Introduction to Home Sale Tax Issues
Employers who reimburse brokers’ commissions and closing costs on the sale of their employees' homes, as part of a relocation, create taxable income for those employees. Since the Tax Reform Act of 1993, no deductions for such relocation expenses are available to employees, and, therefore, all such payments create fully taxable income. As an example, the average sales commission and closing costs on a $300,000 home are approximately $24,000, or about 8% of the home's value. Reimbursing these fees creates a tax liability for the transferee of approximately $8,400 in state, local and federal taxes. For transferees in high-income brackets, this tax liability can run as high as $11,400 (slightly under 50% of the estimated closing costs).
Many employers, attempting to relieve the tax liability for their employees, reimburse their employees for these taxes. In the relocation industry, this is commonly referred to as "gross up." On a $8,400 tax liability, however, the initial reimbursement creates $3,300 in additional taxes for the transferee. Most companies also gross up this amount. If $8,400 is fully grossed up, so that the employee has no net-tax liability, total tax reimbursements come to an average of $16,080 (about 67% of the broker's commissions and closing costs reimbursed) and can reach over $21,230 (about 88.5% of the reimbursement) for employees in the highest tax bracket. (Please see the Assumptions and Calculations chart at the end of this document.)
To eliminate the creation of taxable income these reimbursements create, certain employers have used home purchase programs – also called "buyouts" – designed to utilize the tax effect of Revenue Ruling 72-339 (explained below). Unfortunately, according to the Employee Relocation Council (ERC), historically the cost of buyout programs average almost 17% of the acquisition price of the home. As a result, many corporations have never employed home purchase programs, while others have abandoned buyouts and are looking for other options.
Both companies that directly reimburse brokers' commissions and closing costs and companies utilizing home purchase programs want to assist their transferees in selling their homes without creating taxable income and additional tax costs. This white paper examines the methods by which employers have attempted to do so, and the likely tax consequences thereof.
The utilization of home purchase programs by corporate employers has also created an issue regarding the treatment of the losses and expenses incurred by the employer. Most corporations consider the expenses associated with reselling homes acquired through their home purchase programs as ordinary business expenses, which offset ordinary income. Through a series of Revenue Rulings (e.g. Revenue Ruling 82-204) and Technical Advisory Memoranda, however, the Internal Revenue Service (IRS) has taken the position that for most of these programs, the brokers' commissions, closing costs and losses on resale, relevant to these properties, create capital losses rather than ordinary business expenses. This is significant because many employers (particularly those in the service industry) do not have offsetting capital gains against which to write-off the capital losses.
A brief history of the tax treatments of reimbursements of brokers’ commissions and closing costs
Unquestionably, reimbursement of brokers’ commissions and closing costs, in conjunction with the sale of a relocated employee's home, creates taxable income. During the mid-1960s corporations created the first home purchase programs in an attempt to eliminate the creation of taxable income by the reimbursement of these costs.
In the typical home purchase program the employer, or a supplier retained by the employer (throughout this white paper, utilization of the word employer also refers to a relocation supplier retained by the employer), purchases the employee's home at "fair market value" as set by an appraisal process. In actuality, the employer has given the employee an offer (often called the buyout) to sell the home within a certain number of days (usually 30 to 60). During the 30- to 60-day offer period, the employee may attempt to market the home to see whether they can sell the home for more than the appraised buyout offer. If the employee elects to accept the buyout, then the employer buys the home and closes with the transferee. Closing costs are not charged to the employee, as the employer is simply willing to take a deed for the home without any obligation incurred for such costs. The only exception to this is the first transfer tax (where it is assessed), which is the sole responsibility of the transferee. Further, if the employee lists the home for sale, he or she must have had the real estate broker sign an "exclusion clause," so that the employee does not incur any obligation for real estate commission if the employee sells the home to the employer. Accordingly, no commission upon the sale from the employee to the employer is due.
If during the offer period the employee does find a buyer willing to pay more than the employer's offer, one of two things occurs:
- Assigned Sale: In an assigned sale the employee simply assigns the contract, with the buyer that he or she finds, to the employer. The employer then closes with the employee at the appraised value. Later, if the sale to the ultimate buyer closes for a higher amount, the employee is given an additional sum to make up the entire purchase price from the ultimate buyer.
- Amended Value Sale: In an amended value sale, the employer does not take an assignment of the employee's purchase agreement with the buyer. Instead, the employee informs the employer that a buyer is willing to pay more for the home and the employer then amends its fair-market-value offer up to the amount offered by that buyer. (Later this white paper will analyze reasons for the difference between an assigned and an amended value sale.)
If no buyer is procured by the employee, he or she will accept the offer from the employer. The employer then completes the sale with the employee and conducts a closing where prorations are made up to a certain date (generally the date at which the employee vacates the home). Thereafter, the employer attempts to resell the home and upon such resale all the costs of brokers' commissions, closing costs and any losses on the resale of the home are incurred by that employer.
In 1972, the IRS challenged a company’s in-house home purchase where the employer, as opposed to a relocation service company, purchased and resold the employee's home. The IRS initially contended, in the audit of a taxpayer, who was an employee of the company, that payment of home sale expenses through the employer's home purchase program created taxable income to the employee. Virtually on the "steps of the court house," the IRS relented and thereupon issued Revenue Ruling 72-339.
Revenue Ruling 72-339 basically exempts, from an employee's income, all broker’s commissions and closing costs involved in the employer's resale provided that:
- There is no broker's commission or closing costs (which are by law, or local custom, considered seller's cost and which are paid by the employer) in the sale of the home from the employee to the employer; and
- The purchase price of the home is at no more than fair-market value. (If greater than fair market value, the excess would be taxed to the employee as income.)
The reasoning behind the ruling, as discussed in subsequent Private Letter Rulings and in a 1979 IRS General Counsel's Memorandum (GCM-37888), was that the typical home purchase program really consisted of two separate sales:
- The first sale, from employee to employer, was similar to a "for sale by owner" transaction. There were no broker’s commissions due because of the listing exclusion clause in the employee's agreement with his or her real estate broker. Furthermore, there were no closing costs—as there would be in a typical transaction—because the corporate employer was willing to close without the usual formalities (except the first transfer tax as noted above). Thus, as there were no commissions or most closing costs incurred, these could not be imputed to the employee.
- The second closing transaction, between the employer and the final purchaser, was deemed totally separate from the first transaction. Therefore, none of the costs of the second sale were attributable to the employee.
Beginning in 1976, certain officials at the IRS began to question the validity of 72-339. In a 1979 IRS General Counsel Memorandum, however, the IRS described why it elected not to revoke 72-339. The Counsel supported the reasoning that there are two separate transactions and stated that the only real benefit to the employee is that he or she can sell his or her home quickly. The value of the "quick sale" benefit, however, was deemed impossible to value and thus impractical to tax.
With regard to "assigned" versus "amended value" sales, during the 1970s the IRS, in a number of Private Letter Rulings, upheld the same favorable tax treatment despite involvement by the employee in locating the ultimate purchaser of the house for the employer. Until 1985, the IRS continually upheld favorable tax treatments for programs that constituted both assigned and amended value sales.
In 1982, Revenue Ruling 82-204 was issued. This ruling held that losses on the resale of homes by an employer with an in-house program could not be used as ordinary business expenses but only as capital losses. In arguing against this ruling, industry sources claimed that losses involved in the resale of houses by in-house programs should be treated as ordinary expenses involved in the company's business operations. This was true, it was argued, because the sale of houses was incidental to the corporation's business, which included the relocation of employees. In reviewing this argument, the IRS saw, as support for the position, that the costs of home purchase programs really benefit employees and should be taxed. At this time, industry sources feared that the IRS would want to reconsider Revenue Ruling 72-339, and accordingly, the relocation industry backed off of any attempt to further question Revenue Ruling 82-204.
Since 1982, Revenue Ruling 72-339 has survived three major changes in the tax laws and, despite continuing concerns by the relocation industry, it appears to be a position of the IRS that can be relied upon, at least for now. Yet at the same time, since 1982, it is apparent that the IRS Technical Staff has developed the position that assigned sales (and possibly amended value sales), are "flexible transactions" that should not receive favorable tax treatment. Their reasoning appears to be that:
- These sales really involve one rather than two transactions, as the sale to the ultimate purchaser by the employer has really collapsed into the sale from the employee to the employer; and
- The employer has satisfied an obligation of the employee to pay a broker's commission.
It was reported that a draft Revenue Ruling distinguishing 72-339 from "flexible transactions" was developed in 1986, but it was never issued. In June of 1985, however, the IRS released Technical Advice Memorandum 85-22002, which was given as the result of an audit of a taxpayer. It exhibits the strongest position taken by the IRS against "flexible transactions." In this advisory memorandum the IRS ruled that it would tax the broker's commission in a certain "flexible transaction." While a Technical Advice Memorandum applies only to the case being considered and is not "the law," it does demonstrate the position of the IRS National Office and, accordingly, must be taken seriously by all corporations involved in this issue.
Observing the facts of 85-22002 is difficult, as they are not defined very specifically. It is unknown whether the transaction targeted in the memorandum was actually an assigned or amended value sale. On the surface, the memorandum speaks of an amended value sale. Certain language, however, implies that the transaction was in fact an assigned sale, which was simply called an amended value sale by the employer.
The IRS states that the employee's real estate broker had reason to believe it would be paid its commission by the employer's relocation company, even though the standard exclusion clause was included in the listing agreement. This could imply two things:
- First, that the broker was either told to expect the commission (despite the exclusionary clause) or knew that relocation companies will always pay the commission to the broker; or
- Second, that the contract with the ultimate purchaser was actually executed by the employee and accordingly, the broker was entitled, at that point, to the commission. In its conclusions the IRS states that the broker's commission was taxable income to the employee "absent any reason for the broker to believe that he would not receive a fee from the transaction."
From this Technical Advice Memorandum it was difficult to judge what the IRS's position on a "true" amended value sale would be. It is clear that the position of the IRS is to treat the broker's commission on an assigned sale as W-2 taxable income to the transferee. Still today, no one knows what the IRS position would be in a clear factual situation involving the amended value sale formula. As is noted later in this paper, however, we may know its position shortly.
The ERC's “11 Point Amended Value Plan”
In order to deal with industry concerns over this Technical Advice Memorandum, the ERC published guidelines for companies to structure their "flexible transactions" as amended value sales. The highlights of the ERC's definition of an amended value sale are paraphrased as follows:
- A suitable exclusion clause must be contained in every listing between an employee and a real estate broker that excludes the broker from receiving a commission if the employee sells the home to the employer. The exclusion must be structured so that it will remain in place even if the employer resells the home to someone originally procured by the broker.
- The employee must not execute a sales contract with a prospective buyer. Nor may the employee accept a down payment of any sort. The employee must execute the offer from the employer, which offer shall state that the burdens and benefits of ownership pass to the employer upon execution of the contract and the vacating of the property. This contract must be unconditional at the higher amended value whether or not the prospective purchaser obtains a mortgage commitment. The fact that the sale to the prospective buyer falls through later cannot affect the price. Accordingly, the employer must be “at risk” of owning the home after such a “fall through.” In addition, if the home sale falls through to the outside buyer and if there is a home sale bonus or incentive in the policy, this payment must still be made (i.e. even if the home subsequently goes into inventory).
- Neither the employee nor the employer (in the case where a relocation company is used) can exercise any discretion over the subsequent sale of the home. Nor may the purchase price paid to the employee (once set by reference to the prospective offer) be affected by the ultimate sales price should it be lower or higher. If the employer chooses to use the employee's broker to sell the house to the buyer procured by the employee, the employer must enter into (a) a separate listing agreement with the employee's broker to assist with the resale (which can be limited to the one buyer procured) and (b) a separate contract with the buyer, with the employer arranging transfer of title to the buyer. The employer cannot be under any compulsion to list the home with the employee's broker.
Corporate employers have taken a variety of positions with regard to the ERC's definition of amended value sales subsequent to its publication. Most employers today have described their "flexible transactions" as amended value sales. Quite a few employers follow the guidelines with respect to not allowing the employee to execute a contract with the buyer or accept a down payment. Fewer, however, go to the trouble of having a new listing agreement signed with the real estate broker. Finally, very few have been willing to take a position of risk in amending the contract to the employee up to the price offered by an ultimate buyer until that buyer has at least obtained loan approval. Thus, most employers trying to take advantage of Revenue Ruling 72-339 have done so through the following methods:
- Method One: Using a standard home purchase format with the flexible transaction being a pure "assigned" sale.
- Method Two: Using a standard home purchase format with aspects of the amended value sale but not by becoming at risk to amend the sale with the employee immediately upon receiving a bona fide offer from a buyer. (This is sometimes called an "Un-Pure Amended Value.")
- Method Three: Using a traditional home purchase program format with a "pure" amended value sale with the employer being "at risk."
- Method Four: Using a non-traditional home purchase program wherein the employee markets the home without an offer being made by the employer to purchase the home at any value. Once the employee finds a potential buyer of the home, the employer then tenders an offer to purchase the home at the price offered by the ultimate purchaser. In virtually all of these programs, the employer is never at risk if the sale of the home to the ultimate purchaser falls through. (Only in a few existing programs, of which the author is aware is the employer "at risk.") We shall then call these the "no risk" form of "un-pure" amended value sales. A "pure" amended value sale plan can be employed once an arms-length buyer is identified and the price established as the amended value. This version is often called the "amend from zero" or Buyer Value Option (BVO) plan.
Analyzing the IRS’s position regarding the various methods of meeting Revenue Ruling 72-339
In analyzing the various Revenue Rulings and Technical Advice Memoranda generated by the IRS, some broad conclusions appear. The key to whether a "flexible transaction,” whether called an assigned or amended value sale, creates taxable income to the employee is predicated upon three tests:
- Are two transactions clearly separable so that one does not collapse into the other?
- Does the real estate broker have a reasonable expectation of receiving a commission as a result of listing the home with the employee?
- Is the corporate owner of the home (either the employer or relocation service company), in economic reality, the owner of the property as the result of the first transaction so that the second transaction has economic validity?
The following is an analysis of the four ways to take advantage of Revenue Ruling 72-339, discussed above, and the likely tax treatment by the IRS in terms of these three criteria.
In the traditional home purchase program method with an assigned sale, the IRS has clearly taken the position that this creates taxable income to the employee for the amount of the broker's commission. This is obvious by Technical Advice Memorandum 85-22002, due to the fact that:
- The first transaction collapses into the second because one is dependent on the other.
- The broker has at least a reasonable expectation of a commission from the employee and perhaps even a legal right of receipt.
- The company clearly does not bear the risks and rewards of an owner.
The second method, a traditional home purchase program using an "un-pure" amended value method, (where the employer may not be at risk in the event that the sale with the ultimate purchaser does not close) is very questionable upon analysis of Technical Advice Memorandum 85-22002.
The IRS in this area has always taken the position, which has been supported by the courts, that if the form of the transaction is at variance with its substance and lacks economic reality then the substance will be determinative not the form. (Commissioner v. Court Holding Company, 324 U.S. 311, 1945, C.B.58.). Whether or not there are two transactions, in economic reality, largely rests upon the issue of risk. In the "un-pure" amended value sale, the two transactions (between employee and employer and between employer and ultimate purchaser) are economically tied together by what happens in the second transaction. The position of the ERC is that the first transaction (between employee and employer) will collapse into the second transaction, as the first transaction cannot be completed until the second transaction is a substantial reality. Did the employer actually purchase the home and thereby have all of the risks and rewards of ownership of that property? It has been the position of the ERC that this might not be the case unless the sale to the employer is totally perfected and not reliant, in any fashion, upon the sale to the ultimate purchaser by the employer.
Furthermore, the language of Technical Advice Memorandum 85-22002 must be considered. Technical Advice Memorandum 85-22002 found that the real estate broker had a reasonable expectation of receiving a fee from the sale of the property as the result of the employee listing with that broker.
In the third transaction, the "pure" amended value sale, the ERC suggests that the greatest protection against an unfavorable tax ruling is achieved. In this transaction, all methods have been used to separate the two transactions, and, in economic reality, the employer has become the owner of the home with full risks thereof. If the sale to the ultimate purchaser falls through, the employer will experience all property risks and rewards.
In the fall of 1995, the IRS, although refusing to give either a Revenue Ruling or Private Letter Ruling, indicated to the ERC that for the time being it will not attack transactions that meet the 11 point “pure” amended value sale. This has created an informal “safe harbor.”
Still, the language of Technical Advice Memorandum 85-22002 regarding the expectation of a broker's commission is troubling. It is conceivable that the IRS will later take the position that, regardless of the formalities of the amended value sale, the employee has an obligation to pay a commission to a real estate broker. In economic reality, the employer satisfied this obligation. Thus, the broker would have a reasonable expectation of receiving the commission despite the listing exclusion clause contained in the listing agreement.
The fourth method is the use of an assigned sale without the employer making a prior offer. This transaction has the same inherent problems as any "un-pure" amended value sale in that it is questionable as to whether the employer, in economic reality, ever truly completed the acquisition of the property from the employee as an owner with the full risks and rewards of ownership.
The Amend From Zero or Buyer Value Option Program
In the Amend From Zero or Buyer Value Option (BVO) Program, the employer does not make an offer for the home at fair market value. Instead, the offer is extended only at the market value established by finding an arm’s length buyer. If that buyer is never found, the employer will not purchase the home. This approach would appear to be highly susceptible to attack, even though it loosely follows the informal “safe harbor” of the amended value sale.
The substance of each of the 11 Points of the Amended Value Program is to cause an absolute and complete separation of the two transactions, (from employee to employer and from employer to ultimate buyer) so that one does not depend on the other. In a BVO, however, the transaction (from employee to employer) cannot occur unless and until a transaction (from the employer to the ultimate purchaser) is agreed upon. The employee has hired a broker to procure a buyer, and unless this occurs, the employer will not conclude an agreement with the employee. Further, when a buyer is found, the employer will not execute an agreement with that purchaser until the employee agrees that the price and terms are acceptable. Clearly the transaction between employee and employer will not occur unless the employee and ultimate purchaser reach an agreement on terms and price. This is unlike the typical amended value sale, where the sale from employee to employer will occur regardless of whether the employee finds a buyer who is willing to pay an amount with terms to which the employee agrees. Thus, a BVO is far riskier than a true amended value sale and it is yet to be determined if it may create taxable income to the employee.
Are expenses of home purchase programs ordinary business expenses or capital losses?
Recall that in 1982, Revenue Ruling 82-204 held that the costs of the resale of a home by an employer using an in-house program (where the employer, rather than a relocation service company, actually acquires the home) could not be taken as ordinary business expenses. Revenue Ruling 82-204 held that the costs of the resale of a home must only be reported as capital losses.
In Private Letter Ruling 90-36003, the IRS extended this theory to traditional home purchase programs in which an employer uses a third-party relocation company to actually take title to the properties. The IRS, relying upon the Supreme Court holding in Azur Nut v. Commissioner, Infra, found that the form of the transaction (the relocation company was the owner) was at variance with the substance of the transaction. The IRS held that the transaction lacked economic reality in that the corporate employer would essentially be in the same economic position as the owner of the property. In this instance, the contract between the relocation company and the employer called for the employer to reimburse the relocation company for virtually all of the costs of ownership of that property. Accordingly, the IRS found that the relocation company was not, in an economic sense, the owner of the property. It found rather, that the employer was in the position of being the actual owner of the property. Accordingly, the home was, in economic reality, the capital asset of the employer and the costs of its resale were capital losses. In so finding, the IRS refused to rely upon the assertion that the relocation company was not, according to traditional agency law, an agent of the corporation.
On one hand this ruling was helpful in that it reasserted the IRS’s position that the two-transaction theory in Revenue Ruling 72-339 was still applicable. Unfortunately, however, for the vast majority of corporate employers that utilize third-party relocation service companies, traditional home purchase programs do not create ordinary business expenses for those employers but rather capital losses, which can only be written off to the extent that the company has capital gains.
There is, however, one "safe harbor" for employers to receive treatment of such expenses as ordinary losses. In a Private Letter Ruling 92-44027, the IRS approved as ordinary business expenses, for a relocation company, the costs of holding and reselling homes it acquires. In this situation, the contract between the employee and the relocation company could be categorized as a "fixed-fee contract." In this contract, the relocation service company acquires the home in the traditional home purchase program manner. Rather than the employer reimbursing the relocation company for all expenses and indemnifying it for all losses, the employer's only obligation is to pay the relocation company a fixed fee based upon a percentage of the appraised or amended value of the home. In finding that the relocation company was, in fact, purchasing employees' homes for its account rather than as an agent or "appendix" to the employer, the IRS commented on issues that are germane to both the issues of creation of taxable income and capital loss. The IRS, relying in part on Derr v. Commissioner, 77 T.C. 708, 723 (1991) and Grodt and McKay Realty Inc. v. Commissioner, 77 T.C. 1221, 1237-1238 (1981), found that economic reality was that the relocation service company, which bore the risk of loss or damage to the property, was in fact the actual "owner" to which the sale from the employee occurred.
In citing Grodt and McKay Realty Inc. v. Commissioner, supra, the IRS relied upon a number of factors in determining whether the burdens and benefits of ownership of the property have fallen upon a particular party. These factors include:
- Whether legal title passes
- How the parties treat the transaction
- Whether an equity interest was acquired in the property
- Whether the contract creates a present obligation on the seller to execute and deliver a deed, and a present obligation of the purchaser to make payments
- Whether the right of possession is vested in the purchaser
- Which party pays the property taxes
- Which party bears the risk of loss or damage to the property
- Which party receives the profits from the operation and sale of the property
Accordingly, although the Private Letter Ruling does not specifically mention the capital loss issue or the amended value sale issue, it does bear directly upon both. One may assume that a fixed-fee contract, where the relocation company uses a "pure amended value" sale, may pass scrutiny as (a) not creating taxable income to the employee and (b) creating an ordinary business expense for the employer in the payment of the fixed fee.
Impact on the issue of taxable income:
Note again that Revenue Ruling 72-339 is predicated upon the existence of two transactions and that it appears to be both the position of the ERC, as well as the IRS, that the application of 72-339 is partially based upon whether the economic reality of the transaction is that the employer or its relocation service company is, in fact, the owner of the home. The two transactions (the first from employee to employer and the second from employer to ultimate purchaser) are separable. If in fact the relocation service provider is deemed to be the economic owner of the home through completion of a separate sales transaction with the employee and followed by the relocation company, bearing the benefits and burdens of ownership, then the costs attendant to the disposition of the property should not be taxable income to the employee.
Impact on capital loss:
Again, if the relocation service company is, in economic fact, the owner of the property, attendant with all risks and rewards of ownership, the Private Letter Ruling indicates that the relocation company, rather than the employer, is the owner of the property. As such, payments of a fixed fee from the employer to the relocation service company, which are not conditioned upon the actual economic losses and expenses incurred in the ownership of the property by the relocation service company, should result in the treatment of the fixed fee as an ordinary expense to the employer.
The Amdahl Case and its Impact
In furtherance of the position taken in Technical Advice Memorandum 90-36003, the IRS took the Amdahl Corp. to tax court in 1997, asserting that the costs of its assigned sale program created capital losses, not ordinary business expenses (Amdahl v. Commissioner, 108 T.C. 507 ). The court held that the assigned sale did not create ownership of homes by the corporation, using the criteria of Grodt and McKay Realty v. Commissioner, supra. The court focused on the fact that the assigned sale never vested legal title in the company or its third-party supplier; that the benefits and burdens of ownership never shifted to the company or its third-party supplier; and that the employee, under Amdahl's benefit program, would receive the benefit of any increased sales price if the home was resold by the third-party supplier for more than what was paid to the employee.
The court never reached the issue of whether it was the employer or the third party that was the “owner” of the homes, as it ruled that the employee was truly the owner. Thus, the issue presented in Technical Advice Memorandum 90-36003 of whether the corporation or the third-party supplier was the “owner” of the home was not reached. Nor was the employer's position explored, which stated that if the home was the employer's asset, it was not a “capital asset” at all but merely an asset held incidental to its normal course of business.
Recent Developments—Amdahl and Deed-in-Blank
The litigation involving the Amdahl Corp. is having a substantial impact on the relocation industry. Since the Court ruled that neither the corporate employer nor its third-party relocation supplier ever actually owned the employee's home, the logical conclusion was that the assigned home sale process merely passed ownership from the employee to the ultimate buyer. Thus, the broker's commissions and other costs of acquisition and resale (which the Court concluded were in reality, simply reimbursed expenses from the employer to the employee) could not be deemed capital losses for the employer but rather, were ordinary business expenses. The decision, however, contained very troubling language regarding the creation of W-2 income to transferees.
One of the steps used by Amdahl in its home sale process involved the use of a deed-in-blank. Briefly, in home purchase transactions, the relocation industry had typically utilized one deed for both transactions (from employee to employer or relocation company and from that entity to the ultimate purchaser).
The employee, when selling the home to the employer or relocation company, would execute a deed that did not contain the name of the ultimate purchaser. When the employer or relocation company resold the home, the ultimate purchaser's name would be placed on the deed, using the power of attorney given to it by the employee at his or her closing. In conversations with the IRS, the ERC became sensitized to the IRS's position that because of the absence of the employer or relocation company in the chain of actual title, as required by Revenue Ruling 72-339, the two transactions never really occurred. Historically, the industry's position had been that the actual agreement and closing between employee and employer had transferred sufficient “equitable title” to create ownership of the home to the employer or relocation company.
For over 20 years, the deed-in-blank process had been used by the relocation industry to minimize paperwork, reduce administrative complexity, and keep the company out of the legal chain of title to minimize cost and risk. This process transferred ownership of the transferee’s home to the ultimate buyer using a deed-in-blank without the expense of filing and recording deeds twice. The relocation industry had every reason to believe that using a deed-in-blank process at no time created a situation in which there were not two distinct and separate home sales as required under Revenue Ruling 72-339, since, in substance, the transferee transferred all of the benefits and burdens of ownership to the relocation service provider or employer.
After the Amdahl case, in July of 2001, the ERC Board of Directors approved the unanimous recommendation of the ERC Public Policy Committee relating to “Taking Title by Deed and Eliminating the Deed-in-Blank Process.” The ERC took this rare and unusual action and recommended to all of its membership the following:
“…it would be in the best interest of the members of ERC to use two deeds in relocation home purchase transactions. In the view of the Public Policy Committee, the advantages of doing so far outweigh the costs and other disadvantages identified. Consequently, the Committee believes that ERC should recommend to its members that they take title by deed in home purchase transactions.”
The increase in IRS audits and deed-in-blank under fire
In 2004, the IRS put the spotlight on relocation tax issues. As a result of the Amdahl case decision, the IRS Employment Compliance Audit Division has taken the position that failure of the relocation service provider (or employer) to take title by deed from the employee will result in the transaction being classified as noncompliant with the two-transaction requirement of Revenue Ruling 72-339. This position jeopardizes the protection of the employee from imputed W-2 income, which results from the payment of real estate commissions and most closing costs.
As a result, the number of IRS audits relative to the treatment of home sale expenses has significantly increased, with the IRS auditors taking their position from the unintended consequences of the Amdahl case (which was a capital loss case) and applying these erroneous assumptions to the determination of whether such expenses ought to be required to be treated as W-2 income to the transferee. There is nothing to suggest that the increase in the number of these employment tax audits, where the IRS auditors are attacking the use of the deed-in-blank process, will not continue.
ERC asks for assistance
In late 2003, the ERC asked the IRS to put the Amdahl issue on its Priority Guidance Plan, hoping that it would provide public guidance to the industry on the impact of the Amdahl decision on relocation home sale programs. The IRS agreed, and the Income Tax and Accounting Division (IT&A) of the Office of the Chief Counsel of the IRS took on the project in 2004. The ERC, and member relocation service providers such as SIRVA Relocation, have worked closely with the IT&A to suggest language for a new ruling and submitted a detailed analysis of the current amended value type home sale programs. The submission also included recommendations regarding the proper elements necessary to keep the program compliant with Revenue Ruling 72-339. This process has generated comments and questions from the IT&A and further responses from the ERC. A new ruling is expected by the end of 2005. It is hoped that the ruling will be prospective only, that it will overturn the use of the Amdahl decision in W-2 income audits, and will give guidance as to the appropriate elements of a Revenue Ruling 72-339 compliant transaction.
Coordinated Issue Paper Drafted
In October of 2004, the large and medium size business (LMSB) audit division of the IRS issued a Draft Coordinated Issue Paper (CIP) that directly attacked amended value home sale programs. The Draft CIP was circulated to the ERC and many taxpayers who were, at the time, under audit. The ERC responded in December of 2004 with comments and suggestions for an extensive rewrite of the assumptions and conclusions in the Draft CIP. If adopted by the IRS audit division as originally written, there would be a substantial negative impact on the way the industry manages home sale programs.
The Next Action is With the IRS
It has been determined that the Draft CIP project is not being done in conjunction with the Chief Counsel Office’s public guidance project. The industry is taking the position that the Draft CIP project should be shelved in deference to the public guidance project. The industry anticipates that the Office of the Chief Counsel will issue a new Revenue Ruling by the end of 2005, but this timing is not certain.