Significant Private Letter Rulings - Home Purchase and Relocation Programs 

Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter Scott Associates
Current as of January, 2017

Letter Ruling 9552040. A company used a single Broker Market Analysis (BMA) to determine the price offered to transferees for their homes. No appraisals were done. Provided that the result is "fair market value," the use of a BMA as opposed to appraisals will not affect the result under Rev. Rul. 72-339.

Letter Ruling 9447002. In a typical, appraised value home purchase program, if the homes are purchased at fair market value the employee does not have income from avoiding costs of selling the home, citing Rev. Rul. 72-339. The PLR includes the following caveat, however: "This technical advice memorandum does not address the issue of whether [the company’s] payment of a broker commission would result in compensation to the employee in a situation in which [the company] sold the residence to a third party who had made a purchase offer to the employee."

Letter Ruling 9313015. A company determined an individually calculated maximum limit on any relocated employee’s reimbursable moving expenses. This limit was then reduced by a "cost cutting factor" of 10 to 20 percent, and the reduced amount was advanced to the employee. The employee accounted to the employer for the expenses within three months, and kept any excess over expenses incurred as a bonus. The IRS ruled that the employee has income only after the accounting, with the advances treated as loans until that time, and that the employer need not withhold until then.

Letter Ruling 9244027. If a relocation company has all the risks of loss and benefits of gain on the sale of an employee home, the relocation company (and not the employer) will be considered the owner of the property for federal tax purposes.

Letter Ruling 9041046. A regular, appraised value purchase from an employee is a reportable real estate transaction under section 6045(a), requiring the filing of Form 1099-S, but the subsequent sale by the employer or relocation management company to a third-party buyer is not. In an assigned sale transaction, however, regardless of whether the sale to the third-party buyer is above or below the appraised value, the only reportable transfer is a transfer from the employee to the third-party buyer pursuant to the assigned contract, and reporting is required when that contract closes.

Letter Ruling 9036003. Employer X is deemed to have purchased and sold the homes owned by its employees. The homes are capital assets to X under section 1221 of the IRS Code, and the amounts paid by X to RELOS for such items as mortgage payments, brokers’ commissions, title examinations, transfer taxes, etc., are nondeductible capital expenditures that must be added to the bases of the homes.

Letter Ruling 8928025. A and B purchased and used both Residence #2 and Residence #3 within two years after the date of sale of Residence #1. In accordance with section 1034(c)(4) of the Internal Revenue Code, Residence #2 will constitute the new residence with respect to the sale of Residence #1, provided that the conditions set forth in section 1034(d)(2) (including that the subsequent sale is connected with commencing work at a new place) are met with respect to the sale of Residence #2. Unless the adjusted sales price of Residence #1 exceeds the cost of Residence #2, no gain will be recognized on the sale of Residence #1 for 1986. In accordance with section 1034(e), the adjusted basis of residence #2 will be reduced by the amount of the gain not so recognized on the sale of Residence #1. Gain will be recognized on the sale of Residence #2 for 1988 to the extent that the adjusted sales price of Residence #2 exceeds the cost of Residence #3.

Letter Ruling 8919013. IRS unable to rule on whether taxpayer is entitled to defer the gain from the 1986 sale of home. Provided that the home was a principal residence, that the move was work related, and that the purchase qualifies as a principal residence after the sale of old home on a timely basis, then the gain taxpayer must recognize is limited to the excess of the adjusted sales price of the old home over the cost of purchasing new home.

Letter Ruling 8522002. Describes three "Amended Value" transactions which actually appear to have been more in the nature of assigned sales. Each of the respective employees arranged the sale of his/her house at a price in excess of the appraised value for which Y (the relocation agency) offered to buy the house. In each of these three transactions, the selling employee used a realtor to find a buyer at the higher price and in each transaction the employee was obligated to pay the realtor’s fee if the house were sold to the purchaser produced by the realtor. Payments of the realtors’ fees constituted indirect reimbursements of the employees’ moving expenses and were includible in the employees’ incomes under section 82. The employees were also in receipt of wages in the amounts of their respective reimbursements for the taxes imposed by the FICA, the FUTA, and the Collection of Income Tax at Source of Wages, to the extent that at the time of reimbursement it was not reasonable to believe that a corresponding moving expense deduction was allowable.

Letter Ruling 8430085. Expenses paid or incurred by X, an employer that established a relocation program, in connection with the purchase and resale of a transferring employee’s residence to a third party purchaser, are not includable in the gross income of such employee under section 82.

These expenses include appraisal fees, any real estate commissions payable as a result of the sale, carrying costs incurred by X after acquiring possession of the property, and any loss sustained by X upon the sale of a residence to a third party purchaser. Additionally, state and local realty transfer taxes paid under the relocation program which are treated as imposed on X are not includible in the gross income of a transferring employee. When a transferring employee elects to receive the net investment value as payment for the property, the excess, if any, of such amount over the fair market value of the property is includable in the employee’s gross income under section 82. To the extent amounts paid by X in connection with the purchase of an employee’s home are treated under local law and custom as imposed on X, such amounts are not wages under sections 3121, 3306, and 3401. Amounts paid by X in connection with the purchase of an employee’s home that are treated under local law and custom as imposed on the seller are not wages under the FICA, the FUTA and withholding rules if at the time of payment it is reasonable to believe a corresponding moving expense deduction is allowable to the employee. Real property taxes that are properly apportioned to X will be deductible under section 164(a). Mortgage payments on a residence by X under its employee relocation program are capital expenditures, and the sales commissions are treated as an offset to the selling price of a residence.

Letter Ruling 8428031. Where M, a relocation company, buys a relocating employee’s home pursuant to an agreement and sells it, no part of the transaction results in income to the selling employee for a real estate commission that is neither paid nor incurred. This holding is applicable in both the "market valuation" and "assigned sale" transactions. Where M pays any of the direct home selling costs treated under local law and custom as imposed on the seller, the selling employee is to that extent in receipt of gross income under section 82. The amount of such direct home selling costs are subject to employment taxes, but only to the extent it is reasonable to believe at the time of the payment that a corresponding deduction is not allowable to the employee under section 217. The employer is entitled to a deduction for the payments made to M under the agreement, as ordinary and necessary business expenses under section 162.

Letter Ruling 8425069. M and N are employers. O and P are relocation companies. Where O or P buys a relocating employee’s home pursuant to the agreements with M or N and sells it, no part of the transaction results in income to the selling employee under section 61 or section 82 as compensation for a real estate commission that is neither paid nor incurred. The holding is applicable in both the "appraised value" and "amended offer" transactions of O and similar transactions of P. However, the relocating employee must account for the realized gain on the sale of the home to O or P. Where O or P pays any of the direct home selling costs treated under local law or custom as imposed on the seller, the selling employee is only to that extent in receipt of gross income. However, the selling employee is not in receipt of gross income from amounts paid by O or P in the transaction between O or P and any third party purchaser. Payments made by M or N to O or P for direct home selling costs that are treated under local law and custom as imposed on the seller are subject to employment taxes (FICA, FUTA, and withholding), except to the extent it is reasonable to believe that a corresponding moving expense deduction is allowable to the employee under section 217. No part of the payments made by O or P in the transaction between O or P and any third party purchaser results in "wages" to the employee selling the home. M and N are entitled to a deduction for the payments made to O and P under the agreements as ordinary and necessary business expenses under section 162.

Letter Ruling 8406033. Amounts paid to Relocation Company Y by Employer X under the home purchase agreements are deductible as ordinary and necessary business expenses under section 162(a). Amounts paid by X to Y under the agreements are not compensation to the relocating employee to the extent such payments are not payments of expenses that are treated under local law or custom as imposed on the relocating employee. The relocating employee must account for realized gain on the sale of the home to Y. If Y pays any of the "direct home selling costs" treated under local law and custom as imposed on the seller, the selling employee is to that extent in receipt of gross income under section 82. Amounts paid by X to Y under the home purchase agreements are not "wages" for purposes of FICA, FUTA, and withholding to the extent such payments are not payments of expenses that are treated under local law or custom as imposed on the relocating employee. If Y pays any of the "direct home selling costs" treated under local law and custom as imposed on the seller, such amounts are excepted from the definition of "wages" for employment tax purposes if at the time of such payments it is reasonable to believe that a corresponding deduction by the employee is allowable under section 217.

Letter Ruling 8315021. An employee agreed to pay back relocation reimbursements if the employee left the employer within one year of the move. When the employee left within one year, the employer forgave the required repayment. The IRS held, under very unclear facts, that the forgiveness resulted in cancellation of indebtedness income to the employee, reportable as wages on Form W-2.

Letter Ruling 8244032. An employer’s payments made to M, a relocation company, pursuant to the relocation agreement are deductible as ordinary and necessary business expenses under section 162(a). If M buys a relocating employee’s home pursuant to the agreement and sells it, no part of the transaction results in income to the selling employee under section 82 as compensation for a real estate commission that is neither paid nor incurred. The holding is applicable in both the "appraised value" and "amended value" transactions. However, the relocating employee must account for the realized gain on the sale of the home to M. If M pays for direct home selling costs that are treated under local law and custom as imposed on the seller, the employee is to that extent in receipt of gross income, and such income is subject to employment taxes (FICA, FUTA, and withholding), except to the extent that it is reasonable to believe at the time of the payment that a corresponding moving expense deduction is allowable to the employee.

Letter Ruling 8230071. Amounts paid to a relocation service do not represent compensation to the employee. Accordingly, the employer is not required to report such amounts on employee Form W-2 under Rev. Pro. 80-53 and amounts paid the relocation company do not represent wages subject to withholding or employment taxes.

Letter Ruling 8204135. Supplement to ruling of May 28, 1981 (Letter Ruling 8134089), so that it is clear that the reference to "seller" in the context of a sale by an employee refers to the selling employee. Ruling is amended by substituting the words "selling employee" for the word "seller." It is also concluded that upon N’s resale to a third party of the relocating employee’s former home, no part of that transaction results in gross income to the employee under section 82 of the IRS Code, because the employee is not a party to the resale.

Letter Ruling 8134089. Where N, a relocation company, buys a relocating employee’s home pursant to the agreements with M, an employer, and sells it, no part of the transaction results in income to the selling employee under section 82 as compensation for a real estate commission that is neither paid nor incurred. This holding is applicable in both the "appraised value" and "amended value" transactions. However, the relocating employee must account for the realized gain on the sale of the home to N. Payments made by M to N for direct selling costs that are treated under local law and custom as imposed on the seller are subject to employment taxes (FICA, FUTA, and withholding). These payments are subject to the above employment taxes only to the extent that it is reasonable to believe at the time of the payment that a corresponding moving expense deduction is not allowable to the employee.

Letter Ruling 8113020. M, a corporation, made payments to a relocation company for employee relocation services offered to M’s employees. These services were purchased in order to minimize the disruptive effect of moves on transferred employees’ effectiveness. Various types of benefits provided by an employer to its employees can bear a direct relationship to the business of the employer by bolstering employee morale and thereby increasing employee productivity and efficiency. The expenses incurred in connection with providing these benefits are deductible business expenses. Payments by M to the relocation company will have a similar beneficial effect on the employer-employee relationship. Accordingly, payments made by M to the relocation company pursuant to the relocation agreement are deductible as ordinary and necessary business expenses under section 162(a).

Letter Ruling 8016098. So long as no portion of the fees paid by M, an employer, to Relo, a relocation company, under the proposed agreement is an obligation of M’s relocating employee (seller) under either federal tax laws or local law and custom, M’s relocating employee (seller) does not recognize taxable compensation with respect to all or any part of the fee payments made by M to Relo under the proposed agreement. M is not liable for employment taxes with respect to all or any part of the fee payments made to Relo under the proposed agreement.

The foregoing is intended as general information only. Regarding your specific situation, Worldwide ERC® suggests that you consult with your own tax or legal advisor as appropriate.

For reprint information contact: GovernmentRelations@WorldwideERC.org