Docstoc

CITY OF RANCHO PALOS VERDES

Document Sample
CITY OF RANCHO PALOS VERDES Powered By Docstoc
					                                                 ,

                  CITY OF                        RANCHO PALOS VERDES
MEMORANDUM
TO:                  HONORABLE MAYOR AND MEMBERS OF THE CITY
                     COUNCil                                                          ~
FROM:                DENNIS MCLEAN, DIRECTOR OF FINANCE AND
                     INFORMATION TECHNOLOGY

DATE:                MAY 19, 2009

SUBJECT:             ESTABLISHMENT OF A WRITTEN POLICY FOR USE
                     OF CITY OWNED ELECTRONIC EQUIPMENT

REVIEWED:                   CAROLYN lEHR, CITY MANAGER                     09--
RECOMMENDATION:

   1) Direct staff to develop a written policy for City-owned electronic equipment
      assigned to employees and City Council members, as well as equipment
      allowances paid to employees for employee-owned electronic equipment; and
   2) If approved by the City Council, direct Staff to prepare a written user policy and a
      revision of the salary range Resolution to include electronic equipment allowance
      to certain employees.

EXECUTIVE SUMMARY:

Author's Note: The Executive Summary is a condensed overview of the Staff Report.
Therefore, some of its content is repeated throughout the body of the Report.

Prior to inclusion in the FY07-08 budget, the City Council discussed the merits of the use of
laptops and personal digital assistants ("PDA's") to provide remote access and improve
communication. Several City-owned cell phones are already assigned to employees that
work in the field (Le. building inspectors and maintenance workers). Staff expects to
incorporate guidelines for the use of cell phones, PDA's and laptops (collectively "electronic
equipment") into written policies, based upon the Council's direction regarding several
alternatives discussed in this report. No PDA's or laptops have been distributed to any
employees or Council members at this time. Its Staff understanding that no Council
member or employee will be issued a laptop at this time.

Because of the tax reporting complexities that result from the issuance of electronic


                                                                                         12-1
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 2 of 9

equipment to employees and Council members, Staff has retained the tax and consulting
professionals of Diehl Evans & Company, LLP to provide an opinion about appropriate tax
reporting, including alternatives available for reporting procedures. The Internal Revenue
Service ("IRS") has established written procedures for use of "listed property" by
government employees, including City-owned electronic equipment.

Generally, the City can adopt either an "accountable plan" or "non-accountable plan". An
accountable plan requires extensive documentation from the person who is in possession
of the City-owned device to demonstrate the extent that the device is used for non-City
business. The documentation that is submitted must be audited by the City to assure
compliance with the IRS regulations. On the other hand, a non-accountable plan does not
require the documentation and audit because it is assumed that there will be some
personal use of the device and, therefore, that the cost of the device will be added as
income to the W-2 of the person to whom the device has been given.

Several noteworthy excerpts from Diehl Evan's Opinion Letter, dated April 20, 2009 follow:

      "Cell Phones, PDAs, laptop computers and similar electronic devices ("Electronic
      Equipment") are classified under IRC Regulation 280F(d)(4)(A)(iv) as "Listed
      Property" and, as such, are subject to strict substantiation requirements. The use of
      Electronic Equipment is also subject to strict substantiation rules under IRC Sections
      62(c) and 274, and if these rules are not met, employees must include as a taxable
      fringe benefit the fair value of the use of the Electronic Equipment.

      More specifically, under current Internal Revenue Code rules and regulations and
      under current IRS enforcement policies, in order for an employee to exclude from
      taxable income the fair value of employer-provided Electric Equipment, the employer
      must:

          ./ Require that employees report the business and personal usage of
             Electronic Equipment through an "Accountable Expense Reimbursement
             Plan" (commonly referred to as merely an "accountable plan"),
          ./ Require that the employees keep records to distinguish between business
             and personal use, and
          ./ Have some form of "audit procedures" in place to verify that employee's are
             accounting for business and personal use. (Caveat: The required "audit
             procedures" are not set forth in the Internal Revenue Code or the
             regulations. Generally, IRS agents determine the extent of acceptable "audit
             procedures" when they conduct a field audit.)"

Staff surveyed California cities and other agencies using the Listserve's for the Municipal
Information System Association of California ("MISAC") and the California Society of
Municipal Finance Officers ("CSMFO") with the following questions:

   1) Does your City maintain an accountable plan, including recordkeeping, notation
      of personal v. city-business use and auditing?
   2) If not, do you include the value of the cell phone or PDA in the employee's
      wages?



                                                                                               12-2
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 3 of 9

A summary of the 32 replies received follows:

   if Two (2) cities maintain accountable plans with mandatory recordkeeping and audits;
      whereby no personal use is allowed and no taxable income is added to the W -2 of
      users;
   if Twenty-two (22) cities maintain non-accountable plans; whereby taxable income is
      added to the W -2 of users;
   if Eight (8) cities do not appear to maintain any accountability and no taxable income
      is added to the W -2 of users.

Staff recommends the adoption of a non-accountable plan for the following reasons:

   >   Based upon inquiries with wireless users as well as the City's wireless consultant,
       AT&T, Verizon and Sprint do not provide detailed records with monthly wireless
       service bills, including the call initiator and recipient information for text messages
       and the sender and recipient details for emails. Obtaining detailed records,
       including emails, generally requires a formal request, and such records may not be
       available because of the retention policies of each service provider. Therefore, the
       detailed records may not be easily available to prepare monthly usage reports that
       separate personal from City business use in accordance with the requirements of an
       accountable plan;
   >   A non-accountable plan would minimize HR, payroll and accounting Staff time and
       cost; and
   >   The adoption of a non-accountable plan, rather than an accountable plan, will
       minimize the risk of income tax audit adjustments to the City, Council members and
       employees.

If the City adopts a non-accountable plan for electronic equipment assigned to certain
employees and/or Council members, the fair market value of the equipment, as well as the
service, would be subject to payroll and income taxes to be paid by the employee or
Council Member. Diehl Evans & Company, LLP, has prepared estimates of the amount
that would be subject to income taxes, as well as the resulting tax cost borne by the
employee and/or Council member resulting as a part of their Tax Opinion letter. Based
upon its estimates, Diehl Evans & Company LLP has determined that the tax cost borne by
each employee and/or Council member would not exceed $19 and $22 per bi-weekly pay
period for cell phones and PDA's respectively. Staff recommends a one-time increase of
$19 bi-weekly to the 5 employees who already have been provided a City-owned cell
phone, as well as any employee and/or Council member that is issued a PDA.

Staff recommends that the City establish a policy for electronic equipment allowances as
follows:

City-owned cell phones                     $19 per pay period (not paid, but included in
                                           taxable wages)
City-owned PDA's                           $22 per pay period (not paid, but included in
                                           taxable wages)



                                                                                         12-3
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 4 of9

City business use of personal PDA's         $25 per pay period (included in paycheck and
                                            included in taxable wages)

Staff does not recommend payment of an allowance for City business use of personal cell
phones at this time. Most consumer plans offer a sufficient pool of block air time with a flat
fee; therefore, employees probably do not experience additional cost for the City business
use with their personal cell phones.

The provisions of California AS1234 prohibit payment of an allowance to elected officials.
Therefore, the City cannot pay City Council members a flat allowance for City business use
of personal electronic equipment. Accordingly, In the event the Council elects to use a
PDA for City business use, either a personal PDA could be used (with no allowance paid to
the Council member), or the City would have to issue a PDA for use by the Council
member. If the City adopts recommendation provided by Staff, $22 per pay period would
be included as taxable wages for PDA's.

In a separate report tonight, Staff is recommending the establishment of a Council salary of
that would be effective on or about December 1,2009. If both the establishment of a wage
and a PDA is issued to a Council member is approved by the City Council, the inclusion of
the additional $22 taxable value of the PDA would be effective at such time. Until then, the
$22 taxable value of the PDA would be added as Miscellaneous Income and reported on
US Form 1099.

BACKGROUND AND DISCUSSION:

Anyone can purchase a PDA with minimal initial cost. The monthly cost for personal
wireless service for a PDA appears to range between $50 -100 per user, generally at the
lower end of the range. Several City employees have acquired their own cell phones
and/or PDA's, which they use for both personal and City business. The City does not
currently reimburse the employees for City use of their personally owned cell phones and/or
PDA's.

User Policy

With direction from the City Council regarding the adoption of an accountable plan versus a
non-accountable plan, Staff will develop a written user policy regarding the use of City-
owned electronic equipment. The policy may include the following:

General Provisions

   ~     Assignment of City-owned electronic equipment to employees shall be authorized by
         the City Manager.
   );>   Assignment of City-owned electronic equipment to City Council members shall be
         authorized by the City Council.
   ~     Users shall abide by all federal, state and local laws while using electronic
         equipment.
   ~     Users shall sign a use agreement that includes the expectation that all records shall

                                                                                         12-4
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 5 of 9

         be provided to the City upon request, including pursuant to a public records request
         or discovery request in litigation.

For City-Owned Electronic Equipment:

   );> Except for emergencies and other essential de minimis use, personal use of
       electronic devices is prohibited.
   );> Employee users shall return electronic equipment to the City immediately upon
       termination, leave of absences, or any other separation event or upon request by
       the City Manager or the employee's Department Head.
   );> City Council users shall return electronic equipment to the City immediately upon
       leaving office or upon request by a vote of the City Council that the City is
       discontinuing providing these devices to Council members or that the
       Councilmember is not following the City's procedures.

For Personally Owned PDA's used for City Business:

   );>   In the event the City Manager authorizes the use of personally owned electronic
         equipment for City business, the Director of Finance & Information Technology, or
         designee, shall evaluate the device and approve if it is compatible with the City's
         network, especially for email use.

If an Accountable Plan is established:

   );> Users shall be required to provide a monthly written report evidencing personal v.
       city business use of electronic equipment and reimburse the City for the cost of
       personal use.
   );> Staff expects to develop the user policy for presentation to the City Council for
       approval in conjunction with the FY09-10 budget.

Record Reguest and Record Management Issues

The City has experienced a significant and steady increase of requests for public records,
including emails that would be transmitted using the proposed PDA devices. As the City
Council already knows, the continued use of email and text messaging by the public, Staff
and the Council has already complicated the City's reply to public record requests and has
significantly increased the time to prepare the records and responses.

Staff has made an inquiry with a wireless service consultant to assess current practices
regarding cell phone, text messaging and email record and billing practices. Sprint, Verizon
and AT&T appear to be the most widely used wireless service providers in the area. Based
upon inquiries with wireless users as well as the wireless consultant, AT&T, Verizon and
Sprint do not provide detailed records with monthly wireless service bills, including the call
initiator and recipient information for text messages and the sender and recipient details for
emails. Obtaining detailed records, including emails, generally requires a formal request
and is subject to the retention policies of each service provider. Therefore, the detailed
records may not be easily available to prepare monthly usage reports that separate

                                                                                         12-5
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 6 of 9

personal from City business use.

Prior to issuing electronic equipment to employees and/or Council members, Staff has
conducted inquiries regarding usage practices, especially email with personally owned
PDA's, with appropriate employees and all of the Council members. Based upon the
replies received from three Council members, it appears as though no Council member
uses a personal PDA for City business at this time. It also appears as though the
responding Council members separate and manage City business email traffic from
personal email with due care. Based upon discussions with employees using personal
PDA's for City business, Staff believes that emails transmitted appear to be separated and
managed with care.

Tax Reporting. Usage. Auditing and Payroll Issues

Because of the tax reporting complexities that result from the issuance of electronic
equipment to employees and Council members, Staff has retained the tax and consulting
professionals of Diehl Evans & Company, LLP to provide an opinion about appropriate tax
reporting, including alternatives. The Internal Revenue Service ("IRS") has established
written procedures for use of "listed property" by government employees, including City
owned electronic equipment. Generally, the City can adopt either an "accountable plan" or
"non-accountable plan".

Accountable Plan Alternative

If the provisions of an accountable plan are established and strictly followed (including
prohibition of non-personal use), the use is tax exempt. Unfortunately, the provisions of an
accountable plan include monthly reporting by the user (assuming the details are even
available), auditing by Staff, segregation of personal and City business usage and
reimbursement of personal use and administration of all equipment by Staff.

No published guidelines for the audit procedures required have been provided by the IRS.
Whether or not the reporting and auditing procedures are acceptable to the IRS would be
determined solely by IRS agents that might conduct a compliance audit of the City,
including such procedures. Thus, the taxability would be left for the sole judgment of an
IRS Agent, with only IRS field audit guidelines (if any) to follow. Based upon inquiries
made, text messaging and email traffic are not provided by service providers. This may
compromise the reporting and auditing procedures required by the IRS.

Because the City is considering the issuance of City-owned cell phones and/or PDA's to
certain employees and Council members (the "User") in accordance with an accountable
plan, Staff provided Diehl Evans with a Tax Opinion Letter, dated April 20, 2009, that
served to establish an outline of the process that could be established. The Memorandum
provided an overview of the process for usage reporting, especially separation of personal
and business usage, and Staff's audit of such reports in order to comply with the notice
established by Federal, State and Local Government Office of the IRS and exclude usage
from taxable income of the User. An overview of the process follows:



                                                                                        12-6
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 7 of9

   ~   "The service provider would provide the User with complete details of cell phone,
       text messaging and email activities sent and received each month (assuming such
       records can be provided). 8taff is continuing to ascertain whether text message and
       email activity details (including sender and recipient) can be provided by service
       providers.
   ~   The User would review the monthly activity report, separate the cost of personal v.
       business cell phone, text messages and email activity and prepare and sign a
       monthly report. The User would reimburse the City for the cost of personal activity.

   ~   A member of the Finance and Information Technology department would audit the
       report (at least quarterly), the attached detail provided by the service provider and
       the computation of the personal v. business cost of the usage of the device. Any
       confirmed discrepancies would require a request for an additional reimbursement to
       be made by the User."

Staff does not recommend the establishment of an accountable plan for the following
reasons:

   ~ Diehl Evans cannot express an opinion whether or not the proposed procedures
     outlined in the Memorandum written by Staff, especially the auditing procedures,
     would be satisfactory to comply with the provisions established because the IRS has
     not published any guidelines regarding the auditing procedures required;
   ~ Based upon inquiries with wireless users as well as the wireless consultant, AT&T,
     Verizon and Sprint do not provide detailed records with monthly wireless service
     bills, including the call initiator and recipient information for text messages and the
     sender and recipient details for emails. Obtaining detailed records, including emails,
     generally requires a formal request and is subject to the retention policies of each
     service provider. Therefore, the detailed records may not be easily available to
     prepare monthly usage reports that separate personal from City business use; and
   ~ Staff believes that it will take about one hour to prepare each monthly usage report.
     If 10 electronic equipment devices are issued, Staff estimates that it will take at least
     160 hours annually to prepare and audit usage reports.

Staff does not believe that the time required, in light ofthe uncertainty ofthe acceptability of
the reports by the IRS, warrants establishing an accountable plan. A conservative estimate
of the annual fully burdened internal cost to process and audit usage reports for cell phones
and PDA's (excluding the initial time and cost to establish the process) based upon the
assumption that 10 city-owned devices are issued follows:




                                                                                               12-7
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19,2009
Page 8 of 9

       Total estimated annual cost for accountina and auditina of usage reDorts:

       A - No. hours incurred to prepare monthly usage reports each year                             12
       B - No. Users                                                                                 10

       I - Total estimated no. hours to prepare usage reports each year (A x B)                                120

       C - No. hours to audit usage reports quaeterly by Finance & Information Technology staff       4
       0- No. Users                                                                                  10

       II - Total estimated no. hours to audit each monthly usage reports by Finance & Information
       Technology each year (C x D)                                                                             40

       III - Total estimated hours incurred for accounting and auditing of usage reports (I + II)              160
       IV - Estimated fully burdened rate                                                                 $    95

       I otal   estimated annual cost for accounting and auditing or usage reports (III x IV)             $ 15,149




Additional time would be required to establish written procedures for reporting and
auditing and the development of a policy for the use of City-owned devices.

Non-Accountable Plan Alternative - Recommended by Staff

The City already maintains a non-accountable plan for auto allowances that are provided
the City Manger and Directors for use of personal vehicles while conducting City business.
The City Council's approval of the monthly auto allowance of $150 has been included in the
salary range Resolution that is considered annually during the budget process. In
accordance with federal and state tax laws, the auto allowance is added to employees'
wages subject to both payroll and income tax.

As described in the Executive Summary, Staff recommends the adoption of a non-
accountable plan for the following reasons:

   ~   Based upon inquiries with wireless users as well as the wireless consultant, AT&T,
       Verizon and Sprint do not provide detailed records with monthly wireless service
       bills, including the call initiator and recipient information for text messages and the
       sender and recipient details for emails. Obtaining detailed records, including emails,
       generally requires a formal request and is subject to the retention policies of each
       service provider. Therefore, the detailed records may not be easily available to
       prepare monthly usage reports that separate personal from City business use in
       accordance with the requirements of an accountable plan;
   ~   A non-accountable plan would minimize HR, payroll and accounting Staff time and
       cost; and
   ~   The adoption of a non-accountable plan, rather than an accountable plan, will
       minimize the risk of payroll and income tax audit adjustments to the City, Council
       members and employees.

The continued use of personally owned PDA's by certain employees, rather than
purchasing a City-owned device, will avoid duplicate costs of devices, reduce the overall
cost of monthly service provider use charges and reduce the number of City-owned


                                                                                                                 12-8
ESTABLISHMENT OF A WRITTEN POLICY FOR USE OF CITY OWNED ELECTRONIC
EQUIPMENT
May 19, 2009
Page 9 of 9

electronic devices to be managed by staff.

Legislative Update

 The following excerpt from the Tax Opinion Letter issued by Diehl Evans & Company, LLP,
dated April 20, 2009, offers hope for relief of the reporting burden of cell phones:

                                 "Year 2009 Developments

   1. In January 2009, bills were again introduced in Congress to remove cell phones
      and similar electronic equipment from the "Listed Property" rules. Both the Senate
      Bill (S. 144) and the House Bill (H.R. 690) have the same title: "Modernize Our
      Bookkeeping in the Law for Employee's Cell Phone Act of 2009".

   2. Congress had not taken any final action on these bills through April 20, 2009."

While possibly providing relief to the recordkeeping and tax burdens for cell phones, no one
knows whether the legislation will extend to PDA's.

Initiatives by the League of California Cities

Staff contacted Teresa Acosta, Regional Manager and the City's liaison with the League of
California Cities and Kanat Tibet, the Legislative Analyst for the League assigned to the
City regarding Technology matters. After conducting research with other League staff, Mr.
Tibet reported that the League has not taken any action regarding the "Modernize Our
Bookkeeping in the Law for Employee's Cell Phone Act of 2009", or any other the proposed
federal legislation that could exempt electronic equipment from tax reporting. Mr. Tibet also
reported that the League has not provided any guidance to member cities regarding best
practices for use of electronic equipment.


FISCAL IMPACT:

As stated previously, the FY07-08 budget included a provision for eight (8) Blackberry
devices and seven (7) laptops in the IT Voice program budget. No laptops or PDA's have
been distributed to any to employees or Council members at this time. Regardless whether
the Council adopts any of the recommendations made by Staff, no fiscal impact is expected
on the FY08-09 budget. Any additional cost that may result from acquiring Blackberry
devices, laptops, one-time salary increases and allowances that may be paid employees or
Council members is expected to be fairly minimal.




                                                                                           12-9
             CITY OF RANCHO PALOS VERDES


TAX OPINION LETTER ON THE CiTY OF RANCHO PALOS VERDES'
        ELECTRONIC EQIDPMENT USAGE PROGRAM


                     APRIL 20, 2009




                                                         12-10
 r;,.. DIEHL, EVANS &: COMPANY, LLP'
 ~'                CERTIFIED PUBUC ACCOUNTANTS &: CONSULTANTS

                                                                                                  MICHAEL R. LUDlN, CPA
A PAR:I'NERSHIP INCLUDING ACCOUNTANCY CORPORATIONS                                                CRAIG W. SPRAKER, CPA
                                                                                                  NITlNP. PATI!E., CPA
                                                                                                  ROBERT J. CALLANAN. CPA
                                                                                                 ·PHlLIP H. HOLTKAMP, CPA
5 CORPORATE PARK, SUITE 100                                                                      *THOMAS M. PERwWSKI•.CPA
IRVINE, CALlFORNIA 92606-5165                                                                    "HARVEY J.. SCHROED:ER, CPA
(949) 399-0600 .·FAX (949) 399-0610                                                               KENNEm R. AMES, CPA
                                                                                                 *WILUAM C. PENTZ, ¢A
1¥WW,dieh1evans,com
                                                     April 20, 2009                              °A PROFESSIONAL OORPOllATIOIl




         Mr. Dennis McLean .
         Director of Finance & Information Technology
         City ofRancho Palos Verdes
         30940 Hawthorne Boulevard
         Rancho palos Verdes, CA 90275

         Re: Electronic Equipment Usage Program

         Dear Mr. McLean:

        The City of Ran.cho Palos Verdes (the City) currently provides approximately ten' City
        employees with cell phones. In the future, City officials may issue Personal' Digital
        Assistance Devices (PDAs) and/or laptop computers to City Council members and City
        employees. City-owned cell phones, PDAs and laptop computers are collectively referred
        to in this letter as ''Electronic Equipment". City officials are considering a new
        "Electronic Equipment Usage Program" (the Program), whereby the annual salaries of
        City ,officials and employees using'this Electronic Equipment would be .increased to
        compensate officials and employees for the tax consequences of recognizing the use of
        the Electronic Equipment as a taxable fringe benefit.

        This letter sets forth a description ofthe -Program, our tax opinion regarding the Program,
        special rules applicable to City Council members, applicable tax laws related to the
        Program and the approximate increase in salaries that wo'QId be necessary in order to
        reini.burse 'officials and employees for the estimated federal and California taxes that
        would be payable on the fringe benefit resulting from the use of the Electronic
        Equipment.

        Thank you for retaining our firm for this engagement. Please contact me if you have any
        questions regarding this. letter.                       .

                                                           Very truly yours,

                                                           Diehl, Evans & Company, LLP


                                                           By:  l»'~             j.  ¥h .!S\~
                                                              , William S. Morgan, CPA
                                                                Director ofConsultfug Services




                                                                                                         12-11
  THE CITY'S PROPOSED ELECTRONIC EQUIPMENT USAGE PROGRAM

Noted below is a general summary of the City's proposed "Electronic Equipment Usage
Program" (the Program).


                                City-Owned Cell Phones

 Approximately ten City-owned cell phones are currently used by, and will continue to be
 used by, certain City staff. The phones are generally used for City business, including
-text messaging. In order to avoid the burdensome recordkeeping requirements of the
 Internal Revenue Service (more fully discussed within this letter), City staffpropose that
the fair value of the use of the cell phones (i.e. the entire cost of the cell phone and the
monthly service charges) be included as taxable income on the Fonn W-2 of each
respective staff employee. Also, in order to offset the increase in personal income taxes
that those staff employees will experience, the City is considering providing each
employee with a one-time salary increase equal to 100% of their estimated additional
federal and California tax cost resulting from their use ofthe City cell phones.



The City is considering acquiring and issuing approximately ten City-owned PDAs to
City officials and employees, with as many as five of the City-owned PDAs being issued
to City Council members for City· business purposes. To avoid the recordkeeping
procedures outlined by the IRS, the value ofthe use of the PDA (i.e. the entire cost ofthe
PDA and the monthly service charges) would be included as taxable income on the Fonn
W-2 of each respective staff employee or City Council member. To offset the increase in
personal income taxes that staff employees and City Council members will experience,
the City is considering providing each employee with a one-time salary increase for
100% of their estimated additional federal and California tax cost resulting from their use
ofthePDAs.


                                   Laptop Computers

Based on our discussions with City sta.:tt: it is our understanding that no City Council
member has expressed an interest in using a City-owned laptop computer for City
business. However, in the event that laptops are issued and used by City Council
members for City business (including City e-mail activity), the value of the use of the
laptop (i.e. the entire cost of the laptop and software and the monthly service charges for
wireless internet access) would be included as taxable income on the Form W-2 of each
respective Council member if paid directly by the City. The City Council would decide
whether to acquire City-owned laptop computers, and whether to increase their
compensation to cover some, ifnot all of, the income tax cost related to use ofthe laptop.




                                           .- 2-


                                                                                       12-12
     TAX OPINION REGARDING THE USE OF ELECTRONIC EQUIPMENT

 Cell Phones, PDAs, laptop computers and similar electronic devices (''Electronic
 Equipment") are classified under IRC Regulation 280F(d)(4)(A)(iv) as "Listed Property"
 and, as such, are subject to strict substantiation requirements. The use of Electronic
 Equipment is also subject to strict substantiation rules under IRC Sections 62(c) and 274,
 and if these rules are not met, employees must include as a taxable fiinge benefit the fair
 value ofthe use ofthe Electronic Equipment

 More specifically, under current Internal Revenue Code roles and regulations and under
 current IRS enforcement policies, in order for an employee to exclude from taxable
 income the fair value of employer-provided Electronic Equipment, the employer must:
     • Require that employees report the business and personal usage of Electronic
        Equipment through an "Accountable Expense Reimbursement Plan",
     • Require that the employees keep records to distinguish between business and
        personal use, and                                    .
     • Have some form of "audit procedures" in place to verify that employees are
        accounting for business and personal use. (Caveat: The required "audit
        procedures" are not set forth in the Internal Revenue Code or the regulations.
        Generally, IRS agents determine the extent of acceptable "audit procedures" when
        they conduct a field audit)

  Observation: If the City had a policy in place to prohibit any personal use of the
  Electronic Equipmeilt, and if the City and the employees otherwise met the above three
  tests, then 100% of the use of the Electronic Equipment would be business related and,
. accordingly, no amounts would be taxable to City officials or employees as a fringe
  benefit Should the City Council adopt a policy prohibiting any personal use of Electronic
  Equipment, City staff has prepared a separate memorandum (not included with this tax
  opinion letter) which outlines the staff's proposed procedures for monitoring, and
  accounting for, the use of Electronic Equipment.

Because of the onerous and burdensome IRS roles summarized above, the City intends to
report the value of Electronic Equipment as a taxable fringe benefit and increase the
annual salary of City officials and employees to cover the anticipated increase in federal
and California taxes. At ExhIbits A and B to this letter, we have estimated the one-time
federal and California tax that would be paid by a City official or employee for cell phone
usage (Exhibit A) and PDA usage (Exhibit B), based on the assumptions set forth in these
exhibits. These exhibits also present the approximate annual increase in salary that would
be required to cover the applicable taxes.




                                            -3-


                                                                                       12-13
    TAXOPUUONREGARDmGTHEUSEOFELECTRONICEQIDPMENT
                     (CONTmUED)

 Caveat: The computations at Exhibit A and B represent only the federal and California
taxes that would be paid on additional salary based on the estimated fair market value of
use of the Electronic Equipment. The computations do not take into account any
additional taxes on the additional salary. By way of example, Exruoit A assumes that a
City employee with an existing annual salary of $ 50,000 is issued a City-owned cell
phone. The estimated annual value, or taxable fringe benefit, from use of the cell phone is
$ 1,300. The estimated total federal and California tax on $ 1,300 is $ 429. If the City
pays the employee an additional annual salary of $ 429, that additional salary of $ 429
would, itself: be taxable for federal and California purposes. If the City were to cover
those additional taxes with additional salary, then the total amount of additional salary
and taxes would need to be computed by formula. However, City management has
advised our firm ·that the City only intends to pay additional salary for the first computed
taxes.

        SPECIAL RULES APPLICABLE TO CITY COUNCIL MEMBERS

On October 7, 2005, the California Governor signed into law Assembly Bill 1234 (AB
1234), which took effect on January 1, 2006. AB 1234 set forth new restrictions on
compensation and expense reimbursements to "members of a legislative body", including
City Council members. Among other provisions, AB 1234 added Government Code
Section 53232.3, which states in part that the members of a legislative body must submit
expense reports that "shall be accompanied by the receipts documenting each expense".

AB 1234 does not specifically address the use of, reporting and/or documentation of
Electronic Equipment by members of a legislative body. Accordingly, if the City were to
provide City Council members with City-owned Electronic Equipment, and if the City
did not require City Council members to submit reports detailing their use of such
equipment, and if the reports are not accompanied by detail bills from the provider, then
this mayor may not be in violation ofAB 1234.




                                           -4-


                                                                                       12-14
                              APPLICABLE TAX LAWS

                  General Rules for "Expense Reimbursement" Plans

The primary question regarding an employee reimbursement is whether the payment
constitutes additional cash compensation that should be taxed as ordinary salary or
wages, or whether it qualifies as a business-related "expense reimbursement" that can be
excluded from reportable income.

Under IRC Section 62(c), an arrangement is treated as an "expense reimbursement" if it
requires the employee to:

    (a) substantiate the reimbursement, and
    (b) refund any reimbursement in excess of substantiated expenses.

This means that to -qualify, a ''reimbursement arrangemenf' must comply with both of the
above Code provisions.

Also, under Regulation 1.62-2(c)(I), the reimbursement must have a "business
connection." The business connection requirement is not met where an employer
arranges to pay an amount to an employee regardless of whether the employee incurs (or
is reasonably expected to incur) bona fide employee business expenses (whether or not
deductible by the employee on his or her personal income tax return). (See Regulation
1.62-2(d)(3)(i).)

If all the above rules and regulations are met, amounts paid are treated as paid under an
"Accountable Expense Reimbursement Plan" (see below). If the rules are not met,
payments are treated as paid under a ''Nonaccountable Expense Reimbursement Plan."

Observation: The City currently provides the City Manager and certain City officials
with auto allowances as part of a "Nonaccountable Expense Reimbursement Plan". These
auto allowances are reported as taxable wages on the Form W-2 of the City Manager and
the appropriate City officials.

                     Accountable Expense Reimbursement Plans

City employees often receive reimbursements for a variety of business expenses,
including automobile expenses (where employees use their own autos for government
business), other travel costs, hotel and motel costs, meals and entertainment, etc. In such
cases, the employee may receive reimbursement for actual costs incurred., a per diem
allowance (e.g., a flat rate per day), or a monthly allowance or advance.' If the expense
reimbursements or allowances are not made in accordance with the IRS rules below, they
may be considered "wages" subject to payroll tax withholding.

An expense reimbursement, allowance or advance may be made under either an
"Accountable" or "Nonaccountable" Plan. Reimbursements, allowances, or advances
made under an "Accountable Plan" are not subject to payroll tax withholding.
                                           - 5-


                                                                                      12-15
                     APPLICABLE TAX LAW (CONTINUED)

          General Rules for "Accountable Expense Reimbursement Plans"

In order to qualify as an "accountable" plan, the reimbursement must meet the following
two requirements:

1. Substantiation Requirement (per Regulation 1.274-5T(b)(2):

   The governmental agency must require the employee to substantiate expenses
   incurred. That is, the employee should submit the following for each business-related
   expense:

   a. The amount ofthe expenditure.

   b. The time and place of travel or entertainment.

   c. The business purpose ofthe expenditure.

   d. The business relationship to the person entertained, and the individuals' names.

   It is not necessary to record information in an account book, diary, log, expense
   report, trip sheet, or similar record which duplicates information reflected on a
   receipt, so long as the account book, etc. and receipt complement each other in an
   orderly manner. Also, the degree of substantiation necessary to establish business
   purpose will vary depending upon the facts and circumstances of each case. Where
   the business purpose is evident from the surrounding facts and circumstances, a
   written explanation of such business purpose will not be required. For example, in
   cases where a governmental employee regularly calls on a particular business or
   business associate, a written explanation of the business purpose of such travel
   ordinarily will not be required. Similarly, in the case of a business meal described in
   Section 274(e)(1), if the business purpose of such meal is evident from the business
   relationship to the taxpayer of the persons entertained and other surrounding
   circumstances, a written explanation of such business purpose will not be required.
   (See Regulation 1.274-5(c).)

   The following documentation should be attached to each expense report (per
   Regulation 1.274-5(c)(2)(iii»:

   a. Receipts, paid bills, etc. for any lodging (hotel bills, etc.) regardless of amount,
      and

   b. Receipts for any non-lodging travel or entertainment expenditure of $75.00 or
      more. (See Regulation 1.274-5(c)(2)(iii)(A)(2) and Letter Ruling 200343025.)

   Under these rules, generally, business expenses should be "substantiated" within 60
   days after the expense is paid or incurred.
                                          -6-


                                                                                     12-16
                     APPLICABLE TAX LAW (CONTINUED)

   General Rules for "Accountable Expense ReimblU"sement Plans" (Continued)

2. Requirement to Return Unsubstantiated Advances:

   The employee must be required to return to the governmental agency any amount in
   excess of substantiated expense within a "reasonable period of time." A reasonable
   period of time depends on the facts arid circumstances. Under the regulations, the
   Treasury has established a "safe harbor" for returning unsubstantiated advances; i.e.,
   the excess must be returned within 120 days after the expense is paid or incurred.
   Aiso, in the case of allowances or advances, the expense must be incurred (to come
   under the safe harbor) no later than 30 days after the allowance or advance is paid to
   the employee. (IRC Section 62(c); Reg. 1.62-2(c)(2)(i); Reg. 1.62-2(d)(i); Reg. 1.62-
   2(e); Reg. 1.62-2(£).)

   To the extent amounts are not paid under an "accountable plan" they constitute
   "wages" and are subject to income and payroll tax withholding when paid. If the
   governmental agency established an "accountable plan," but the employee did not
   substantiate the expenses or return advances within a reasonable period, only the
   amounts not substantiated or not returned, however, will constitute "wages."

                  General RBI!s for "Electroni.c Equipment" Usage


1. Personal Computers:

  Computers are included as "Listed Property" under IRC Regulation
  280F(d)(4)(A)(iv) and, as such, are subject to special substantiation rules. Use of a
  computer is also subject to the substantiation rules under IRC Section 274, and
  business use of a computer may not be excluded as a "working condition fringe
  benefit" unless the employee substantiates business use of the computer by adequate
  records. (See Regulation 1.274-5T(e)(1) and Regulation 1.132-5(c).)

  Also, in order for a computer to qualify as a "working condition fringe benefit," the
  IRS has ruled that the employer must require that the employee have the computer
  "for the convenience of the employer and as a condition of employment." (IRC
  Section 280F(d)(3)(A) and Regulation 1.280F-6(a).) The IRS has stated that the
  "condition of employment" requirements means the employee must not be able to
  properly perform his or her duties without the home computer. The fact that a
  computer enables the employee to perform the duties more easily and efficiently is
  not enough. (Revenue Ruling 86-129; IRS Pub. No. 529 (2000) p. 3.)




                                          -7-


                                                                                    12-17
                      APPLICABLE TAX LAW (CONTINUED)

           "General Rules for "Electronic Equipment" Usage (Continued)

1. Personal Computers (Continued):

   However, some courts are more lenient. A home computer was required for the
   employee to properly perform his duties when the computer substantially aided
   research involving massive data and writing, and when the employer didn't supply
   computers needed for planning involving extensive number crunching.          The
   "convenience of the employer" condition was satisfied because the computer
   purchase spared the employer the cost of providing a suitable computer.
   (Cadwallader, Thomas (1989) TC Memo 1989-356, aff'd on another issue (1990,
   CA7) 67 AFTR2d 91-301, 919 F2d 1273.) But the mere use of a home computer for
   the employee's convenience isn't enough even if the employer encourages such use.
   (Bryant, Robert (1994, CA3) 74 AFTR2d 94-6388.)

2. Cell Phones and Other Electronic Equipment:

  Like computers, cell phones anQ. similar electronic equipment are classified. as "Listed
  Property" and, as such, are subject to strict substantiation requirements. The IRS takes
  the position that the personal use of cell phones and other electronic equipment should
  be taxed to the employee as compensation, with the employer responsible for federal
  withholding.

  Generally, in order to exclude the electronic equipment from an employee's taxable
  income, it must meet the three tests ofIRC Section 132:

     •   The electronic equipment must be for City business purposes (not personal
         use)

     •   The employee must "verify" that the electronic equipment was used. for City
         business (IRS rules are not specific as to how or when the amounts must be
         verified), and

     •   The employee must reimburse the City for any allowance that is not related to
         business use.

  In a 2003 Tax Court Memorandum decision (Gaylord, T.C. Memo Decision 55,300
  (M», the court disallowed a taxpayer's business deduction for cell phone expenses,
  due to a lack of sufficient substantiation.




                                            - 8-

                                                                                     12-18
                     APPLICABLE TAX LAW (CONTINUED)

           General Rules for "Electronic Equipment" Usage (Continued)

2. Cell Phones and Other Electronic Equipment (Continued):

  In 2004, the IRS issued Private Letter Ruling 200435019. Under the facts of this
  ruling, an employer provided various employees with cell phones. The employer's
  policy stated that there was to be no personal use of the cell phones and, if any
  personal calls were made, the employee was to reimburse the employer for the cost of
  the personal calls. The company kept copies of the cell phone bills, which listed the
  telephone numbers called. However, the records did not indicate the person with
  whom the employee spoke and/or the business reason for their conversation. The IRS
  ruled that cellular telephones are classified as "listed property" under the Internal
  Revenue Code and the regulations. Strict substantiation is required for deductions
  related to listed property. In this instance, the IRS ruled that the employees' use ofthe
  employer-provided cell phones was not adequately substantiated and that the cost of
  all calls, other than those that were made to certain telephone numbers that were
  clearly for business use, should have been included in the employees' wages.

                                 Year 2007 Developments

   a. In 2007, the Federal, State and Local Government Office of the IRS (FSLG)
      posted a notice on the IRS' website setting forth its position on the taxation of cell
      phone use. The notice sets forth the following guidance:

      Government-Owned Cell Phones Provided to Employees:

      To be able to exclude the use by an employee from taxable income from an
      employer-owned cell phone, the employer must have some method to require the
      employee to keep records that distinguish business from personal phone charges.
      If the telephone is used exclusively for business, all use is excludable from
      income (as a working condition fringe benefit). The amount that represents
      personal use is included in the wages of the employee. This includes individual
      personal calls, as well as a pro rata share ofmonthly service charges.

      In general, this means that unless the employer has a policy requiring employees
      to keep records, or the employee does not keep records, the value of the use ofthe
      phone will be income to the employee.




                                           -9-


                                                                                       12-19
                    APPLICABLE TAX LAW (CONTINUED)

          General Rules for "Electronic Equipment" Usage (Continued)

2. Cell Phones and Other Electronic Equipment (Continued):

                         Year 2007 Developments (Continued)

      At a minimum, the employee should keep a record of each call and its business
      purpose. If calls are itemized on a monthly statement, they should be identifiable
      as personal or business, and the employee should retain any supporting evidence
      of the business calls. This infonnation should be submitted to the employer, who
      must maintain these records to support the exclusion of the phone use from the
      employee's wages.

      The following situations illustrate the appli~tion of the rules:

      Example I: A municipal government provides an employee a cell phone for
      business purposes. The government's written policy prohibits personal use of the
      phone. The government routinely audits the employee's phone billings to confirm
      that personal calls were not made. No personal calls were actually made by the
      employee. The business use of the phone is not taxable to the employee.

      Example 2: A municipal government provides an employee a cell phone for
      business purposes. The government's written policy prohibits personal use of the
      phone. However, the government does not audit phone use to verify exclusive
      business use. The fair marlcet value of the phone, plus each monthly service
      charge and any individual call charges are taxable income to the employee,
      reportable on Fonn W-2.

      Example 3: A state agency provides an employee with a cell phone and pays the
      monthly service charge. The employee is required to highlight personal calls on
      the monthly bill. The employee is then required to timely reimburse the agency
      for the cost of the personal calls, and the employee is charged a pro rata share of
      the monthly charge. The value of the business use portion of the phone is not
      taxable to the employee.

      Employee-owned Cell Phones:

      If the employee owns the phone, the listed property requirements do not apply.
      Any amounts the employer reimburses the employee for business use of the
      employee's own phone may be excludable from wages if the employee a<;eOunts
      for the expense under the accountable plan rules. See Publication 15, Employer's
      Tax Guide (Circular E), for more information about the accountable plan rules.



                                          - 10-


                                                                                    12-20
                     APPLICABLE TAX LAW (CONTINUED)

             General Rules for "Electronic Equipment" Usage (Continued)

2. Cell Phones and Other Electronic Equipment (Continued):

                          Year 2007 Developments (Continued)

   b. 2007 IRS Information Letter:

      In an information letter addressed to U.S. Representative Dennis Moore (INFO
      2007-0030), an IRS Branch Chief discussed the proper tax treatment of employer-
      provided cell phones. An employer can exclude the value of an employee's use of
      a cell phone from the employee's income if it ''has some method of requiring the
      employee to keep records that distinguish business from personal phone charges."
      The employer must include the value of any personal usage in the employee's
      wages. Personal use includes individual personal calls, as well as a pro rata share
      of monthly service charges. IRC Section 274(d) requires the employee to keep a
      record of each call and its business purpose. If the employee does not use the cell
      phone to make personal calls or has only minimal personal usage,-the business use
      ofthe phone is not taxable to the employee.

                               Year 2008 Developments

   1. The Federal State and Local Government Division of the IRS posted a notice On its
       website entitled "Employee Cell Phones". (See www.irs.gov/fslglarticle). The
       article was specifically directed to governmental units. Significant points from
       that notice were as follows:

         •    Cell phones and pagers are considered "Listed Property"

         •    "Substantiation Requirements":

              "To be able to exclude the use. by an employee from taxable income from
              an employer-owned cell phone, the employer must have some method to
              require the employee to keep records that distinguish business from
              personal phone charges. The amount that represents personal use is
              included in wages of the employee. This includes individual personal calls,
              as well as a pro rata share ofmontbly service charges".

              "Example 2: A municipal government provides an employee a cell phone
              for business purposes. The government's written policy prohibits personal
              use of the phone. However, the government does not audit phone use to
              verify exclusive business use. The fair market value of the phone, plus
              each monthly service charge and any individual call charges are
              taxable income to the employee, reportable on Form W-2".

                                         - 11 -


                                                                                    12-21
                     APPLICABLE TAX LAW (CONTINUED)

           General Rules for "Electronic Equipment" Usage (Continued)

2. Cell Phones and Other Electronic Equipment (Continued):

                          Year 2008 Developments (Continued)

   2. In a 2008 Tax Court case (Josef Balla v. Commissioner, TC Memo 2008-18), the
      court ruled that the taxpayer could not deduct cell phone and pager expenses
      because the employer did not require the employee to carry cell phones or pagers,
      and the taxpayer did not provide proper "substantiation" for the phone and pager
      charges.

   3. During 2008, legislation was mtroduced in Congress to remove cell phones and
      similar telecommunications equipment from the definition of "Listed Property".
      In February 2008, identical bills were introduced in the House and Senate (H.R
      5450 and S. 2668) entitled "Modernize Our Bookkeeping in the Law for
      Employee's Cell Phone Act of 2008". Also, in April 2008, the ''Taxpayer
      Assistance and Simplification Act of 2008" was introduced (H.R. 5719), which
      includes provisions to relieve taxpayers of the burdensome cell phone
      substantiation rules. As of March 26, 2009, none of this legislation had been
      passed by Congress and signed into law.

   4. The IRS recently released its "Priority Guidance Plan" for 2008-2009. Under the
       plan, the IRS intends to provide new guidance on the substantiation requirements
       for the business use of cell phones and similar telecommunications equipment.


                               Year 2009 Developments

   1. In January 2009, bills were again introduced in Congress to remove cell phones
      and similar electronic equipment from the "Listed Property" rules. Both the Senate
      Bill (S. 144) and the House Bill (H.R. 690) have the same title: ''Modernize Our
      Bookkeeping in the Law for Employee's Cell Phone Act of2009".

   2. Congress had not taken any final action on these bills through April 20, 2009.




                                         - 12-


                                                                                       12-22
             CAVEAT REGARDING THE SCOPE OF THIS LETTER

This letter discusses the federal and California income tax consequences of the City of
Rancho Palos Verdes' Electronic Equipment Usage Program. This letter does not address
if the Program is in compliance with other laws and regulations, such as the California
Government Code, California Labor Code, the Fair Labor Standards Act (FLSA), the
Employee Retirement Income Security Act (ERISA), the Consolidated Omnibus Budget
Reconciliation Act (COBRA) , the Age Discrimination in Employment Act (ADEA) and
other such laws.


            REOIDRED DISCLOSURES UNDER IRS CIRCULAR 230

To ensure compliance with requirements imposed by the IRS, we inform you that any
U.S. federal tax advice contained in this communication is not intended or written to be
used, and cannot be used, for the purpose of (l) avoiding penalties under the Internal
Revenue Code or (2) recommending to another party any transaction or Dlatter addressed
herein.




                                         - 13-


                                                                                   12-23
 EXHIBIT A



CELL PHONES




              12-24
       CITY OF RANCHO PALOS VERDES
       ADDITIONAL INCOME TAX ON CITY-OWNED CELL PHONE USAGE
       ASSUMPTIONS AND TAX UABILITIES OF EMPLOYEES USING CITY-OWNED CELL PHONE

       Economic and Tax Assumptions

       1. City employee's tax filing status is single
       2. Employee's only income is salary from the qty
       3. City employee uses standard deduction for the tax return
       4. Income taxes are calculated based on 2009 Federal and 2008 ~alifornia tax tables
       5. The original cost of the cell phone is $100 .
       6. The monthly plan fee from the wireless provider is $100 per month, which includes unlimited minutes,
          text messages and internet access

       Federal and California Income Taxes

                                           Ass.umed $50.000 Salary          Assl;lmed $100,000 Salary       Assun'!ed $150.000 Salary

                                           wlo Cell Ph.. .w l Cell Ph.      wlo Cell Ph. wI Cell Ph.            wlo Cell Ph. wI Cell Ph.
      salary                                      50,000          50,000        100,000     100,000                150,000      150,000
      Cell Phone Cost·                                             1,300                      1,300                               1,300
      Standard Deduction                           (5,700)        (5,700)        (5,700)     (5,700)                (5,700)      (5,700)
      Exemption Deduction                         ~               (3.650)        13,650)     (3,650l                (3,650)      (3,650)
      Taxable Income·                             40;650          41,950         90.650      91,950                140,650      141,950

      Federal Income Tax Br~cket                      25%            25%            28%         28%                    28%          28%
      State Income Tax Bracket                       8.00Aj         8.0%           9.3%        9.3%                   9.3%         9.3%
      Federal Income Tax                           5,83·8 -        6,163         18,528      18,892·                32,528       32,$92
      State Income Tax                             1,559           1.663          6,126       6,247                 10,776       10.897
      Total taxes                                  ~               ~             ~           ~                      ~            ~

      Tax Increase

      Year 2009 Federal Tax Brackets For Filing Status "Single"
      If the taxable income is between...                   Then the tax is:
       $                 and       $      10,400             10 % of taxable income
       $ 10,400          and       $. 35,400                 $775.00 plus 15% of the excess over $10,400
       $ 35,400          and       $      84,300             $4,525.00 plus 25% of the excess over $35,400
       $ 84,300··       "and       $ 173,600                 $16,750.00 plus 28% ofthe excess over $84,300
       $173,600          and      $ 375,000                  $41,754.00 plus 33% of the excess over $173,600
       $ 375,000         and      . •'H above                $108,216.00 plus 35% of the excess over $375,000

      Year 2.008 state Tax Brackets For Filing Status "Single"
      Ifthe taxable income is between...                      Then the tax is:
       $                and       $      7,168                 1 % of taxable income
       $ 7,168          and       $    16,994                  $71.68 plus 2% of the excess over $7,168
       $ 16,994         and       $    26,821                  $268.20 plus 4% of the excess over $16,994
       $ 26,821         and       $    37,233                  $661.28 plus 6% of the excess over $26,821
       $ 37,233         and       $    47,055                  $1,286.00 plus 8% ofthe excess over $37,233
       $ 47,055         and          above                     $2,071.76 plus 9.3% of the excess over $47,055




1:\MCS\Rancho Palos Verdes\lncome Tax Calculation.xlsCell Phone                                                           12-25
EXHIBITB



  PDAs




           12-26
CITY OF RANCHO PALOS VERDES
AODITIONAlINCOME TAX ON CITY-OWNED PDA USAGE
ASSUMPTIONS AND TAX LIABILITIES OF EMPLOYEES USING CITY-OWNED PDA

Economic and Tax Assumptions

1. City emplQyee's tax filiOg status is single
2. Employee's only income is salary from the City
3. City employee uses standard deduction for the tax return
4. Income taxes are calculated based on 2009 Federal and 2008 california tax tables
5. The original cost of PDA is $300
6. The monthly plan fee from the wireless provider is $100 per month, which includes unlimited minutes,
   text messages and internet access including email

Federal and California Income Taxes

                                   As$umed $50,000 salary                 Assumed $101),000 $alary   Assumed $150,000 Salary


                                     w!oPDA             w!PDA              w!o PDA       w!PDA           w/oPDA       w!PDA
Salary                                    50,000             SO,OOO           100,000     100,000          150,000    150,000
Cell Phone Cost                                                1,500                        1,500                       1,500
Standard Deduction                        (5,700)             (5,700) .        (5,700)     (5,700)          (5,700)    (5,700)
Exemption Deduction                        (3,650)           (3,650)           (3,650)     (3,650)          (3,650)    (3,650)
Taxable Income                            40,650             42,150            90,650      92,150          140,650    142,150

Federal Income Tax Bracket                   25%                 25%              28%          28%             28%        28%
State Income Tax Bracket                    8.0%                8.0%             9.3%         9.3%            9.3%       9.3%
Federal Income Tax                         5,838              6,213            18,528      18,948           32,528     32,948
State Income Tax                           1,559              1.679             6,126       6,266           10,776     10,916
Total taxes                                z.m                z.m              ~           ~               ~           ~

Tax Increase                                                   m                             a2                          a2
Year 2009. Fede;ral Tax Brackets For FRlng Status "Single"
If the taxable i'noome is between...                   Then the tax is:
 $                  and       $    10,400               10 % of taxable income
 $ 10,400           and       $    35,400               $775.00 plus 15% of the excess over $10,400
 $ 35,400           and       $    84,300               $4,525,00 plus 25% of the excess over $35,400
 $ 84,300           and       $ 173,600                 $16,750.00 plus 28% of the excess over $84,300
 $ 173,600          and       $ 375,000                 $41,754.00 plus 33% of the excess over $173,600
 $ 375,000          and         above                   $108,216.00 plus 35% of the excess over $375,000

Year 2008 State Tax Brackets For Filing Status "Single"
If the taxable income is between...                    Then the tax is:
 $                 and       $      7,168               1 % of taxable income
 $ 7,168           and       $    16,994                $71.68 plus 2% of the excess over $7,168
 $ 16,994          and       $    26,821                $268,20 plus 4% of the excess over $16,994
 $ 26,821          and       $    37,233                $661.28 plus 6% of the excess over $26,821
 $ 37,233          and       $    47,055                $1,286.00 plus 8% ofthe excess over $37,233
 $ 47,055          and         above                    $2,071.76 plus 9.3% of the excess over $47,055




  1;\MCS\Rancho Palos Verdes\lncome Tax Caleulatlon.xlsPDA                                                      12-27