Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017
Relocation company service fees are universal, and are not considered taxable. Rev. Rul. 2005-74, 2005-2 CB 1153, specifically includes among the costs paid by the employer a fee to the relocation management company, and holds than none of the costs are taxable. This is in keeping with years of private letter rulings to the same effect. See LTR 8406033 (Nov. 4, 1983)(fees were to promote and improve the productivity of employees, and not taxable to the employees). See also LTR’s 8244032 (Aug. 6, 1982); 8428031 (Apr. 5, 1984); and 8425069 (Mar. 20, 1984).
Moreover, such fees should be considered nontaxable regardless of the taxability of the home purchase and sale costs. In numerous IRS audits of relocation programs, agents have accepted the argument that service fees should be excluded from the costs that are considered taxable to employees, even if the actual costs associated with the home sales are found to be taxable. Such would be the case, for example, if the home sale program was not considered to be covered by Rev. Rul. 2005-74.
This treatment of fees acknowledges that the fees are paid for administration and delivery of a benefits program, not for specific taxable benefits to employees. Seeking to tax the fees would be akin to seeking taxability, for example, of fees paid to benefits administrators for maintaining a company’s 401(k) or health plans.
The fees paid in a typical home sale program do not provide any taxable benefits to employees. The fees compensate the service provider for its efforts in setting up files and taking steps necessary to value the home and manage the acquisition and sale process on behalf of the employer. There is no value to the employee in the payment of this fee. The fee simply compensates the service provider for designing, managing, and implementing a part of the employer’s relocation program, assuring that the employees are efficiently moved from one location to another, and for incurring costs for home purchases and sales that are themselves not taxable to employees.
For the same reasons, service fees are considered to be deductible by the employer as ordinary and necessary business expenses. IRS takes the position in Rev. Rul. 82-204, 1982-2 CB 192 that costs of buying and selling the homes give rise to a capital loss, not ordinary deductions. That position is incorrect, is not followed by the vast majority of employers, and has never been litigated. However, even if the IRS is correct, IRS agents on audit have always accepted that service fees themselves (as opposed to the actual costs of buying and selling, which are capitalized into the home) are deductible as business expenses.