by Edgar Mosquera Jr.

John, the executive of XYZ Corporation receives a $150,000 tax bill in the mail.  He has been receiving security services from XYZ Corporation. The IRS audited his taxes and found that he had not paid taxes for those security services for the last several years.  If the executive is receiving these security services and never pays out of his own pocket, can the IRS impute the value of those services as gross income to the executive? Yes, the IRS can tax the executive based on the value of the services he is receiving. Imagine if you will an executive using years of security service and then finding out that he will have to pay taxes based on the value of the security services he received.

Does this issue ever come up?  Look at former Senator Tom Daschle who was nominated to President Obama cabinet.  Only to withdraw his nomination due to several tax issues.  One in particular was that Tom Daschle did not pay taxes on a car and driver from 2005-2007 that was provided by a private donor. This section may not have applied to Mr. Daschle, but he could have been saved embarrassment and money, if only the company providing him services had let him know that he may be required to pay taxes on those services.

Your executive can avoid being taxed for these services by meeting certain requirements set by the IRS.  As security professionals it is important to know these requirements, which allow our principles to exclude employer-provided transportation for security concerns from gross income.Not meeting these requirements can have detrimental consequences causing your executive to be liable for past due taxes.

The IRS defines gross income as all income from whatever source derived”.As gross income it may be subject to a tax.  Therefore, the security services, which the executive is receiving at no cost from his company, can be regarded as income and may by subject to tax.

However, gross income does not include the value of a working condition fringe.  If certain requirements are met, the value of the security services will not be taxable to the executive under the working condition fringe.  Therefore, the security services will be excludable from the executive’s gross income under § 1.132-5.


Section 1.132-5(m) covers the working condition fringe regarding employer-provided transportation for security concernsand sets forth the requirements necessary for the executive to exclude his security services from gross income.Regulation § 1.132-5(m)(1) provides that if a bonafide business-oriented security concern exists, and an overall security program exists, then the employee may exclude the excess of the value of the transportation provided by the employer over the amount that the employee would have paid for the same mode of transportation absent the bona fide security concern.

The above paragraph can be broken down into three sections.  First, a bonafide business-oriented security concerns exists.  Second, an overall security program exists.  Third, the employee may exclude the excess of the value of the transportation provided by the employer over the amount that the employee would have paid for the same mode of transportation absent a bonafide security concern.


A bonafide business oriented security concern exists.  Bonafide is latin for “good faith”, so it must be a genuine or authentic business-oriented security concern.Next, it must be a business-oriented security concern.  Therefore, the security concern must be business related.  An example of a business-oriented security concern would be an employee receiving kidnapping threats from a drug cartel because his company is the leading pharmaceutical distributor in the area.  However, if that same employee were to receive kidnapping threats solely because he owes money to the drug cartel for drugs he had purchased in the past, his security would not qualify for the exclusion.

Also, the bonafide business-oriented security concern must be specific in order for the IRS to allow it as an exclusion.  A generalized concern for an employee’s safety is not a bonafide business-oriented security concern.  For example, just because an executive is assassinated in Japan does not necessarily mean that an executive in chicago is in any danger.

The IRS list several examples of a specific business-oriented security concern such as terrorist activity, death threats, threat of kidnapping, and threat of serious bodily harm.  However, this list is not all-inclusive.  The threat of death, kidnapping, or serious bodily harm must be imposed on the employee or a similarly situated employee because of the employee’s status as an employee of the employer.  Once again, if these threats came about because of some personal matter, such as the executive dating his neighbor’s wife, it will not be excludable because it has to be because of his status as an employee of the company.


Second, an overall security program must exist.  Under § 1.132-5(m)(ii) an overall security program exists if the employer can establish that security is provided to the employee on a 24 hour basis.  “An overall security program must include the provision of a bodyguard/chauffeur who is trained in evasive driving techniques; an automobile specially equipped for security; guards, metal detectors, alarms, or similar methods of controlling access to the employee’s workplace and residence; and, in appropriate cases, flights on the employer’s aircraft for business and personal reasons.

However, for various reasons the employee or the company may not want or need security on a 24 basis.  Under § 1.132-5(m)(2)(iv), an overall security program is deemed to exist if the following conditions are satisfied:

  1. A security study is performed with respect to the employer and the employee (or a similarly situated employee of the employer) by an independent security consultant.  Obviously the company that provides the security study (risk assessment) cannot also do the physical security because he may then be tempted to add much more security than is necessary;
  2. The security study is based on an objective assessment of all facts and circumstances;
  3. The recommendation of the security study is that an overall security program (asdefined in paragraph (m)(2)(iii) of this section) is not necessary and therecommendation is reasonable under the circumstances;
  4. And the employer applies the specific security recommendations contained in thesecurity study to the employee on a consistent basis.  So if the security study recommends that the employee be driven to work everyday of the week, he must be driven everyday of the week to work or else not driven at all.

Therefore, if these conditions are met, 24 hour security will not be necessary. Please note that the employer must periodically evaluate the situation for purposes of determining whether the bona fide business-oriented security concern still exists.


Third, the employee may exclude the excess of the value of the transportation provided by the employer over the amount that the employee would have paid for the same mode of transportation absent the bonafide security concern.Please note that the bodyguard/chauffer (security driver) must be trained in evasive driving techniques for the exclusion to apply.Although bodyguards and security drivers apply to this section, an example involving a car will be used to clarify this particular section.  John currently drives a sedan valued at $50,000.  He currently has no security concerns.  This would be his mode of transportation absent the bonafide security concern.  Now his employer, XYZ Corp. decides that he needs security due to recent death threats.  XYZ Corp decides to put bulletproof doors and windows on John’s BMW along with a new car alarm.  The value of the upgrades is $30,000.   John can potentially exclude the $30,000 from his gross income.  The $30,000 is the excess of the value of the transportation provided by the employer over the $50,000 that he was originally paying for the same mode of transportation (sedan) when he had no security concerns.In short the extra expense of security specific costs paid by the company are not a tax liability to the employee.

As seen above § 1.132-5(m) regarding employer-provided transportation for security concerns can be complex with various pitfalls along the way.  So make sure you have reviewed the code and are clear on the requirements. Here is a final example provided within the code which takes into account most of the elements discussed in section 1.132-5(m):

Ex. Assume that Mr. Jones is the chief executive officer of, a multinational corporation. Assume further that there have been kidnapping attempts and other terrorist activities in the foreign countries in which Mr. Jones performs services and that at least some of such activities have been directed against Mr. Jones or similarly situated employees. In response to these activities, the multinational corporation provides Mr. Jones with an overall security program, including an alarm system at his home and bodyguards at his workplace, a bodyguard/chauffeur, and a vehicle specially designed for security during Mr. Jones overseas travels. In addition, assume that company requires Mr. Jones to travel in the corporate airplane for business and personal trips taken to, from, and within these foreign countries. Also, assume that but for bona fide business-oriented security concerns, no part of the overall security program would have been provided to him. Mr. Jones may exclude as a working condition fringe the value of the special security features of the automobile and the value attributable to the bodyguards and the bodyguard/chauffeur. Mr. Jones may also exclude the excess, if any, of the value of the flights over the amount A would have paid for the same mode of transportation but for the security concerns. As an alternative to the preceding sentence, Mr. Jones may use the working condition safe harbor described in paragraph (m)(4) of this section and exclude as a working condition fringe the excess, if any, of the value of personal flights in the corporate airplane over the safe harbor airfare determined under the method described in paragraph (m)(4) of this section. If this alternative is used, Mr. Jones must include in income the value of the availability of the vehicle for personal use and the value of the safe harbor.

As this example shows, if the requirements listed under § 1.132-5(m) are met, the value ofspecial security features on an automobile, the bodyguards, and the bodyguard/chauffeurs are excludible from gross incomefor executives.  However, it is important to closely read and follow the rules of this section because one mistake can be costly.


Treas. Reg. §1.132-5(a) – “working condition fringe” is any property or service provided to an employee of an employer to the extent that, if the employee paid for the property or service, the amount paid would be allowable as a deduction.

Security Related Transportation. IRS. Mar. 2010. Dec. 15, 2010,,id=134943,00.html.

Treas. Reg. §1.132-5(m)(2)(A)

Treas. Reg. §1.132-5(m)(iii)

Treas. Reg. §1.132-5(m)(8). Example(2)