes or
vouchers are readily available for use on the transit systems. The IRS requests
administrators of, and participants in, such arrangements to provide comments
concerning any issues that have arisen related to the transition from paper vouchers to
other methodologies for providing transportation fringe benefits. For example,
employers transitioning from paper transit passes to cash reimbursement arrangements
may have questions regarding how to comply with the requirement in section 1.132-9,
Q/A-16 that employees incur expenses prior to the date employers make payments as
they move from an in-kind arrangement, which does not have such a requirement
regarding the timing of expenses, to a cash reimbursement arrangement.
4. Application of bona fide reimbursement arrangement requirements in
context of electronic media.

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Treasury and the IRS also requests comments concerning the circumstances
under which the provision of transit benefits via electronic media constitutes a bona fide
reimbursement arrangement. For example, the IRS has become aware of
arrangements under which employers load funds onto electronic media at the beginning
of each month after receiving an employee certification of expected transit expenses
and then utilize one or both of the following: (1) true-up mechanisms under which
employers periodically review statements detailing employees’ transactions and require
employees to repay the costs of any “unauthorized” transactions, or (2) sweep-away
mechanisms under which employers delete any unused amounts from employees’
electronic media at the end of each month. The IRS requests comments concerning
whether arrangements under which employers credit employees’ electronic media with
amounts before the employees actually incur transit expenses may qualify as bona fide
cash reimbursement arrangements through use of one or both of these safeguards and
if the employee provides reasonable substantiation of the expenses incurred within the
meaning of Section 1.132-9, Q/A-16(c). The IRS also requests comments concerning
any other similar safeguards that should enable such up-front crediting of employees’
electronic media to qualify as bona fide cash reimbursement arrangements.

REQUEST FOR COMMENTS
The IRS requests comments on the issues described above. Comments should
be submitted in writing on or before August 27, 2012. All Comments will be available for
public inspection and copying. Comments may be submitted in one of three ways:

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1. By mail to CC:PA:LPD:PR (Notice 2012-38), Room 5203, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
2. Electronically to Notice.Comments@irscounsel.treas.gov. Please include “Notice
2012-38” in the subject line of any electronic communications.
3. By hand-delivery Monday through Friday between the hours of 8 a.m. and 4 p.m. to
CC:PA:LPD:PR (Notice 2012-38), Courier's Desk, Internal Revenue Service, 1111
Constitution Ave., NW, Washington, DC 20224.

DRAFTING INFORMATION
The principal author of this announcement is Syd Gernstein of the Employment
Tax 2, Tax Exempt and Government Entities Division. For further information regarding
this announcement, contact Syd Gernstein or Jean Casey at (202) 622-6040 (not a toll-
free call).