I LOVE FRINGE BENEFITS! Lori Stieber Internal Revenue Agent, Federal, State and Local Governments April 3, 2014 Tax Exempt/Government Entities Division Federal, State and Local Governments 1 WHERE TO GET INFORMATION http://www.irs.gov/government-entities/federal,-state- &-Local-Governments/Educational-Resources 2 Fringe Benefits Tax Exempt/Government Entities Division Federal, State and Local Governments 3 1
WHAT IS A FRINGE BENEFIT? Cash, property, services in addition to regular wages 4 ARE FRINGE BENEFITS TAXABLE? Taxable to employee unless specifically excluded by IRC Taxable means subject to withholding and reported on W-2 in year benefit provided 5 SPECIAL ACCOUNTING RULES Reporting period Regular or supplemental withholding November/December benefits election Election not to withhold 6 2
VALUING NON-CASH FRINGE BENEFITS FMV What would it cost employee to buy benefit from an unrelated third party? 7 FRINGE BENEFIT CODE SECTIONS Examples: IRC 119 Meals and Lodging IRC 127 Educational Assistance IRC 132 General Fringe Benefit Section 8 WORKING CONDITION FRINGE BENEFIT Definition: Property or service that employee would have been entitled to deduct on 1040 if employer hadn t provided it 9 3
WORKING CONDITION FRINGE BENEFIT General Rules: Must relate to employer s business Employee could have deducted expense on 1040 Employee must substantiate business use 10 IRC 132(e) DE MINIMIS FRINGE BENEFIT General Rules: Property or service that is small in value, and Provided to employee infrequently, not regularly 11 PER DIEM PAYMENTS Tax Exempt/Government Entities Division Federal, State and Local Governments 12 4
WHAT IS A PER DIEM? Method of reimbursing employees for business expenses for overnight travel Reimbursement tax free if rules are met 13 PER DIEM Tax Free, If: Accountable plan rules re followed, and Per Diem reimbursement is at or below Federal rates Receipts are not required 14 PER DIEM Breakdown Per Diem consists of: Lodging Meals and incidental expenses (M&IE) Rates vary by city 15 5
LODGING PER DIEM Use rate of city where you spend the night Room tax and energy charges are not part of lodging; they are reimbursed separately 16 M&IE PER DIEM Includes: Meals, and Tips for food and luggage handling, and Laundry and dry cleaning for travel of less than 4 consecutive nights 17 PER DIEM OTHER RULES Prorate M&IE for days of departure and return Employer may pay other tax-free business expenses in addition to Per Diem: room taxes, cab, telephone charges, laundry 18 6
ACCOUNTABLE PLANS Tax Exempt/Government Entities Division Federal, State and Local Governments 19 20 ACCOUNTABLE PLAN? Allowance or reimbursement where amounts are non-taxable, if certain rules are met 21 7
THREE RULES Business connection Adequate accounting Excess returned on a timely basis 22 BUSINESS CONNECTION Directly related to trade or business Deductible on 1040 23 ADEQUATE ACCOUNTING Verify: Date Time Place Amount Business Purpose 24 8
RETURN EXCESS TIMELY Within a reasonable period of time 25 NON-ACCOUNTABLE PLAN Does not meet ALL 3 RULES for Accountable Plans 26 QUESTIONS? 27 9
RECAP HELPFUL RESOURCES www.irs.gov/government- Entities/Federal,-State-&-Local- Governments/Educational-Resources Educational materials for government entities www.irs.gov/forms-&-pubs Link to download forms and publications and other educational resources 28 USEFUL TELEPHONE NUMBERS 1-827-829-5500 for the TE/GE toll-free tax assistance line 1-800-829-3676 for the Forms order site 1-866-455-7438 for 1099 and W-2 assistance 29 CELL PHONES No longer considered listed property 30 10
PAYMENTS IN LIEU OF INSURANCE Receipts for insurance or medical expenses Non-Taxable No reporting required 31 PAYMENTS IN LIEU OF INSURANCE (cont.) Cash Payments No Accounting Fully Taxable W-2 Reportable Box 1 Gross Compensation Box 3 SSA Wages Box 5 Medicare Wages 32 MOVING EXPENSES Tax Exempt/Government Entities Division Federal, State and Local Governments 33 11
MOVING EXPENSES IRC Section 132(g): Allows employer to reimburse employee IRC Section 217: Allows individual to deduct certain expenses 34 MOVING EXPENSES Not taxable to EE if: Paid under an Accountable Plan Specific tests of IRC 217 met 35 IRC 217 TESTS Must be an employee Employee must incur the expenses Expenses closely related to starting work at new job location Expenses allowed under section 217 Must met time and distance tests 36 12
MOVING EXPENSES Non-Taxable Costs of Traveling: Moving other members of household Airfare, Car Lodging while travelling Parking fees, tolls 37 MOVING EXPENSES Non-Taxable Costs of Moving Household Goods/Personal Effects: Packing, Crating, Transporting Shipping Car(s) Shipping Pet(s) Storage & Insurance (30 consecutive days) 38 MOVING EXPENSES Reimbursements are not included in income if: Expenses qualify under IRC 217, and Are reimbursed in the same calendar year they are deducted 39 13
MOVING EXPENSES Timing of Taxability Employer s Reporting on W-2 40 MEAL ALLOWANCES & REIMBURSEMENTS Tax Exempt/Government Entities Division Federal, State and Local Governments 41 MEAL ALLOWANCES & REIMBURSEMENTS Meals while traveling Meals while not traveling Meals with meetings or entertainment De minimis meal allowances 42 14
MEAL ALLOWANCES & REIMBURSEMENTS Meals while traveling Tax-Free Requirements: Must be away from tax home overnight, or long enough to require substantial sleep or rest No set numbers hours away or distance Substantiation required 43 MEAL ALLOWANCES & REIMBURSEMENTS Meals not away from home: Meals with meetings Meals with entertainment De minimis meals 44 MEAL ALLOWANCES & REIMBURSEMENTS Meals with meetings or entertainment: Tax-Free if meal meets test: Directly Related test, or Associated With test 45 15
MEAL ALLOWANCES & REIMBURSEMENTS Directly Related Meals Tax-Free Meals as part of business meetings Meals at service club or professional meetings Example- Rotary, Finance Officers Association, CPA 46 MEAL ALLOWANCES & REIMBURSEMENTS Associated With Test Meals with clear business purpose Substantial business discussion/negotiations directly preceding or following a meal 47 MEAL ALLOWANCES & REIMBURSEMENTS Associated With Meals Tax-Free Meals at conventions Meals at conferences 48 16
MEAL ALLOWANCES & REIMBURSEMENTS De Minimis Meals Tax-Free if: Meal is small in value and occasional Not provided routinely or often Provided so employee can work overtime Enables employee to work overtime 49 MEAL ALLOWANCES & REIMBURSEMENTS De Minimis Meal Generally meal must be consumed during overtime period Meal allowances based on number of hours worked does not qualify as de minimis 50 MEAL ALLOWANCES & REIMBURSEMENTS Note: Meals consumed en-route to daily business events are not tax deductible ie Breakfast and dinner while traveling to and from a daily convention or conference would not be deductible 51 17
MEAL ALLOWANCES & REIMBURSEMENTS No hotel = No tax free meal reimbursement while traveling to and from event If you break for lunch and everyone is responsible for their own lunch arrangements, the reimbursement for lunch is fully taxable 52 EMPLOYEE VEHICLE USED FOR EMPLOYER S BUSINESS Tax Exempt/Government Entities Division Federal, State and Local Governments 53 EMPLOYEE S CAR REIMBURSED BUSINESS USE is Non- Taxable if AT or BELOW Federal Mileage Rate 54 18
STANDARD MILEAGE RATES 2010.50 cents per mile 2011.51 cents per mile 2012.555 cents per mile 2013.565 cents per mile 2014.56 cents per mile 55 EMPLOYER PROVIDED VEHICLES Qualified Non-Personal Use Vehicle By design, vehicle is unlikely to have personal use Use of vehicle is tax-free 56 EMPLOYER PROVIDED VEHICLES Qualified Non-Personal Use Vehicles Clearly marked police and fire vehicles School Buses Unmarked law enforcement vehicles Special purpose vehicles snow plows, etc. Vans and pickups must be modified to qualify 57 19
THIS QUALIFIES: 58 THIS DOESN T QUALIFY 59 DEFINITELY NOT 60 20
THIS QUALIFIES 61 AND DEFINITELY NOT THIS ONE A Cowasaki 62 EMPLOYER PROVIDED VEHICLES See Publication 15-B for car valuation rules on employer provided vehicles. Available at www.irs.gov/publications 63 21
QUESTION 1 When a County s Sheriff squad cars are no longer being used in the active fleet, they are provided to the County jail administrators for commuting. The County would like to know if they can use the commuting rule to value the employees personal usage of the vehicles. 64 QUESTION 2 We have a policy that specifically prohibits an employee from using a county supplied cell phone for personal reasons and we police the cell phone bills for personal use. We discipline employees for violating this policy. Will personal use still be taxable? 65 QUESTION 3 We have a question related to de minimis fringe benefits. If an employer provides a gift certificate for a Christmas turkey or an occasional theatre ticket, what facts and circumstances would allow the gift certificate to be excluded from taxable income? 66 22
RECAP HELPFUL RESOURCES www.irs.gov/government- Entities/Federal,-State-&-Local- Governments/Educational-Resources Educational materials for government entities www.irs.gov/forms-&-pubs Link to download forms and publications and other educational resources 67 QUESTIONS? 68 USEFUL TELEPHONE NUMBERS 1-827-829-5500 for the TE/GE toll-free tax assistance line 1-800-829-3676 for the Forms order site 1-866-455-7438 for 1099 and W-2 assistance 69 23
UNIFORMS AND CLOTHING ALLOWANCES Tax Exempt/Government Entities Division Federal, State and Local Governments 70 UNIFORMS Uniforms must be qualified in order to be exempt from tax Plain pants and a shirt do not qualify as a uniform Suits, sport coats, etc. worn by plain clothes police officers do not qualify as uniforms 71 OTHER TYPES OF COMPENSATION Tax Exempt/Government Entities Division Federal, State and Local Governments 72 24
OTHER TYPES OF COMPENSATION All income is taxable unless excluded by the IRC Some types of payments are Supplemental Wages 73 SUPPLEMENTAL WAGES Bonuses: Signing, Recruiting, Relocation Awards for outstanding service Back Pay Severance Pay Administrative Leave 74 SUPPLEMENTAL WAGES Withhold: Two Different Methods: 1. Optional 2. Aggregate 75 25
AWARDS AND PRIZES Tax Exempt/Government Entities Division Federal, State and Local Governments 76 AWARDS AND PRIZES Cash or Cash Equivalent Always Taxable Cash Equivalent: Savings bonds, unrestricted gift certificates and gift cards 77 AWARDS AND PRIZES Non-Taxable Awards and Prizes Only three types are tax-free: Certain awards/prizes transferred to charity De minimis awards/prizes Certain employee achievement awards 78 26
AWARDS AND PRIZES Transferred to Charity: Must be given for charitable, scientific, artistic, or educational achievement, and Must be transferred to charitable organization before taking possession Other rules apply 79 AWARDS AND PRIZES Non-Taxable De Minimis Awards/Prizes: Cannot be cash or cash equivalent Must be small in value and not given frequently No set $$$ amount for de minimis 80 AWARDS AND PRIZES Non-Taxable De Minimis Awards/Prizes: Examples: Holiday ham or turkey Flowers for special occasions Nominal birthday gifts Coffee mugs, plaques 81 27
AWARDS AND PRIZES Non-Taxable De Minimis Awards/Prizes: Examples: Holiday ham or turkey Flowers for special occasions Nominal birthday gifts Coffee mugs, plaques 82 AWARDS AND PRIZES Non-Taxable Employee Achievement Awards/Prizes: Must be non-cash Must be for safety or length of service Value cannot exceed either $400 or $1600/year/employee Average value of all awards cannot exceed $400 and remain tax-free 83 AWARDS AND PRIZES Non-Taxable Length of Service Awards: Cannot be given within the first five years of service Cannot be given more often than very five years (except for retirement awards) 84 28
AWARDS AND PRIZES Non-Taxable Safety Awards: Cannot give first year of employment, and Cannot be given to more than 10% of eligible employees (not managers, clerical, or other professional employees) 85 AWARDS AND PRIZES Taxable Awards: Cash or cash equivalent Non-Cash awards won in employer sponsored drawing Any award other than qualified nontaxable (Wellness Incentives) 86 PROFESSIONAL LICENSES AND DUES FOR ORGANIZATIONS Tax Exempt/Government Entities Division Federal, State and Local Governments 87 29
PROFESSIONAL LICENSES Fees Paid to Maintain Ordinary Business Expense If EE Pays: Deductible on 1040 If ER Pays: Working Condition Fringe Follow Accountable Plan Rules Employee Must Keep Records 88 ORGANIZATION DUES General Rule: Not deductible Exception for Professional Organizations Business Leagues Professional Organizations Trade Associations 89 QUESTIONS? 90 30
QUESTION 1 We have a question related to a retirement gift. A faculty member of a school is retiring and his department would like to give a $100 gift card to a restaurant as a retirement present. The employer wants to know if this is taxable or not because of the infrequency and special occasion circumstance. 91 QUESTION 2 We have a question about uniforms. Are fire retardant uniforms provided as a condition of employment and worn by workers that are performing electrical work taxable? 92 QUESTION 3 Our new union agreement states that some employees get a $75.00 boot allowance. What is the best way to handle this? Also our police officers get a $500.00 allowance for uniforms. The union agreement states uniforms will be ordered and paid according to police department policy. Does this let us off the hook and put the record keeping on the employee? 93 31
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Federal, State and Local Governments Quick Links for Government Entities Toll-free telephone number for governmental entities: 1-877-829-5500 Email question to: tege.ask.fslg@irs.gov - Account-related questions. - Request for affirmation letter of tax exemption. - Request for private letter ruling. Toll-free telephone number for Martinsburg Computing Center (MCC): 1-866-455-7438 Email questions to: mccirp@irs.gov Questions concerning filing requirements and procedures for issuers of information returns (including any Form 1099) may contact the Martinsburg Computing Center from 8:30 am to 4:30 pm Eastern Time, Monday thru Friday. Federal, State and Local Governments (FSLG) Web portal for governmental entities to obtain federal tax information, including current news and tax law updates http://www.irs.gov/government-entities/federal,-state-&-local-governments FSLG Newsletters Semiannual newsletters containing information on current developments and upcoming events of interest to government entities http://www.irs.gov/government-entities/federal,-state-&-local-governments/current-edition-of-the-fslg-newsletter FSLG Customer Services A variety of methods in which government entities can contact the IRS with accountrelated questions. http://www.irs.gov/government-entities/federal,-state-&-local-governments/fslg-customer-services FSLG Toolkits Information, publications and forms for specific tax areas of concern to government entities. Public Employer s Toolkit: http://www.irs.gov/government-entities/federal,-state-&-local-governments/public- Employers-Toolkit Government Entity Compliance Toolkit: http://www.irs.gov/government-entities/federal,-state-&-local- Governments/Government-Entity-Compliance-Toolkit Government Retirement Plans Toolkit: http://www.irs.gov/government-entities/federal,-state-&-local- Governments/Government-Retirement-Plans-Toolkit International Withholding Issues Toolkit: http://www.irs.gov/government-entities/federal,-state-&-local- Governments/International-Withholding-Issues-Toolkit Compliance Self-Assessment Tool Form 14581: http://www.irs.gov/government-entities/federal,-state-&-local- Governments/Compliance-Self-Assessment-Tool-Available E-News Subscriptions A variety of topics to which a user may subscribe to stay informed on new developments, issues, etc. http://www.irs.gov/newsroom/content/0,,id=103381,00.html e-services Online Tools for Tax Professionals Web-based products that allow tax professionals and payers to conduct business with the IRS electronically, available only to approved IRS business partners and not to the general public. e-services is available via the internet 24 hours a day, 7 days a week. http://www.irs.gov/taxpros/article/0,,id=109646,00.html Rev. 3-2014 Page 1 of 6
Federal, State and Local Governments Quick Links for Government Entities TIN Matching Program requires registration available through Online Tools for Tax Professionals use to match Taxpayer Identification Numbers (TINs) against those provided by vendors, contractors, medical, legal and other service providers (confirm numbers provided on Forms W-9). Use of this system will help your governmental entity avoid CP 2100 notices for unassigned, invalid or TIN-Name mismatches. Publication 2108A http://www.irs.gov/pub/irs-pdf/p2108a.pdf SSA Business Services Online Requires registration provides for electronic filing of Forms W-2 as well as Social Security Number matching to ensure SSNs provided by employees are valid. http://www.socialsecurity.gov/bso/bsowelcome.htm SSA State and Local Coverage Handbook Provides comprehensive information on Social Security and Medicare coverage provisions, including Section 218. https://secure.ssa.gov/apps10/poms.nsf/chapterlist!openview&restricttocategory=19 I-9 Central U.S. Citizenship and Immigration Services Instructions for completing Form I-9, Acceptable Documents, Retaining and Storing Form I-9; E-Verify; Customer Support http://www.uscis.gov/portal/site/uscis/menuitem.eb1d4c2a3e5b9ac89243c6a7543f6d1a/?vgnextoid=84c267ee5cb38210v gnvcm100000082ca60arcrd&vgnextchannel=84c267ee5cb38210vgnvcm100000082ca60arcrd FSLG FAQs Frequently Asked Questions on a variety of topics of interest to government entities http://www.irs.gov/government-entities/federal,-state-&-local-governments/federal,-state,-&-local-governments- FAQs Cafeteria Plans Meal and Vehicle Expenses Retirement Plan Issues Miscellaneous Reporting Issues Issues for Government Entities Fact Sheets on Many Topics http://www.irs.gov/government-entities/federal,-state-&-local-governments/issues-for-government-entities Backup Withholding Communications Tax Continuing Employment Exception (Medicare) De Minimus Fringe Benefits Employer Pick-Up Contributions to Benefit Plans Elected / Appointed Officials Employees / Contractors FSLG Examination Process Fuel Tax Exemptions Government Plans Group Life Insurance Information Letter Concerning Tax-Exempt Status Is My Entity a Government Entity? Issues for Firefighters Payment Card Reporting Rehired Annuitants Section 218 Agreements State Legislator Travel TIN On-Line Matching Unrelated Business Income Voluntary Classification Settlement Program Rev. 3-2014 Page 2 of 6
Federal, State and Local Governments Quick Links for Government Entities Frequently Used Publications IRS Forms and Publications http://www.irs.gov/forms-&-pubs Publication Number, Title, URL Publication 15 (Circular E) Employer s Tax Guide http://www.irs.gov/pub/irs-pdf/p15.pdf Publication 15-A Employer s Supplemental Tax Guide http://www.irs.gov/pub/irs-pdf/p15a.pdf Publication 15-B Employer s Tax Guide to Fringe Benefits http://www.irs.gov/pub/irs-pdf/p15b.pdf Table of Contents Employer Identification Number (EIN) Who Are Employees? Family Employees Employee s Social Security Number (SSN) Wages & Other Compensation Tips Supplemental Wages Payroll Period Withholding From Employees Wages Required Notice to Employees about the Earned Income Tax Credit (EIC) Depositing Taxes Filing Form 941 or Form 944 Reporting Adjustments to Form 941 or Form 944 Federal Unemployment (FUTA) Tax Special Rules for Various Types of Services & Payments How to Use the Income Tax Withholding Tables Who Are Employees? Employee or Independent Contractor? Employees of Exempt Organizations Religious Exemptions and Special Rules for Ministers Sick Pay Reporting Special Rules for Paying Taxes Pensions & Annuities Alternative Methods for Figuring Withholding Formula Tables for Percentage Method Withholding (for Automated Payroll Systems) Wage Bracket Percentage Method Tables (For Automated Payroll Systems) Combined FIT, EE Social Security & EE Medicare Withholding Tables Tables for Withholding on Distributions of Indian Gaming Profits to Tribal Members Fringe Benefit Overview Fringe Benefit Exclusion Rules Fringe Benefit Valuation Rules Rules for Withholding, Depositing & Reporting Rev. 3-2014 Page 3 of 6
Federal, State and Local Governments Quick Links for Government Entities General Instructions for Forms W-2 and W-3 Including Forms W-2AS, W-2GU, W-2VI, W-3SS, W-2c, and W-3c http://www.irs.gov/pub/irs-pdf/iw2w3.pdf General Instructions for Information Returns http://www.irs.gov/pub/irs-pdf/i1099gi.pdf Publication 463 Travel, Entertainment, Gift and Car Expenses http://www.irs.gov/pub/irs-pdf/p463.pdf Publication 963 Federal-State Reference Guide http://www.irs.gov/pub/irs-pdf/p963.pdf What s New Reminders Need Help? How to Get Forms & Publications Common Errors on Forms W-2 General Instructions for Forms W-2 & W-3 Specific Instructions for Form W-3 General Instructions for Forms W-2c and W-3c Specific Instructions for Form W-2c Specific Instructions for Form W-3c Forms 1097, 1098, 1099, 3921, 3922, 5498 & W-2G Who Must File Other Information Returns When to File Where to File Filing Returns with the IRS Electronic Reporting Paper Document Reporting Corrected Returns on Paper Forms Void Returns Recipient Names and Taxpayer Identification Numbers (TINs) Filer s Name, Identification Number and Address Account Number Box on Forms Statements to Recipients Backup Withholding Penalties Payments to Corporations and Partnerships Earnings on Any IRA, Coverdell ESA, Archer MSA or HAS Certain Grantor Trusts Special Rules for Reporting Payments Made through Foreign Flow-Through Entities on Form 1099 Travel Entertainment Gifts Transportation Recordkeeping How to Report Social Security & Government Entities Government Entities & Federal Taxes Wage Reporting & Employment Taxes Determining Worker Status Social Security & Medicare Coverage Social Security & Public Retirement Systems Social Security Administration Internal Revenue Service Social Security Administrators Rev. 3-2014 Page 4 of 6
Federal, State and Local Governments Quick Links for Government Entities Publication 1281 Backup Withholding for Missing and Incorrect Names and TINs http://www.irs.gov/pub/irs-pdf/p1281.pdf Publication 5137 ** NEW in 2014 ** Fringe Benefit Guide Office of Federal, State and Local Governments http://www.irs.gov/pub/irs-pdf/p5137.pdf Publication 5138 ** NEW in 2014 ** Quick Reference Guide for Public Employers Office of Federal, State and Local Governments http://www.irs.gov/pub/irs-pdf/p5138.pdf Introductions Backup Withholding Rates / Effective Dates Frequently Asked Questions Where to Call for Help Actions for Missing TINs and Incorrect Name/TIN Combinations: CP2100 Notice; Missing TINs; Incorrect Name/TIN Combination; First & Second B Notice; Third & Subsequent Notices The IRS Matching Process / Name Controls Flow Charts: First & Second B Notices Name Compression Specifications for B Notice Tape Cartridge Instructions for Reading Tape Cartridges Instructions for Reading CD/DVD Media Other Forms: Form W-9; Form W-8 Series & Instructions Reporting and Withholding Working Condition Fringe Benefits De Minimus Fringe Benefits No-Additional Cost Fringe Benefits Qualified Employee Discounts Qualified Transportation Fringe Benefit (QTF) Health and Medical Benefits Travel Expenses Transportation Expenses Moving Expenses Meals and Lodging Reimbursements for use of Employee Vehicle Employer-Provided Vehicles Equipment and Allowances Awards and Prizes Professional Licenses and Dues Educational Reimbursements and Allowances Dependent Care Assistance Group Term Life Insurance Fringe Benefits for Volunteers Fringe Benefits for Independent Contractors Compensation Social Security and Medicare Coverage Public Retirement Systems Retirement Plans Fee-Based Public Officials Special Situations for Public Workers Fringe Benefits Information Reporting Backup Withholding Key Dates Section 218 Social Security Coverage Flowchart Medicare Coverage Flowchart Rev. 3-2014 Page 5 of 6
Federal, State and Local Governments Quick Links for Government Entities IRS Video Portal Recorded Webinars and Phone Forums on a Variety of Topics of Interest for Government Entities http://www.tax.gov/governments/employers ACA Provisions What you Need to Know Furnishing Form 1099-G Electronically Avoiding Information Reporting Problems Payments to Foreign Persons Overview Avoiding Interest and Penalties Section 218 Agreements and Restructuring Backup Withholding for Form 1099-MISC Section 218 Tools and Tips Employment Tax Issues Taxability of Certain Fringe Benefits FICA Replacement Plans Travel Reimbursement Policies Form 1099-G Furnishing Electronically Unique Employment Tax Issues for GEs Form 1099-MISC Filing Requirements Worker Classification Retirement Plans http://www.tax.gov/governments/retirementplans Rev. 3-2014 Page 6 of 6