[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.132-4]

[Page 562-565]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.132-4  Line of business limitation.

    (a) In general--(1) Applicability--(i) General rule. A no-
additional-cost service or a qualified employee discount provided to an 
employee is only available with respect to property or services that are 
offered for sale to customers in the ordinary course of the same line of 
business in which the employee receiving the property or service 
performs substantial services. Thus, an employee who does not perform 
substantial services in a particular line of business of the employer 
may not exclude from income under section 132 (a)(1) or (a)(2) the value 
of services or employee discounts received on property or services in 
that line of business. For rules that relax the line of business 
requirement, see paragraphs (b) through (g) of this section.
    (ii) Property and services sold to employees rather than customers. 
Because the property or services must be offered for sale to customers 
in the ordinary course of the same line of business in which the 
employee performs substantial services, the line of business limitation 
is not satisfied if the employer's products or services are sold 
primarily to employees of the employer, rather than to customers. Thus, 
for example, an employer in the banking line of business is not 
considered in the variety store line of business if the employer 
establishes an employee store that offers variety store items for sale 
to the employer's employees. See Sec. 1.132-7 for rules relating to 
employer-operated eating facilities, and see Sec. 1.132-1(e) for rules 
relating to employer-operated on-premises athletic facilities.
    (iii) Performance of substantial services in more than one line of 
business. An employee who performs services in more than one of the 
employer's lines of business may only exclude no-additional-cost 
services and qualified employee discounts in the lines of business in 
which the employee performs substantial services.
    (iv) Performance of services that directly benefit more than one 
line of business--(A) In general. An employee who performs substantial 
services that directly benefit more than one line of business of an 
employer is treated as performing substantial services in all such line 
of business. For example, an employee who maintains accounting records 
for an employer's three lines of business may receive qualified employee 
discounts in all three lines of business. Similarly, if an employee of a

[[Page 563]]

minor line of business of an employer that is significantly interrelated 
with a major line of business of the employer performs substantial 
services that directly benefit both the major and the minor lines of 
business, the employee is treated as performing substantial services for 
both the major and the minor lines of business.
    (B) Examples. The rules provided in this paragraph (a)(1)(iv) are 
illustrated by the following examples:

    Example (1). Assume that employees of units of an employer provide 
repair or financing services, or sell by catalog, with respect to retail 
merchandise sold by the employer. Such employees may be considered to 
perform substantial services for the retail merchandise line of business 
under paragraph (a)(1)(iv)(A) of this section.
    Example (2). Assume that an employer operates a hospital and a 
laundry service. Assume further that some of the gross receipts of the 
laundry service line of business are from laundry services sold to 
customers other than the hospital employer. Only the employees of the 
laundry service who perform substantial services which directly benefit 
the hospital line of business (through the provision of laundry services 
to the hospital) will be treated as performing substantial services for 
the hospital line of business. Other employees of the laundry service 
line of business will not be treated as employees of the hospital line 
of business.
    Example (3). Assume the same facts as in example (2), except that 
the employer also operates a chain of dry cleaning stores. Employees who 
perform substantial services which directly benefit the dry cleaning 
stores but who do not perform substantial services that directly benefit 
the hospital line of business will not be treated as performing 
substantial services for the hospital line of business.

    (2) Definition--(i) In general. An employer's line of business is 
determined by reference to the Enterprise Standard Industrial 
Classification Manual (ESIC Manual) prepared by the Statistical Policy 
Division of the U.S. Office of Management and Budget. An employer is 
considered to have more than one line of business if the employer offers 
for sale to customers property or services in more than one two-digit 
code classification referred to in the ESIC Manual.
    (ii) Examples. Examples of two-digit classifications are general 
retail merchandise stores; hotels and other lodging places; auto repair, 
services, and garages; and food stores.
    (3) Aggregation of two-digit classifications. If, pursuant to 
paragraph (a)(2) of this section, an employer has more than one line of 
business, such lines of business will be treated as a single line of 
business where and to the extent that one or more of the following 
aggregation rules apply:
    (i) If it is uncommon in the industry of the employer for any of the 
separate lines of business of the employer to be operated without the 
others, the separate lines of business are treated as one line of 
business.
    (ii) If it is common for a substantial number of employees (other 
than those employees who work at the headquarters or main office of the 
employer) to perform substantial services for more than one line of 
business of the employer, so that determination of which employees 
perform substantial services for which line or lines of business would 
be difficult, then the separate lines of business of the employer in 
which such employees perform substantial services are treated as one 
line of business. For example, assume that an employer operates a 
delicatessen with an attached service counter at which food is sold for 
consumption on the premises. Assume further that most but not all 
employees work both at the delicatessen and at the service counter. 
Under the aggregation rule of this paragraph (a)(3)(ii), the 
delicatessen and the service counter are treated as one line of 
business.
    (iii) If the retail operations of an employer that are located on 
the same premises are in separate lines of business but would be 
considered to be within one line of business under paragraph (a)(2) of 
this section if the merchandise offered for sale in such lines of 
business were offered for sale at a department store, then the 
operations are treated as one line of business. For example, assume that 
on the same premises an employer sells both women's apparel and jewelry. 
Because, if sold together at a department store, the operations would be 
part of the same line of business, the operations are treated as one 
line of business.

[[Page 564]]

    (b) Grandfather rule for certain retail stores--(1) In general. The 
line of business limitation may be relaxed under the special grandfather 
rule of this paragraph (b). Under this special grandfather rule, if--
    (i) On October 5, 1983, at least 85 percent of the employees of one 
member of an affiliated group (as defined in section 1504 without regard 
to subsections (b)(2) and (b)(4) thereof) (``first member'') were 
entitled to receive employee discounts at retail department stores 
operated by another member of the affiliated group (``second member''), 
and
    (ii) More than 50 percent of the previous year's sales of the 
affiliated group are attributable to the operation of retail department 
stores, then, for purposes of the exclusion from gross income of a 
qualified employee discount, the first member is treated as engaged in 
the same line of business as the second member (the opeator of the 
retail department stores). Therefore, employees of the first member of 
the affiliated group may exclude from income qualified employee 
discounts received at the retail department stores operated by the 
second member. However, employees of the second member of the affiliated 
group may not under this paragraph (b)(1) exclude any discounts received 
on property or services offered for sale to customers by the first 
member of the affiliated group.
    (2) Taxable year of affiliated group. If not all of the members of 
an affiliated group have the same taxable year, the affiliated group 
must designate the 12-month period to be used in determining the 
``previous year's sales'' (as referred to in the grandfather rule of 
this paragraph (b)). The 12-month period designated, however, must be 
used on a consistent basis.
    (3) Definition of ``sales.'' For purposes of this paragraph (b), the 
term ``sales'' means the gross receipts of an affiliated group, based 
upon the accounting methods used by its members.
    (4) Retired and disabled employees. For purposes of this paragraph 
(b), an employee includes any individual who was, or whose spouse was, 
formerly employed by the first member of an affiliated group and who 
separated from service with the member by reason of retirement or 
disability if the second member of the group provided employee discounts 
to that individual on October 5, 1983.
    (5) Increase of employee discount. If, after October 5, 1983, the 
employee discount described in this paragraph (b) is increased, the 
grandfather rule of this paragraph (b) does not apply to the amount of 
the increase. For example, if on January 1, 1989, the employee discount 
is increased from 10 percent to 15 percent, the grandfather rule will 
not apply to the additional 5 percent discount.
    (c) Grandfather rule for telephone service provided to 
predivestiture retirees. All entities subject to the modified final 
judgment (as defined in section 559(c)(5) of the Tax Reform Act of 1984) 
shall be treated as a single employer engaged in the same line of 
business for purposes of determining whether telephone service provided 
to certain employees is a no-additional-cost service. The preceding 
sentence applies only in the case of an employee who by reason of 
retirement or disability separated before January 1, 1984, from the 
service of an entity subject to the modified final judgment. This 
paragraph (c) only applies to services provided to such employees as of 
January 1, 1984. For a special no-additional-cost service rule relating 
to such employees and such services, see Sec. 1.132-2(a)(6).
    (d) Special rule for certain affiliates of commercial airlines--(1) 
General rule. If a qualified affiliate is a member of an airline 
affiliated group and employees of the qualified affiliate who are 
directly engaged in providing airline-related services are entitled to 
no-additional-cost service with respect to air transportation provided 
by such other member, then, for purposes of applying Sec. 1.132-2 
(relating to no-additional-cost services with respect to such air 
transportation), such qualified affiliate shall be treated as engaged in 
the same line of business as such other member.
    (2) ``Airline affiliated group'' defined. An ``airline affiliated 
group'' is an affiliated group (as defined in section 1504 (a)) one of 
whose members operates a commercial airline that provides air 
transportation to customers on a per-seat basis.
    (3) ``Qualified affiliate'' defined. A ``qualified affiliate'' is 
any corporation

[[Page 565]]

that is predominantly engaged in providing airline-related services. The 
term ``airline-related services'' means any of the following services 
provided in connection with air transportation:
    (i) Catering,
    (ii) Baggage handling,
    (iii) Ticketing and reservations,
    (iv) Flight planning and weather analysis, and
    (v) Restaurants and gift shops located at an airport.
    (e) Grandfather rule for affiliated groups operating airlines. The 
line of business limitation may be relaxed under the special grandfather 
rule of this paragraph (e). Under this special grandfather rule, if, as 
of September 12, 1984--
    (1) An individual--
    (i) Was an employee (within the meaning of Sec. 1.132-1 (b)) of one 
member of an affiliated group (as defined in section 1504(a)) (``first 
corporation''), and
    (ii) Was eligible for no-additional-cost services in the form of air 
transportation provided by another member of such affiliated group 
(``second corporation''),
    (2) At least 50 percent of the individuals performing services for 
the first corporation were, or had been employees of, or had previously 
performed services for, the second corporation, and
    (3) The primary business of the affiliated group was air 
transportation of passengers, then, for purposes of applying sections 
132(a) (1) and (2), with respect to no-additional-cost services and 
qualified employee discounts provided after December 31, 1984, for that 
individual by the second corporation, the first corporation is treated 
as engaged in the same air transporation line of business as the second 
corporation. For purposes of the preceding sentence, an employee of the 
second corporation who is performing services for the first corporation 
is also treated as an employee of the first corporation.
    (f) Special rule for qualified air transportation organizations. A 
qualified air transportation organization is treated as engaged in the 
line of business of providing air transportation with respect to any 
individual who performs services for the organization if those services 
are peformed primarily for persons engaged in providing air 
transportation, and are of a kind which (if performed on September 12, 
1984) would qualify the individual for no-additional-cost services in 
the form of air transportation. The term ``qualified air transportation 
organization'' means any organization--
    (1) If such organization (or a predecessor) was in existence on 
September 12, 1984,
    (2) If such organization is--
    (i) A tax-exempt organization under section(c)(6) whose membership 
is limited to entities engaged in the transportation by air of 
individuals or property for compensation or hire, or
    (ii) Is a corporation all the stock of which is owned entirely by 
entities described in paragraph (f)(2)(i) of this section, and
    (3) If such organization is operated in furtherance of the 
activities of its members or owners.
    (g) Relaxation of line of business requirement. The line of business 
requirement may be relaxed under an elective grandfather rule provided 
in section 4977. For rules relating to the section 4977 election, see 
Sec. 54.4977-1T.
    (h) Line of business requirement does not expand benefits eligible 
for exclusion. The line of business requirement limits the benefits 
eligible for the no-additional-cost service and qualified employee 
discount exclusions to property or services provided by an employer to 
its customers in the ordinary course of the line of business of the 
employer in which the employee performs substantial services. The 
requirement is intended to ensure that employers do not offer, on a tax-
free or reduced basis, property or services to employees that are not 
offered to the employer's customers, even if the property or services 
offered to the customers and the employees are within the same line of 
business (as defined in this section).

[T.D. 8256, 54 FR 28606, July 6, 1989]