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Introduction to Home Sale Tax Issues - IRS Revenue Ruling: 2005-74

This paper is a continuation of SIRVA Consulting’s “Introduction to Home Sale Tax Issues” white paper, published August 2005. It specifically addresses the purpose and implications of Revenue Ruling 2005-74, issued by the Internal Revenue Service (IRS) November 30, 2005, on corporate home sale programs.

Introduction and History

In his initial statements concerning the November 30, 2005 publication of IRS Revenue Ruling 2005-74 (referred to hereafter as Rev. Rul. 05-74), it was suggested by Peter Scott, Tax Counsel for the Employee Relocation Council (ERC), that while the ruling may not be a “home run” for the employee relocation industry, it is certainly a triple. SIRVA suggest that the new revenue ruling is more than a triple, it is an “inside-the-park” home run — the hit is good enough to get us home and we just need to do a little more work to get us there! Strained sports analogies aside, the IRS pronouncements in Rev. Rul. 05-74 serve as validation of generally accepted relocation programs, along with the 11 Key Elements previously promulgated by the ERC.

Since Revenue Ruling 72-339 (referred to hereafter as Rev. Rul. 72-339) was issued in 1972, the IRS has not provided any material guidance on what constitutes a compliant relocation home sale program. Rev. Rul. 05-74 provides a detailed analysis of home sale relocation programs that the industry can use as guidance to review, maintain and even enhance existing programs for satisfactory IRS treatment. Rev. Rul. 05-74 does not change any existing laws or rules, nor does it create any new laws or rules — it simply provides an “official” interpretation of Rev. Rul. 72-339.

Rev. Rul. 72-339 acknowledges the general “two transaction” rule that, in an employment relocation setting, when an employee sells their home to their employer in one transaction and then the employer sells that home in a second, separate transaction to a third-party buyer, the second sale does not create a taxable event to the employee for the real estate commissions and closing costs neither paid nor incurred. Rev. Rul. 72-339 contains no explanations, interpretation or guidance, however, of what constitutes a compliant two-transaction program or how to implement one. Rev. Rul. 05-74 provides some parameters and tangible concepts on how to develop and implement a compliant home sale program that has no improper linkage between the two sales.

Rev. Rul. 05-74: The three scenarios and IRS analysis

The ruling is set forth as an analysis of three scenarios that contain certain fact patterns. The IRS reviews the fact patterns and then sets forth the acceptable and unacceptable features of each scenario.

The first two scenarios of the ruling contain well-accepted program features that are common in the industry and provide guidance for acceptable relocation programs. The third scenario contains program features that the industry has always understood to be questionable and that could create a non-compliant program. It is important to recognize that the ruling does not set forth the only methods of conducting a compliant two-transaction program. Rather, the ruling is the application of current law to a specific set of facts. The ruling uses the scenarios as examples to allow the IRS to examine and clarify what factors are significant for the legitimate transfer of the benefits, burdens and risks of home ownership. The ruling is binding on IRS personnel and provides the relocation industry with information on how the IRS would, for tax purposes, treat similar facts and circumstances.

Scenario one: Appraised value transaction

In scenario one, an appraisal process is used to establish the purchase price. A binding, non-contingent contract of sale is executed between the Relocation Service Provider (RSP) and the employee. The offer is open for 90 days. Upon acceptance of the contract by the employee, the home is purchased by the RSP for the pre-determined appraised value. At closing, the RSP pays the employee their net equity, becomes fully responsible for the property and holds itself out as such to the general public. Upon resale by the RSP, the closing costs and real estate commission in the third-party sale are the obligation of the RSP.

Scenario two: Amended Value Offer (AVO) transaction

Scenario two follows the same fact pattern as the first scenario except that it adds the program feature of marketing the home after the appraised value offer is presented. If a higher value offer is received from a third-party buyer, the original offer is “amended,” the RSP purchases the home from the employee, and the RSP then sells it to the third-party buyer. The closing costs and real estate commission in the third-party sale are the obligation of the RSP. If the third-party sale fails to close, the RSP is still obligated to purchase the home from the employee at the agreed upon amended value and the employee does not have to return any part of the purchase price to the RSP.

Scenario three: Amended value transaction

In scenario three, the fact pattern is the same as in scenario two except that the amended offer to the employee is conditioned upon the contract between the RSP and the third party. Additionally, the employee appears to control the negotiations. Finally, the employee is paid only “if and when” the third party sale closes.

Acceptable Program Features

The ruling indicates that a two-transaction program is acceptable if, after settlement (closing) with the employee, the RSP becomes “unconditionally obligated for all maintenance, insurance, expenses, risks, losses and costs associated with the home” and that after the settlement date, the RSP “holds itself out as the owner of the home to the general public.” This restates the bedrock position that the RSP must be a bona-fide owner of the home. But the ruling goes further. This section will examine the numerous program features built into the first two scenarios. By acknowledging the validity of these scenarios, the ruling appears to accept and validate many of the procedures used in existing relocation programs.

1. Use of a relocation service provider

The ruling acknowledges and confirms that the home sale program can be conducted in the name of the RSP. The fact that the RSP executes the contracts, deeds and all other home sale transaction documentation has no detrimental effect on the validity of the two-transaction home sale process.

2. The exclusion clause (and validation of the rule of law concerning contracts)

The IRS has validated the use of the exclusion clause as part of the listing process. The second (amended value) scenario fact pattern indicates that the employee initially signs the listing agreement with the real estate broker but that it contains an “exclusion clause,” which states that no commission is earned or due if the home is sold by the employee to the RSP. The broker is paid pursuant to a listing agreement signed with the RSP. By recognizing and allowing this practice, the IRS is reinforcing the rule of law that contract terms mean something and that it is not a “ruse” to have a contract (the listing agreement) that eliminates the employee’s obligation to pay a commission under certain circumstances. The broker is well aware of the exclusion clause terms and is on at least equal footing with the employee and the RSP when executing the listing agreement and the exclusion clause. There is no inherent unfairness or undue influence being imposed upon the broker. The terms of the exclusion clause and second listing agreement evidence a transfer of the benefits, burdens and risk in the home sale transaction and support the fact that the RSP, and not the employee, is the real economic party in interest with the broker. It is important, however, that the facts and circumstances support the contract language — it must be true that the RSP, not the employee, is ultimately obligated to pay the commission under the listing agreement and that the commission is due in the second transaction (RSP to third-party buyer) and not by the employee in the first transaction (employee to the RSP).

This concept can also be applied to the existence and terms of the contract of sale between the RSP and the employee. If the contract language evidences that there is a binding, enforceable, non-contingent contract, then, as long as the facts and circumstances do not belie the contract language, the IRS should acknowledge the contract and follow the contract terms in establishing two transactions.

3. Deed in Blank

The ruling is unequivocal in eliminating the need for a double deed as an absolute requirement to maintain a compliant program for W-2 income tax purposes. While not using the exact words of “equitable title transfer”, “real economic party in interest” or “substance over form”, it is clear that the intent of the IRS is to examine if the reality of the transaction is the transfer of the benefits, burdens and risks of ownership, no matter if a deed is or is not transferred in name to the RSP. This is not to suggest that the two-deed process may never be appropriate1. The fact is the transfer of a deed is still a valid indicia of home ownership. The ruling states: “The application of the [factors described in the first two scenarios] establishes the benefits and burdens of ownership.” A company must therefore evaluate all of the features of its home sale program to determine its strength. If it is determined that other features may not be as strong, then the transfer of a deed in the name of an RSP is a program enhancement that should be considered. The filing of a deed cannot take the place of a real transfer of benefits, burdens and risks but it can enhance the support for that position.

4. Appraiser and broker selection process

The scenarios accepted by the IRS allow for the RSP to manage the appraisal process. As part of that process, a list of appraisers is used from which an employee can select two appraisers to value the property for the appraised value transaction. Thus, the use of appraisers is an appropriate means to establish fair market value.

The scenarios also require the employee to select a real estate broker from a list of qualified brokers provided by the RSP. Although “qualified” is not defined in the ruling, permitting broker qualifications implicitly acknowledges and approves the RSP participation in the marketing process, including the ability to establish parameters on the marketing of the home.

5. Third-party offer qualification

The approved scenarios reference that the RSP is permitted to “determine that the [third-party] offer is ‘bona-fide’ before amending the original appraised value offer.” Even though bona-fide is not defined or elaborated on in the ruling, such language would certainly seem to allow the RSP to recognize their intention to resell the property quickly and with minimal loss and expense and thus, make sure that the third-party buyer is financially qualified to purchase the property. In addition, this may be interpreted to allow the RSP to take some steps to ensure that the offer price itself is reasonable and legitimate. This is not to suggest that the employee transaction can be conditioned upon financing or a mortgage appraisal, but rather that the RSP can take some preliminary steps before entering into the contracts with the employee and the third-party buyer to validate the offer price as a legitimate, bona-fide offer within the particular real estate market in which the offer is made.

These features are important because they accept that the RSP can maintain significant control over the entire relocation home sale process without negatively affecting the integrity of two transactions.

6. Mortgage payments

The approved scenarios also contain language that acknowledges and approves the RSP continuing to make the mortgage payments of the employee after settlement with the employee. The language in the approved scenarios states that, pursuant to the contract between the employee and the RSP, the RSP “may assume, take subject to, or otherwise become responsible for any outstanding mortgages, liens or encumbrances.” It further states that after settlement (closing) with the employee, the RSP “deals with mortgage holders, insurance companies, home maintenance companies, taxing jurisdictions, utility companies, real estate brokers and other third parties in its own name.” The reference to taking subject to outstanding mortgages and dealing with mortgage companies appears to validate the practice of servicing mortgages as opposed to satisfying them upon settlement with employees.

The contractual obligation to pay the mortgage constitutes sufficient consideration for the purchase of the property and is an indicator of ownership. While there may be other issues related to the decision to satisfy a mortgage upon settlement, IRS two-transaction scrutiny may not be one of them.

Cautioned Actions

Although many relocation practices and procedures are confirmed in the ruling, there are others that must be addressed with caution. The third scenario addresses certain processes and program features that the IRS indicates may be problematic for a successful and compliant two-transaction home sale program. The first is the employee’s involvement in and control of a third-party negotiation; the second is the contingency of the employee transaction on obtaining a third-party contract; and the third is the method and timing of the employee receiving proceeds. All of these appear to be program features that will be subject to further IRS scrutiny and evaluation.

1. Employee negotiation participation

In the third scenario, the IRS describes a program where “the Employee retains the right to approve or reject any third-party offer or counter offer made in the course of negotiations between [the RSP] and the third-party Buyer.” The IRS deems this unacceptable because the employee “effectively retains the rights to negotiate the final contract and obtain the benefit of a higher price for the property.” Accordingly, the IRS concludes that there was no real transfer of the benefits and burdens of ownership.

Because, however, in the first instance, the employee has the right to establish the terms upon which they will sell their home to the RSP, and the RSP offer is established by the third-party buyer’s offer, it is unreasonable to believe that the IRS does not contemplate that a permissible program will allow the employee some involvement in the negotiation process. At first glance, it appears that what the IRS is attempting to avoid is a situation where the employee can participate in re-negotiation after they have signed their deal with the RSP. Additionally, this could be interpreted to caution RSP’s (and by extension employers) from removing themselves from the contract negotiation process until the employee has cut the deal they want with the third-party buyer. The RSP must involve itself and negotiate the risks and terms that are appropriate for itself with the third-party buyer and those risks that are appropriate for itself with the employee. This process lends itself to the fact there are to be two separate contracts. Although the monetary terms of those contracts may be consistent and negotiated simultaneously, there must be a recognition that certain other terms, such as financing and appraisal contingencies, selection of title insurance, qualification for homeowner’s insurance, closing dates, damages and liability issues will be different between the two contracts.

The IRS is confirming the realization that, despite the fact that the employee has the right to negotiate their terms with the RSP, the second contract (between the RSP and the third-party buyer) is the contract of the RSP and must be acted upon as such.

2. Contract contingencies

The third scenario “unacceptable” program describes a program where the RSP is not required to offer a higher, amended value for an employee’s home unless and until the RSP enters into a sales contract with the third-party buyer. The IRS identifies this limitation as a negative factor in determining if there are two separate transactions. Just as with the employee’s participation in the negotiations, this prohibition appears to be inconsistent with the idea that the employee may accept or reject the offer from the RSP that is based upon the third-party offer. It would be impractical to believe that the RSP would become aware of the third-party offer and accept it before the employee learned of the third-party offer and advised whether it was acceptable to him/her.

It appears more likely, that the IRS is concerned about the RSP executing the contract with the employee and then having the ability to terminate that contract if the contract with the third-party buyer never materialized or was later terminated for reasons not involving the RSP’s contract with the employee, such as financing or appraisals. As such, the concern again appears to revolve around how much participation the employee has and how much issue resolution can be achieved before the contracts are signed. Companies will have to be able to demonstrate some independence between the third-party contract and the employee contract. If the process results in a contract with the employee that is not subject to the execution or contingencies arising out of the third-party contract, however, the specific IRS concerns will have been addressed.2

3. Payment to the employee

The last problematic fact pattern of the third scenario identifies the payment made to the employee. In the fact pattern, the home sale proceeds representing the higher, amended offer are distributed to the employee, and not to the RSP, only if and when the sale to the third-party buyer closes. The linking of the payment of proceeds and closing of the third-party transaction has always been suspect. The IRS now clarifies this point. Payment of the consideration must flow through the RSP and cannot be conditioned upon, or subject to, the receipt of proceeds from the third-party buyer. The payment of proceeds to the employee must be independent of the success of the third-party transaction.

Unanswered Questions

While clarifying some issues and raising concerns about others, the ruling still leaves some issues unanswered and therefore, unresolved.

1. Holding periods

The ruling does not address what time frame constitutes the necessary amount of time the RSP must own the property between settlement with the employee and settlement with the third-party buyer (“holding period”). It has long been presumed that the RSP must hold the property for some time period in order to establish the transfer of the benefits, burdens and risks of ownership. While several theories exist, and the practices of employers and RSP’s vary, it is well understood and accepted by all parties (including the IRS) that, in the context of ownership of residential real estate, the ownership period of an RSP is relatively short. It remains to be seen whether this fact, coupled with the ruling’s silence on this issue, is a tacit acceptance of current industry practices for holding periods.

2. Inspections

The ruling also does not address whether the inspections by the third-party buyer can be used by the RSP or even whether the RSP contract with the employee can be conditioned on repairs. As previously described, the ruling acknowledges and accepts that the home sale programs may contain certain procedures. Obtaining inspections and using a third-party buyer’s inspections are often contained within these program procedures. The ruling does not address these factors. The RSP, however, as any buyer of real estate, has the right to conduct inspections and request repairs as a result of those inspections as a provision of its agreement to purchase the property. As long as the inspections are not unreasonably demanded, or used as a “ruse” to condition a sale on the success of the third-party agreement, there is no reason to believe that inspections would create improper linkage between the two contracts of sale, even if the RSP and third-party buyer used the same inspections.

3. Bonuses

Home sale bonuses, which are used to encourage an employee to accept an offer from the RSP based upon a third-party offer, are also not addressed in the ruling. Bonuses are not a direct part of the home sale process in that they are not a condition of the contract of sale, once signed. The bonus is a separate payment made to the employee as a result of company policy. Although the payment of the bonus is affected by whether it is the appraisal or the third-party buyer that establishes the offer price, it is not a condition of the contract between the RSP and the employee. Once the contract is signed between the employee and the RSP, the RSP must purchase the property. The IRS is silent on the process of using bonuses.

4. The Buyer Value Option (BVO)

Lastly, and quite possibly most significant, is the IRS’s silence with respect to Buyer Value Option (BVO) programs. The methodology and process of a BVO is the same as the methodology and process of an AVO. To that extent, the BVO program was validated. Additionally, by upholding the previously discussed proposition that the terms of a contract must be acknowledged, the BVO process is further validated because once signed, the contract between the employee and the RSP is valid, binding and not contingent upon any action by the outside buyer.

In all three scenarios, however, there is a presumption of an underlying appraised value —something missing from the BVO. One should not assume that the omission was an oversight. Whether the silence is a tacit acceptance or a result of uncertainty on the part of the IRS, the acceptance of BVO programs is not fully resolved. The industry has continually provided support for the validity of BVO programs and the value and risk transfers that occur in such transactions. Seemingly, IRS agreement with that support will have to wait.


Rev. Rul. 05-74 confirms many industry practices and clarifies the prohibitions against others. It does not appear to make any radical changes in the ways and means of conducting relocation home sale programs. By providing examples and interpretive guidance on Rev. Rul. 72-339, that are consistent with most well-accepted industry practices, it gives employers and RSPs the confidence to move forward with existing programs that may require only minor adjustments and not wholesale remodeling of their programs. We expect that the IRS will continue to evaluate the intention and actions of the parties and the risk and value transfers to determine the true economic owner and the validity of a transaction. To that extent nothing has changed. If there is a significant takeaway from Rev. Rul. 05-74 it is that the RSP must act like a reasonable and real buyer and seller -- and do so independently in each of its two transactions. How would a prudent buyer or seller in the shoes of the RSP act? If the actions and agreements of the RSP are prudent, fair and independent, they should not be detrimental to a compliant program that otherwise contains a real transfer of risk.

For those companies that were previously skeptical of two-transaction programs, the ruling validates their use and establishes the parameters for implementing a successful two-transaction program. For those companies already using such a program the ruling provides additional means to review programs for IRS compliance. Now is the perfect opportunity for employers and RSPs alike to initiate and perform a thorough top-to-bottom review of their home sale programs.

Take this opportunity -- don't get "called out" at the "third scenario." Employers must take the time to review and refine their programs for the IRS compliance -- ensuring that the RSP engages in transactions in a matter consistent with being both a prudent buyer and a prudent seller and, in a way that results in a real risk and value transfers -- and then head for home!

1Interestingly, by eliminating the two-deed issue at the federal tax level, the issue may now be addressed at the state level. Prior to the IRS two-deed position arising from “Amdahl” and the ERC recommendation to use two deeds, several states were advancing the position that two transfer taxes may be due even if a deed in blank is used. The states’ position was that their laws required payment of a transfer tax upon the transfer of any interest in the property, which would include an equitable transfer. Because of the wide spread use of double deeds post Amdahl, the issue became moot at the state level. The elimination of the federal requirement may now cause the issue to be readdressed at the state level. Whether states will renew their efforts and whether their laws may contain exceptions for relocation transactions is yet to be seen.

2 An interesting dichotomy arises with the ability of the RSP to evaluate the “bona-fides” of a third-party offer. There is an appraised value offer that already exists and, if accepted by the employee, the RSP will be bound to comply with it. Therefore, no matter how many conditions are placed on providing the amended value offer to the employee, and no matter how much negotiation takes place between the employee and the third party, the RSP may still be obligated to purchase the property from the employee if the appraised value offer is accepted. The contract contingencies and employee participation do not affect the obligation of the RSP to accept the benefits, burdens and risks of ownership (and in fact they may, in some circumstances, increase those risks if no deal is made with the third party). Only the determination of the best fair market value purchase price to the employee is affected by the possible amended value. This is not to suggest that the employee negotiation issues and contract contingency issues raised in the third scenarios are moot. There is support for the RSP, however, to make material inquiries in determining the “bona-fides” of an offer and that the employee has a real and legitimate stake in the negotiation of key components of a third-party offer that may affect the offer from the RSP to the employee.