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Tax benefits of relocation costs.

With many businesses moving or expanding their operations to new locations, tax practitioners should carefully review the costs associated with the relocation effort to maximize the available tax benefits. The costs involved in searching for and ultimately moving to a new business location are often substantial. Taxpayers often invest considerable time and resources investigating several possible sites, but will only choose one, or may decide not to move at all. The question for the tax practitioner then arises as to how expenses attributable both to the site chosen, as well as to those investigated but subsequently abandoned, are treated for tax purposes, i.e., whether they may be deducted currently or must instead be capitalized.

Typical relocation expenses include legal and consulting fees for feasibility studies, architectural planning, engineering services, contract negotiations, computer installations and other professional services, as well as the cost of physically moving machinery, equipment and office furniture. Expenses for travel to proposed sites and meetings with state economic development groups for the purpose of negotiating tax and other financial incentives to induce the company to relocate to its jurisdiction are often involved. CPAs may be consulted to determine the tax implications of the move, and to formulate budgets and projections as a consequence of the move.

For financial statement purposes, relocation costs are generally expensed when incurred. For tax purposes, Sec. 162 allows a current deduction for ordinary and necessary business expenses, while expenses incurred for the acquisition of a capital asset generally must be added to the asset's cost basis under Sec. 263. The origin of the expense determines whether it may be deducted or capitalized and amortized. To be currently deductible for tax purposes, however, two additional tests must be met. Under the "all events" test of Sec. 461(h)(4), an accrual-method taxpayer is entitled to a deduction only when "all events" that determine that the liability does in fact exist have occurred, and the amount of such liability can be determined with reasonable accuracy. The second test permits a taxpayer a deduction only after "economic performance" with respect to the item has occurred (Sec. 461(h)(1)). For services, economic performance is deemed to occur as the services are provided. These rules do not apply to expenses otherwise capitalizable under Sec. 263(a). (A detailed discussion of these tests is beyond the scope of this item.)

Legal fees incident to the successful negotiation of a sale and leaseback transaction were held to be nondeductible additional costs of settling a lease in Altec Corp., TC Memo 1977-438. The court looked to the origin of the expense and determined that the legal fees were incurred for the creation of a long-lived asset--a 25-year lease--and were required to be capitalized and amortized over the lease's term.

In Levenson @ Klein, Inc., 67 TC 694 (1977), the taxpayer incurred legal and other professional fees in an effort to lease and purchase real property. The court emphasized substance over form in holding that expenses related to the lease that was agreed to must be capitalized and amortized over its term. However, professional fees related to unsuccessful searches for property were deductible.

In Millinery Center Building Corp., 21 TC 817 (1954), legal fees paid to acquire real estate and cancel the lease thereon were held to be nondeductible, since they were incurred to obtain capital assets, namely the title to land the taxpayer acquired.

The Tax Court has also held that attorneys' fees for drawing up documents for the acquisition of a building by an individual were nondeductible capital expenditures. In Collins, 54 TC 1656 (1970), the taxpayer purchased an apartment building as income-producing property. The taxpayer claimed deductions for legal services and tax advice related to the acquisition, which the IRS disallowed. The court agreed with the Service as to the legal fees by finding them to be capital expenditures. Fees for accounting and tax services, however, were currently deductible under Sec. 212, since the services performed by the CPA were related to tax advice and assistance in tax matters, including assistance in preparing the purchase contract and other documents, provision of necessary financial data, and other advice with respect to the tax consequences of purchasing the building. Although in this case the building was purchased for income-producing purposes, such that Sec. 212 governed the deductibility of related expenses, it is reasonable to conclude that an analogous business deduction under Sec. 162 would be permitted. Therefore, amounts paid by a taxpayer to its CPA for developing tax savings plans, providing relevant financial information and analyzing the tax consequences of its relocation effort will be currently deductible, including services related to the site chosen.

Legal fees incurred pursuant to an unsuccessful or subsequently abandoned attempt to acquire or lease property have been held to be currently deductible. In Davidson, 27 BTA 158 (1932), the taxpayer incurred legal fees and travel expenses related to negotiations for the acquisition of several land leases. One lease was subsequently secured, but the remaining leases were not approved. The court held that both the attorneys' fees and the travel expenses related to the leases that the taxpayer failed to secure were currently deductible.

Based on this analysis, a taxpayer will be able to deduct that portion of legal fees and related travel expenses incurred with respect to sites not ultimately selected, but must capitalize the expenditures related to the site chosen and amortize them over the new buidling's useful life or lease term, as applicable.

Sec. 162 also governs the deductibility of costs of physically moving machinery and equipment. In MacAdam @ Foster, Inc., 8 BTA 967 (1927), the court allowed the taxpayer to deduct expenses incurred to transport machinery from its existing building to a new location. No improvements were made, and the expense was not considered an installation cost, since the machinery had already been set up and used prior to the move.

In Rev. Rul. 70-392, the Service held that labor and transportation costs for relocating the existing physical assets of a group of regulated electric utility companies were deductible under Sec. 162, since the relocation of existing assets did not result in a material change in their physical or mechanical characteristics or an extension of their useful lives, and was not part of a general plan for improvement. Rather, the relocation allowed the assets to remain in service for the balance of their original useful lives. Based on similar logic, Rev. Rul. 79-135 held that the cost of moving equipment to a new location, pursuant to a plan to acquire, renovate and equip an existing facility, was deductible. Therefore, labor and transportation expenditures for physically moving assets to a new location were deductible, provided the assets were not materially altered or their useful lives not substantially prolonged.

When moving expenses and professional fees related to a business's relocation or acquisition of a new lease are subject to reimbursement, the Tax Court has held such expenditures nondeductible to the extent of the reimbursement. In Charles Baloian Co., 68 TC 620 (1977), the building in which the taxpayer's business was located was scheduled for demolition by the Redevelopment Agency, forcing the taxpayer to relocate. The accrualmethod taxpayer requested reimbursement for its moving expenses from the agency, which was subsequently granted. The court disallowed a moving expense deduction, since the taxpayer's right to the offsetting reimbursement was sufficiently fixed and noncontingent so as to deny a deduction for the related expense.

In Wolfers, 69 TC 975 (1978), the taxpayer was forced by the Federal government to vacate its business premises, and was eligible to receive reimbursement for moving costs related to the relocation. The court stated that a corporation's payments for rent, moving expenses and professional fees in connection with a relocation effort were deductible under Sec. 162. The court further held that expenses were not deductible to the extent the taxpayer received reimbursement for such expenses prior to incurring them, based on its rationale in the Baloian case.

When the right to reimbursement was not yet fixed or determinable, as in Buffalo Wire Works Co., 74 TC 925 (1980), and Electric Tachometer Corp., 37 TC 158 (1961), the Tax Court allowed a deduction for moving expenses. In Buffalo, the taxpayer's land, building and fixtures were condemned by the state. Because the taxpayer used the condemnation award to purchase qualified replacement property, the reimbursement was treated as an amount realized on involuntary conversion, and not as reimbursement for moving expenses. Consequently, the moving expenses were deductible. The taxpayer in Electric Tachometer incurred expenses to move its machinery and equipment from property that was appropriated by the state. Since the state had not acted on the taxpayer's claim for recovery of expenses by the end of its tax year, its right to reimbursement was not sufficiently fixed to disallow a deduction for its moving expenses. The Service has affirmed these positions in Rev. Rul. 78-388, stating that moving expenses incurred in relocating a trade or business are ordinary and necessary business expenses, but that such expenses are not deductible to the extent they are reimbursable.

In summary, accounting fees and attorneys' fees directly attributable to tax savings and taxrelated advice, as well as the cost of moving furniture and machinery, are currently deductible. Legal, engineering and consulting fees related to a successful relocation project, and expenses for the installation of a new computer system, must be capitalized in accordance with Sec. 263(a) and amortized or depreciated over the applicable period. Other professional fees related to proposed sites not chosen are deductible when another site is selected or when the search is affirmatively abandoned. Travel and meeting expenses allocable to the relocation effort are currently deductible.

In any relocation case, consideration should be given to the origin of the expense. If legal fees are directly related to the acquisition of the property of the negotiation of the lease, they must be capitalized. With respect to consulting fees, the proper allocation of the amount to be expensed or capitalized and the appropriate amortization periods are determined when a new facility is selected and placed in service. To the extent that financial accounting rules provide for different treatment for these items, any differences will be reported on Schedule M-1 of the corporation's Federal income tax return.

From Betsy Eike, CPA, New York, N.Y.
COPYRIGHT 1995 American Institute of CPA's
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Author:Eike, Betsy
Publication:The Tax Adviser
Date:Feb 1, 1995
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