Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017
Late on November 30, 2005, the Internal Revenue Service released the ruling long sought by the relocation industry on the tax treatment of relocation home purchase programs. The ruling can be found here. The ruling is the first formal expression of an IRS position on home purchase programs in more than 30 years. The following offers a preliminary analysis.
Rev. Rul. 2005-74 provides an unqualified endorsement of Appraised Value transactions, and of Amended Value transactions that conform to the 11 key elements crafted by Worldwide ERC® in 1985. The ruling says that two separate, independent sales occur in such transactions, and the holding in Amdahl v. Commissioner, 105 T.C. 507 (1997) will not apply. In both situations, the ruling makes clear that use of a blank deed does not affect the favorable result.
The ruling includes a third factual scenario in which the program will not be treated as including two separate, independent sales, and costs will be taxable to the employee. In that scenario, the relocation management company is not required to amend its offer at the higher outside price unless and until it is able to enter into a sale contract with the outside buyer, the employee retains the right to negotiate the relocation company’s sale to the outside buyer, and the proceeds representing the higher amended value are paid to the employee "only if and when" the outside sale closes. The IRS describes the sale of the home by the employee to the relocation management company as being "contingent" upon the relocation management company entering into a contract with the outside buyer. Neither the facts nor the analysis in this unfavorable scenario are completely clear, and some additional clarification may need to be sought from IRS.
The ruling does not mention the Buyer Value Option, either favorably or unfavorably. However, because the Buyer Value Option is in substance simply an Amended Value transaction without an initial offer, the analysis of Amended Value transactions in the ruling would appear to apply to BVO’s as well, with the result that BVO’s conforming to the 11 key elements should continue to be considered nontaxable, and BVO’s containing the unfavorable elements in the third factual scenario above will no doubt be treated as taxable by the IRS. However, it remains highly advisable to structure BVO’s as delayed Amended Value transactions, with an eventual guaranteed buyout.
In the ruling fact scenarios, a relocation management company is employed to buy and sell the houses. However, the ruling makes clear that the real party in interest is the employer, and the employer is treated as the real buyer and seller. The relocation management company is considered an agent of the employer. Consequently, although the ruling is silent on the issue, it would apply to in-house programs in the same way it applies to programs outsourced to relocation management companies.
The ruling is also favorable in that it does not include any facts relating to the holding period for the properties. Consequently, the industry can continue to come to its own conclusions as to what holding period will be respected. Caution should be exercised, however, in interpreting this aspect of the ruling too broadly. It is likely that, notwithstanding the absence of any reference to holding periods in the ruling, the IRS would continue to object if sales are simultaneous or very close together.
The ruling also does not discuss the type of deduction the employer gets for the costs. IRS has, since Rev. Rul. 82-204, taken the position that such costs are capital, and deductible only against capital gains. The ruling should be considered favorable in that it does not highlight this issue, but nothing suggests that the IRS has changed, or will change, its position. Consequently, since the ruling clearly treats the employer as the owner in Appraised Value and properly organized Amended Value transactions, the IRS will continue to insist that costs incurred are capital. The industry, for its part, will continue to argue that the houses are property held for sale in the ordinary course of a trade or business under section 1221(1) of the Code, and not capital assets.
The ruling likely will have an immediate effect on audits and Appeals that are ongoing. In each, the IRS agent or Appeals Officer will undoubtedly seek to determine whether the facts in the taxpayer’s case are close to the favorable scenarios, or are more like the unfavorable scenario. In dealing with such inquiries, taxpayers should seek to emphasize those aspects of their program that are like the favorable scenarios in the ruling, and unlike the unfavorable one. In particular they should point out the ruling’s favorable holding on the blank deed. Further, in most programs it should be possible to emphasize that there is no profit passback, and that the purchase from the employee, and the payment of proceeds to the employee, is not contingent on the second sale being successfully completed. As noted, although the IRS analysis of the unfavorable scenario in the ruling is not clear, IRS seems to consider the two factors noted as extremely important.
Worldwide ERC® will continue to analyze the ruling, and expects to provide further views and reaction in the near future.