Comments Concerning Proposed Regulation on Qualified Transportation
Fringe Benefits under Internal Revenue Code Section 132(F)

III.  Substantiation

Another issue that is raised by the Proposed Regulation is the waiver of any substantiation requirement where the voucher system is used. Under Q/A-16(d), the Proposed Regulation addresses the proper methods for establishing a bona fide reimbursement arrangement. However, under Q/A-18, the Proposed Regulation states that "[t]here are no substantiation requirements if the employer distributes transit passes." We believe that the voucher system has serious potential for abuse. For example, if an employee receiving qualified transit passes from a salary reduction plan receives the maximum monthly benefit of $65, he receives a $65 bearer instrument with respect to which he has paid no federal income or employment taxes. The same employee is also entitled to a full benefit for qualified parking. If the employee drives his car to work and parks everyday, thus, not needing the transit pass, the employee could regularly sell the transit voucher at a discount ($63) to another individual who uses mass transit. In this case, the employee has saved income and employment taxes on $65/month (and is only out the $2 discount), the employer has saved the employer portion of employment taxes, and the person on the street to whom the transit pass has been sold has received a discount that will be significant if he is able to repeat the transaction each month. Consequently, the only loser is the federal fisc. Moreover, there is no assurance that there has been any increase in mass transit usage, since the bearer instrument could be negotiated to any person on the street in need of a transit pass. Thus, we believe that the Proposed Regulation has created an incentive to employees to purchase mass transit vouchers on a pre-tax basis and establish a secondary market selling those vouchers at a discount. Because there is no enforcement mechanism to police this activity, tax dollars are lost forever.

In contrast, the cash reimbursement method established in Q/A-16(d) provides a method of substantiation giving the government greater assurance that there is less of a chance for abuse. Even though the Proposed Regulation provides that an employer may impose greater substantiation requirements if the employer distributes vouchers, the likelihood that any employer will want to increase its administrative burden is remote. We believe that the cash reimbursement system provides a safer method for the government to ensure that the qualified transportation fringe benefits rules are not abused. Accordingly, we commend the Treasury and Service for not imposing additional requirements beyond those statutorily necessary on the availability of the cash reimbursement method, but question whether additional safeguards may be appropriate in connection with the distribution of vouchers.