Internal Revenue Bulletin No. 2025–35

Bulletin Overview: Modernizing Fringe Benefits & Farm Valuation

This edition of the Internal Revenue Bulletin (IRB) 2025-35, dated August 25, 2025, features two key items of interest to tax practitioners. First, proposed regulations (REG-132805-17) address the determination of an employer’s "line of business" for purposes of excluding certain fringe benefits from an employee’s gross income under Section 132. Specifically, the proposed regulations aim to modernize the definition of "line of business" by adopting the North American Industry Classification System (NAICS) in place of the outdated Enterprise Standard Industrial Classification (ESIC) Manual, last updated in 1974. This change reflects the evolving economic landscape, particularly the rise of the internet economy and large, multi-departmental retail operations. Second, Revenue Ruling 2025-16 provides the 2025 interest rates to be used in computing the special use value of farm real property for estate tax purposes, pursuant to an election made under Section 2032A, allowing for valuation based on actual use rather than highest and best use. These rates are crucial for estates seeking to minimize tax liability on farmland. The IRS is, in effect, acknowledging the realities of modern business while continuing to provide guidance on established estate tax provisions.

Proposed Regs: IRS Ditches 1974 Standard for NAICS in Fringe Benefit Tests

Following the guidance on farm valuation for estate tax purposes, the IRS is also addressing the modernization of fringe benefit rules, specifically concerning the "line of business" test for certain exclusions. This update is detailed in REG-132805-17, a notice of proposed rulemaking.

1. The Rule: The IRS is proposing to update how employers determine their "line of business" for purposes of excluding certain fringe benefits from an employee's gross income. Specifically, the proposed regulations seek to replace the outdated Enterprise Standard Industrial Classification (ESIC) Manual of 1974 with the more current North American Industry Classification System (NAICS). This change directly impacts the application of Section 132(a)(1), concerning "no-additional-cost services," and Section 132(a)(2), concerning "qualified employee discounts." Section 132 provides for the exclusion of certain fringe benefits from an employee's gross income and wages. No-additional-cost services, as defined in Section 132(b), are services provided by an employer to an employee that are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, provided the employer incurs no substantial additional cost (including foregone revenue). Qualified employee discounts, as defined in Section 132(c)(1), are discounts with respect to qualified property or services. Section 132(c)(4) defines "qualified property or services" as any property (other than real property and personal property held for investment) or services that are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.

2. The Context: The current regulations, relying on the 1974 ESIC Manual, are increasingly inadequate for defining "line of business" in today's economy. The ESIC Manual lacks categories for modern industries like internet service providers or cell phone manufacturers, creating ambiguity and compliance challenges. The House Report on the Deficit Reduction Act of 1984, which added Section 132 to the Code, suggested referencing Standard Industrial Classifications (SIC) for guidance. However, the IRS opted for the ESIC Manual, a supplement to the SIC. Now, recognizing the obsolescence of the ESIC Manual and the widespread adoption of NAICS across government and industry, the IRS is proposing this change to align with current economic realities. This proposed change is particularly relevant given recent court cases interpreting Section 132, such as Mihalik v. Commissioner, T.C. Memo. 2022-36, which highlighted the strict interpretation of "employee" for purposes of no-additional-cost services, underscoring the importance of clear and up-to-date definitions.

3. The Implication: This proposed change has several important implications for tax practitioners.

• NAICS Four-Digit Industry Group: The proposed regulations specify that an employer's "line of business" will be determined based on the NAICS four-digit industry group classification. An employer is considered to have more than one line of business if it offers property or services in more than one four-digit NAICS industry group. Practitioners will need to become familiar with the NAICS Manual to accurately classify their clients' businesses and ensure compliance with Section 132.
• Aggregation Rules Update: The regulations also propose updates to the aggregation rules under § 1.132-4(a)(3). The existing "department store" rule is being expanded to include "general merchandise store, including warehouse clubs and supercenters," recognizing the evolution of retail and the prevalence of big-box stores like Costco and Walmart. This means that employees working for these types of employers will generally be considered to be working in one line of business, even if the store sells a wide variety of unrelated products (e.g., groceries and electronics). The change also addresses specialty stores that sell closely related items classified under different NAICS codes, providing they would be considered within one line of business if sold at a general merchandise store.
• Compliance and Planning: Practitioners must advise clients to review their fringe benefit programs and ensure they align with the new NAICS-based definitions. This includes re-evaluating employee eligibility for no-additional-cost services and qualified employee discounts. Furthermore, practitioners must stay abreast of any further modifications to the aggregation rules following the comment period. The proposed regulations are slated to apply to taxable years beginning on or after the date the final rules are published in the Federal Register.

Estate Tax: 2025 Interest Rates for Farm Special Use Valuation

The previous section detailed the IRS's proposed shift to NAICS classifications for fringe benefit tests, emphasizing the need for practitioners to adapt to these modernized definitions. Shifting gears to estate tax matters, Revenue Ruling 2025-16 addresses the valuation of farm property for estate tax purposes, providing crucial interest rates for estates valuing farmland as of a date in 2025.

Section 2032A of the Internal Revenue Code offers a significant tax break for family farms. Specifically, Section 2032A allows an executor to elect to value real property used for farming or in a closely held business based on its actual use rather than its "highest and best use." This can substantially reduce the estate tax burden, but strict requirements must be met, including material participation by the decedent or a family member and continued qualified use by a qualified heir. One method for determining this special use value relies on interest rates for Farm Credit System loans.

Revenue Ruling 2025-16 provides the average annual effective interest rates on new loans under the Farm Credit System, as mandated by Section 2032A(e)(7)(A)(ii) for calculating the special use value of farm real property. These rates are to be used by estates that elect to value farmland under Section 2032A as of a date in 2025.

The key rates for 2025 are as follows:

• AgFirst, FCB: 6.25%
• AgriBank, FCB: 5.80%
• CoBank, ACB: 5.78%
• Texas, FCB: 6.21%

These rates apply to specific geographic territories. AgFirst, FCB, serves Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Virginia, and West Virginia. AgriBank, FCB, covers Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Tennessee, Wisconsin, and Wyoming. CoBank, ACB, serves Alaska, Arizona, California, Colorado, Connecticut, Hawaii, Idaho, Kansas, Maine, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, New York, Nevada, Oklahoma, Oregon, Rhode Island, Utah, Vermont, and Washington. Finally, Texas, FCB, covers Alabama, Louisiana, Mississippi, and Texas.

Practitioners advising estates with farmland should utilize these rates when making a Section 2032A election. They must also ensure that the estate meets all other requirements of Section 2032A, including the material participation and qualified heir rules, to avoid recapture of the tax benefits. Note that the maximum reduction in value allowed under Sec. 2032A for 2025 is $1,420,000.