Have you considered a leave-based charitable donation program?

A growing number of companies are setting up programs whereby employees can forgo vacation, sick or personal leave time in exchange for employer contributions to specific charitable organizations. Donating unused leave to charitable organizations became increasingly popular after the terrorist attacks on September 11, 2001. Is the leave that employers donate for their employees-which would have been part of the employees' income if not donated-taxable?

Under guidance issued by the IRS after September 11, 2001, the donation was generally not taxable. If the organization to which the money-in-lieu-of-leave was donated fell within the category of charitable organizations recognized by the Internal Revenue Service, it was not considered the income of the employee who requested the donation.

The IRS again issued a similar guidance after Hurricane Katrina devastated areas of Alabama, Mississippi, and Louisiana in August, 2005. Employees can donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for Hurricane Katrina victims. Payments must be made before January 1, 2007. Employees do not have to include the donated leave in their income and employers will be permitted to deduct the amount of the cash payment.

The guidance provides that:

• the charitable organization must be one described in the Internal Revenue Code at §170(c);

• participating employees may not claim a charitable contribution deduction (under Code Sec. 170) on their personal income tax return; and

• employer contributions are deductible under Code Sec. 162.