Service clarifies position on employer payments to relocation service companies.

Employers often hire relocation services companies (RSCs) to purchase, then sell, the homes of employees being transferred to new job locations. Rev. Rul. 2005-74 provided guidance on whether to treat such transactions as (1) a single sale of the residence from the employee to a third-party buyer or (2) two separate sales transactions--a sale of the residence to an RSC (acting as the employer's agent) and a sale by the RSC to a third party. In right of an unfavorable decision in Amdahl Corp., 108 TC 507 (1997), the ruling helps to clarify the Service's evolving position.

Amdahl Corp.

In Amdahl, the IRS's position was that there were two sales transactions. It unsuccessfully argued that the residence was first sold to the employer, then sold by the employer to the third-party purchaser. It further contended that the employer's payments to the RSC were for capital assets (purchase of the residence) and, thus, not deductible as ordinary and necessary business expenses.

Facts: In the case, the employer contracted with an RSC to assist in selling employees' residences. The RSC first made an employee an offer for the home, based on an average of two independent appraisals. Employees could then use the RSC to sell their homes in one of two ways. One was an assigned sale, under which an employee attempted to market the residence. If the employee received a bona fide offer from a third party that exceeded the RSC's offer, he or she could accept it and assign the contract to the RSC. The RSC would handle the remaining details of the transaction and pay any closing costs.

If the employee did not obtain an acceptable third-party offer, he or she could transact a regular sale through the RSC. In a regular sale, the employee accepted the RSC's offer, and the RSC paid him or her the value of the equity in the home. In addition, the RSC paid the cost of maintaining the residence until a third party purchased the property, including mortgage and property tax expenses (although the employee continued to be legally responsibility for those items). The employer paid a fee to the RSC, and reimbursed it for any expenses and losses associated with maintaining and selling the property. Any gain on the sale by the RSC, however, was assigned to the employee.

On acceptance of the RSC'S offer, the employee signed and delivered a blank deed to the RSC. This deed included only a description of the property and the employee's signature. Neither the deed nor the sale was recorded. The employee retained legal title to the residence until it was sold to a third party; at that point, the name of the third-party purchaser was entered on the deed as grantee. The RSC had the authority to accept or reject any third-party offer. If the property was not sold to a third party within a year, title would pass to the RSC.

Ruling: In reaching its decision, the Tax Court relied on Grodt & McKay Realty, 77 TC 1221 (198]), which identified the following factors in determining whether a sale has taken place:

1. Whether legal title passes;

2. How the parties treat the transaction;

3. Whether equity was acquired in the property;

4. Whether the contract creates a present obligation on the seller to execute and deliver a deed and a present obligation on the purchaser to make payments;

5. Whether the right of possession is vested in the purchaser;

6. Which party pays the property taxes;

7. Which party bears the risk of loss or damage to the property; and

8. Which party receives the profits from the property's operation and sale.

The Amdahl court concluded that, in both assigned and regular sales, the most significant factors supported the view that the employees retained the benefits and burdens of the property's ownership. The employees retained legal title to the property; there was no intention to transfer ownership; the sales contracts were executory in nature, only executed if the property were not sold to a third party within a year; and the employee received any profits beyond the original contract price. As a result, there was only one sales transaction, the employer did not acquire ownership and the amounts paid to the RSC were deductible as employee relocation expenses.

Rev. Rul. 2005-74

In Rev. Rul. 2005-74, the IRS indicated that it will follow Amdahl. In addition, it provided three situations based on that case to explain and illustrate its position on the treatment of employer payments to RSCs. In each scenario, the parties to the transaction are the employee, the employer, the RSC and the third-party purchaser. The employer contracts with the RSC to assist in the sale of the employee's residence.

Situation 1

In the first situation, the RSC contracts with the employee to pay the appraised value of the residence. On its sale, the employee vacates the property and the RSC becomes fully responsible for any mortgage(s) and "unconditionally obligated for all maintenance, taxes, insurance, expenses, risks, losses and costs associated with the home as of the settlement date." At closing, a deed is provided to the RSC, with the grantor's name left blank. The RSC then has the option of affixing its own name to the deed, or waiting and inserting the name of the purchaser when the property is subsequently sold to a third party.

The employer pays the RSC a fee for its services and reimburses it for costs associated with the purchase and sale of the employee's home. In addition, the employer is responsible for any losses the RSC incurs on the sale, but is entitled to any proceeds that exceed the cost.

Situation 2

The facts are the same as in Situation 1, except that the employee is offered a value option, under which he or she can market the residence in an effort to obtain a bona fide offer in excess of the appraised value. The marketing of the home must be through a broker approved by the RSC, and the contract between the employee and the broker must include an "exclusion clause" that provides that the broker earns a commission only if a sale of the home to a third party (not the RSC) closes.

If a higher offer is obtained, the contract between the employee and the RSC is amended to reflect the higher price. The RSC then enters into a new contract with a broker (normally, the same broker) to sell the property. The property may be sold to the same third party or to a different one; the price could be higher or lower than the one the RSC paid to the, employee. The employer continues to be responsible for any costs and is entitled to any gain.

Situation 3

The facts are the same as in Situation 2, except that a different value option is provided the employee. The employee is entitled to the excess price (actual price of the home in excess of the appraised value) if and when the RSC closes on a sales contract with a third-party buyer. Additionally, the employee can approve or reject any offer or counteroffer the RSC makes in negotiation with potential third-party purchasers.

Analysis

The ruling provides that, in both Situations 1 and 2, there are two sales of the residence. The first is a sale from the employee to the employer (with the RSC acting as the employer's agent); the second is a sale from the employer to the third-party purchaser. In each situation, the benefits and burdens of ownership are transferred to the employer. As the employer's agent, the RSC is responsible for all costs associated with maintaining the residence. The risk of loss and the benefits of gain on the sale of the property to a third party are transferred to the employer. The actual transfer of a legal tide is not critical to the result.

As a result of the two-sale outcome, amounts the employer pays to the RSC are costs of buying and selling the property, and not deductible expenses associated with relocating the employee. The net amount paid is a capital loss, which (unfortunately for corporations) is only deductible to the extent of capital gain.

In Situation 3, the result is different. Only one sale occurs, between the employee and the third-party purchaser. In the contract between the employee and the RSC, the employee retains the right to approve any offer or counteroffer in negotiations between the RSC and any potential third-party purchaser; the employee also retains the right to benefit from any additional gain on the sale. The benefits and burdens of ownership are not transferred to the employer. The employer does no more than underwrite the cost incurred by the RSC in facilitating the sale of the residence by the employee to the third-party purchaser.

If there is just one sale, between the employee and a third party, the amounts paid by the employer are deductible as ordinary and necessary expenses of relocating the employee. Unfortunately for the employee, the amounts paid are taxable compensation.

Conclusion

Rev. Rul. 2005-74 provides insight into the Service's current position on the treatment of employer payments to RSCs for assistance in the sale of employees' residences. A goal of the ruling seems to be to minimize the opportunities for such transactions to be treated as a single sale between the employee and a third-party purchaser. The facts in Amdahl appear to set the limit to which the Service will indulge a single-sale outcome.

The ruling will be most helpful when an employer's plan exactly mirrors Amdahl or one of the situations presented. Nonetheless, there will be situations that fall in the gray areas, and some uncertainty will continue to exist.

FROM WAYNE M. SCHELL, PH.D., CPA, CHRISTOPHER. NEWPORT UNIVERSITY, NEWPORT NEWS, VA (NOT AFFILIATED WITH CPAMERICA INTERNATIONAL)