Wall Street Journal Tax Report:  Donating Your Vacation Time, by Laura Saunders:

Now there is another way for workers to help victims of superstorm Sandy: donating unused vacation days.

This past week, the IRS reactivated this
benefit [in Notice 2012-69], which it previously allowed after the Sept. 11 attacks and
Hurricane Katrina.

In recent years many companies have begun offering employees greater
flexibility in managing their vacation time and other "leave" days, such
as allowing them to buy or sell extra days, while limiting time carried
over from prior years that puts a liability on the books. The IRS's
move provides tax breaks both to employers who allow donations of days
and to employees who make them.

"Based on our experience, I have no doubt the IRS's action will
turbocharge donations to Sandy relief," says Mary Hevener, an
employee-benefits expert at Morgan, Lewis & Bockius in Washington
who worked with the American Payroll Association to secure the ruling. …

As a result of the IRS's ruling, all three groups benefit.
Charitably-minded employees can make a donation without writing a check.
Although they don't get a deduction on their tax return, the pay they
forfeit is subtracted from their total earnings. Tax-wise this is often a wash. …

Employers benefit because the donated pay is deductible as wages
rather than a charitable contribution. That is welcome both because
charitable deductions are sometimes limited and because larger wage
deductions can be helpful with other tax issues. … 

For nonprofits helping Sandy victims, the IRS's move will likely
bring in more money—both because workers will find it easy to contribute
unused days and because the donated leave is exempt from Social
Security and Medicare taxes, as well as income taxes. This year, those
taxes top out at 13.3% when employer and employee shares are added
together.