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The one-year policy mandate typically is grounded in Internal Revenue Code Section 217. This section controls the taxation of the employee’s moving expenses (typically the household goods shipment) and final trip cost (typically air/car travel and hotel).

Provided that the employee satisfies the 50-mile rule (The 50-mile rule does not require the employee to move 50 miles from the old residence to the new residence. It requires that the new job location extend the current commutation distance by more than 50 miles.) and provided further that the employee is a full-time employee for 39 weeks out of the first 12 months after arrival at the new location, Section 217 allows the employee to exclude the household goods shipment and final-trip travel costs from his or her income (even if provided by the employer).

The employee’s ability to qualify for that deduction is important because it eliminates a tax liability that the employer commonly assumes in the form of a gross-up payment. The magnitude of this liability is mitigated by two factors: the expenses in question do not involve sale of the employee’s home, typically the largest cost area in a relocation; and the only risk is the amount of incremental exposure to income taxes that the employee might face if he or she were to lose the 217 deduction. If the cost of a domestic U.S. household goods shipment and travel to the new location totaled $10,000, the gross-up payment might range from roughly $3,000 to $6,000, depending on the employee’s tax bracket and the employer’s policy.

The critical language in Section 217 conditions the deduction on the expenses being incurred, “…in connection with the commencement of work by the taxpayer as an employee.”

The Treasury regulations (issued by IRS) provide detail on what is meant by the above language. Treasury Regulation 1.217-2(a)(3)(i) gives guidance on what IRS expects from a taxpayer to prove the move was “in connection with” the new job. It says: “In general, moving expenses incurred within one year of the date of the commencement of work are considered to be reasonably proximate in time to such commencement.”

In tax-speak, this regulation gives a “safe harbor” to moves that are completed in one year or less. It also gives a very reliable bright line on which to base a policy provision.

What about moves that linger for more than one year? Between a challenging real estate market, employees who are reluctant to reduce their asking price, and increased reliance on the buyer value option program (which may not offer an appraised value buy out), it is increasingly common for a move to take in excess of one year to complete.

The only tax element that is jeopardized by the longer timeframe is the Section 217 deduction, relating to the costs of moving the employee and his or her belongings to the new location; all other tax aspects of the relocation remain unaffected by the lapse of time. At all times, however, an employer must be prepared to demonstrate a legitimate business need for the relocation.

Is It One Year or Not?
The one-year element of the Treasury regulation is not engraved in stone. In fact, the same Treasury regulation that imposes the one-year rule also allows the deduction, “if it can be shown that circumstances existed that prevented the taxpayer from incurring the expenses of moving within the one-year period allowed.”

As an example of this kind of circumstance, the regulation provides an illustration where parents wished to allow their children to finish a certain level of education before moving to the new location (more than a year after the father moved to the new place of work).

A revenue ruling issued by IRS in 1978 expands on delays caused by educational needs. In that ruling, the taxpayer asked for, and received, validation of a 30-month delay in completing a move based on his desire to have his child complete junior high school in the original location.

Despite the deeply personal choice involved in educating one’s children, the regulations seem to favor decision dynamics that are external to the taxpayer as being excusable. If this factor is deemed to be “external,” then it is reasonable to ask what type of circumstance qualifies as “internal.”

In an earlier letter ruling, IRS found that a taxpayer who simply could not afford to pay for his transoceanic move in one year and, therefore, moved his goods in increments over the next two years, was still moving “in connection with the commencement of work.”

Where Does That Leave an Employer?
The instances described above tend to lead to the conclusion that there really is no such thing as an external force. After all, concerns such as “I want my children to finish their schooling in the same location” and “I really don’t want to overextend financially” seem to be internally motivated and deeply personal decisions. However, to conclude that external forces do not exist would be incorrect.

The Treasury regulations also provide an illustration of what IRS deems not to be an external force: A taxpayer who changed jobs from Washington, DC, to Baltimore, Maryland, initially opted for a long distance commute and did not change residences (The regulations were last revised when the law required a 35-mile change; they have not been updated to reflect the new 50-mile rule. The city centers of Washington and Baltimore are approximately 40 miles apart and such a move would, today, fail to satisfy the 50-mile rule). After 18 months, however, the taxpayer tired of the commute and decided to relocate his residence to the Baltimore area. The regulations found no external influences on the delay and, therefore, denied him the Section 217 deduction. On the other hand, it is entirely possible that the regulations would have granted the deduction if the taxpayer’s change-of-heart was based on an external force, such as the taxpayer’s plan to rely on mass transit service between the two cities, which was later terminated.

Most recent, there is a 1996 Tax Court decision involving Les Martin and Millie Martin. In that case, the Tax Court refused to allow the Martins two years to complete their move. The Court rejected the Martins’ arguments that it was very hard to find a nice home in Kalamazoo, MI, in less than one year; and that Mr. Martin was too busy with work to devote time to househunting.

The court rejected the taxpayer’s efforts to prove that a seller’s market that existed at the time in Kalamazoo made it difficult to find suitable housing. The court further rejected Mr. Martin’s claim that his work responsibilities precluded househunting activities. The court took note that Mrs. Martin produced no evidence on why she could not go househunting.

Where Does That Leave an Employer With a One-year Policy?
First, and most important, a move that takes more than one year to complete is not “illegal” in any sense of the word. Second, given the language in Section 217 and the regulations and the case law, it also is clear that the “one-year rule” does not create a “hard stop” to the relocation process.

The key question is going to be whether the employee who cannot sell his or her home in only one year will be seen as being subject to external forces, like having a child who needs 30 months to complete junior high school, or not being flexible enough about housing in Kalamazoo.

The Martin case and the Baltimore commuter regulations make clear that there are limits to the timeframe and limits to the acceptability of the reasons behind the timeframes. At one end of the spectrum is a very conservative position, that all moves that extend beyond one year are not considered eligible for the Section 217 tax deduction. A company that has more appetite for risk may opt for the other end of the spectrum with a very aggressive position based on the concept that the national real estate market is in a challenging and unprecedented time and that any move that takes more than one year is connected to this external situation and still is eligible for the Section 217 tax deduction. Such an employer also might seek to rely on the fact that all employer-sponsored moves are, by their very definition, arguably connected to the commencement of work, because very few employers provide gratuitous relocation benefits.

As with many decisions that are tax-driven, there is no clearly authorized or prohibited right or wrong answer. As usual, it is a balance between safety and cost. The best way of navigating the examples above and applying them to your situation is to evaluate each such exception to policy to see whether it can be substantiated that external forces created the need for more than one year or it is simply the employee’s personal desires that caused the delay in finalizing the move.

Bruce Perlman, CRP, is senior vice president, general counsel for Cartus, Danbury, Connecticut. He can be reached at +1 203 205 6550 or bruce.perlman@cartus.com.