One of your corporate clients has approached you about whether or not its employees are required to include certain benefits provided by the corporation in their income. In particular, the corporation has inquired whether the following benefits provided by the corporation to employees would be included in an employee's taxable income:

I. The employer would like to provide employees with valet transportation services to and from work; that is, the employer would like to pick employees up at their homes, transport them to work, and then return them home at the end of the day. In order to operate as cheaply as possible, the company envisions using a number of Toyota Priuses (a relatively small car that holds about four adults, including the driver) to provide the service. These are the same cars that run various errands for the employer during the day. They estimate that the vehicles will be used about 40% of the time to run various errands, and the remainder of their use will be dedicated to providing the transportation services. The employer anticipates that the monthly value of this benefit would be approximately $300 per month.

II. In order to promote healthier lifestyles and exercise, the employer would like to offer employees the opportunity to use athletic facilities free of charge. They want to extend the benefit to their employees, as well as to the employees' spouses, dependent children, and parents/grandparents (if applicable). To accomplish this task, the employer plans on contracting with a private gymnasium located nearby (e.g., a Gold's Gym or other gym that sells memberships to the general public). The gymnasium will still maintain its other customers, who it expects will remain the majority of its overall membership. The monthly value of this benefit is estimated to be approximately $200.

Explain to your client the general rules surrounding whether an employee must include benefits provided by the employer in income. Then, for the two proposed benefits mentioned above, explain whether the employee would have to include the amount in income or what provision or exception might apply to make the proposed benefit nontaxable. If the employer would have to make changes to the proposed benefit to render it nontaxable, explain what changes would have to be made. Finally, explain what the resulting benefit would be to the employee and how much, if any, of the benefit the employee could exclude from income. Make sure to detail any significant exceptions or rules that apply to the benefit exception at issue.