IRS Ruling on Employer-Sponsored Home Buyout Programs
Good News for Employees and the Relocation
Nicholas C. Lynch and Michael F. Lynch
NOVEMBER 2006 - Companies doing business internationally need
a global business plan that includes maintaining a mobile
workforce. According to 2004 data from the Employee Relocation
Council (ERC), about 1.5 million employer-assisted moves occur
annually (this figure includes international and military
transfers). Each year, about 450,000 domestic employer-assisted
job-related relocations and about 400,000 international transfers
occur. These data suggest that domestic moves are leveling
off while international transfers are on the rise.
data show that in 2003 the average cost to relocate a home-owning
current employee was $70,771 and the cost to move a home-owning
new hire was $52,109. The cost to relocate a current employee
who does not own a home was only $19,129, and the cost to
bring on board a renting new hire was $15,079. Thus, relocating
a current home-owning employee costs about $50,000 more
than relocating a renting employee.
When an employee is asked to move, many employers engage
the services of a relocation management company to reduce
the stress on the transferred employee and his family and
to make the move financially feasible. Relocation companies
refer employees to local qualified real estate agents, who
assist the employees in developing and executing a comprehensive
sales plan for their former residence. The goal is to sell
the old residence as quickly as possible for the best possible
price in order to enable the employee to purchase a suitable
replacement residence. Employers realize that one reason
employees refuse to move is because of the high cost of
housing and the fear of having to pay duplicate home expenses.
As part of a relocation incentive package, many employers
offer to buy an employee’s current residence at its
current appraisal value. In the past, this buyout option
was available only to high-level executives. Today, however,
these programs are commonplace.
For tax purposes, the government has been seeking ways
to tax relocated employees on the amount that the employer
gives to the relocation company on the employee’s
behalf to facilitate the quick sale of the employee’s
home. Also, the government has been attempting to recharacterize
the employer’s deduction of the payment to the relocation
company from an ordinary expense to a capital loss.
The relocation industry has been patiently awaiting a favorable
ruling on the taxability of home sale/purchase transactions.
Revenue Ruling 2005-74 (2005-51 IRB, 11-30-2005), which
has been anticipated for more than 30 years, represents
an important win for the industry. It sets forth several
fact patterns that dictate whether a transferred employee
has additional compensation on the sale of the former residence
to the employer.
Since 1972, in Revenue Ruling 72-339, the IRS has maintained
that if an employer-sponsored relocation home sale program
is viewed as two separate sales (one from the employee to
the relocation company or employer, followed by another
from the relocation company or employer to a bona fide third-party
buyer), then there are no payroll tax consequences for the
employee following the second sale. In other words, the
fee paid by the employer to the relocation company and the
employer-paid costs of selling and closing the second sale
would not be considered additional compensation to the employee.
This also meant that employers didn’t have to match
any related payroll taxes.
Revenue Ruling 72-339, however, contained no guidelines
as to what constituted two separate sales and what would
be viewed as one sale. In 1985 the ERC published a list
of the 11 key elements it believed would result in relocation
home sales programs being viewed as two independent transactions.
(See Supplement to the Guide for Managing the Mobile
Work Force, Employee Relocation Council, 1999.) Those
elements are as follows:
- Any employee wishing to take advantage of the amended
value option who lists her home with a real estate broker
must include a suitable exclusion clause in the listing
agreement whereby the listing agreement is terminated
upon the sale of the home to either the employer or the
- Under no circumstances should the employee accept a
down payment from a potential buyer.
- Under no circumstances should the employee sign an
offer presented by a potential buyer.
- The employee must enter into a binding contract of
sale with the employer or relocation service company.
- After the execution of the contract of sale with the
purchaser, and after the employee has vacated the home,
all burdens and benefits of ownership should pass to the
- The contract of sale between the employee and the purchaser
at the higher price should be unconditional and not contingent
on any event, including the potential buyer’s obtaining
a mortgage commitment.
- Neither the employee, nor the employer, in the case
of a relocation company transaction, may exercise any
discretion over the subsequent sale of the home by the
- The purchaser should enter into a separate listing
agreement with a real estate broker to assist with the
resale of the property.
- The purchaser should enter into a separate agreement
to sell the home to a buyer.
- The purchaser should arrange for the transfer of title
to the buyer.
- The purchase price eventually paid by the buyer must
have no effect on the purchase price paid to the employee.
The IRS did not respond to the ERC’s elements. In
fact, the government remained silent on the issue for almost
12 years. Then, in 1997, in Amdahl Corp. and Consolidated
Subsidiaries v. Comm’r [108 TC 507 (1997)], the
IRS made its position clear.
In Amdahl, the employer paid the relocation expenses
of its employees and provided financial assistance in connection
with the sale of their residences. The employer hired a
relocation company that paid employees the equity in their
homes and paid the costs of maintaining the residences,
including the mortgage and property tax expenses, until
a third-party buyer was found to purchase the residence.
The employer paid a fee to the relocation company and reimbursed
it for all of its expenses. The IRS disallowed these deductions
because it considered the employer to have acquired equitable
ownership of the residences, and treated the payments as
a capital loss to the employer. As opposed to ordinary expenses,
which are deductible in full, such corporate capital losses
could be used only to offset any corporate capital gains.
Amdahl Corp. argued that the payments to the relocation
company were employee benefits similar to reimbursed moving
expenses, which are fully deductible. The employer also
argued that it never acquired an ownership interest in the
residences. The Tax Court stated that the threshold question
was whether Amdahl acquired ownership of the residences.
If Amdahl was found to be the owner of the residences, then
the court would need to decide whether the residences were
capital or ordinary income assets.
In reaching its decision, the court looked at the economic
realities of the transaction. It looked at all of the relevant
facts, circumstances, and written agreements to determine
if Amdahl became the owner of the residences. Furthermore,
it stated that a sale takes place when the benefits and
burdens of ownership are transferred, rather than when the
technical requirements for the passage of title under state
law are satisfied. According to the court [see Grodt
and McKay Realty v. Comm’r, 77 TC 1221 at 1237-1238
(1981)], the following factors are considered in determining
whether a transaction constitutes a sale:
- Whether legal title passes;
- How the parties treat the transaction;
- Whether any equity 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 on 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
- Which party receives the profits from the operation
and sale of the property.
The IRS conceded that because the employees signed blank
deeds authorizing the relocation company, by power of attorney,
to fill in the ultimate third-party buyer’s name,
Amdahl never acquired legal title to the residences. The
IRS argued, however, that Amdahl had acquired beneficial
ownership of the residences, based upon the agency relationship
between the relocation company and Amdahl.
According to the Tax Court, however, if the relocation
company were acting as an agent, it was acting as an agent
of the relocated employee with the power to complete the
blank deed. According to the court, Amdahl was not interested
in the home’s long-term appreciation. The court agreed
with Amdahl that the home-disposal program was a business
expense to induce employees to move and to speed the relocation
process. The entire transaction was structured to encourage
employees to accept the employer’s offer to transfer.
The contracts of sale merely gave the relocating employees
their equity in their residences before the residences were
sold. This enabled employees to purchase new residences
with minimum delay. The contracts also relieved the relocating
employees from the burden of having to pay duplicate mortgages,
taxes, insurance, and other costs on both new and former
Based upon the above reasoning, the Tax Court held that
Amdahl did not acquire legal or beneficial ownership of
the residences. The most significant factors in the decision
were the fact that the relocating employees retained legal
title; the intent of the parties; the executory nature of
the contracts of sales; and the fact that the employees
received any profits from the sale to the third parties.
In essence, the relocating employees retained both the benefits
and burdens of ownership of the residences. Thus, Amdahl
was able to deduct all payments to the relocation company
as ordinary and necessary business expenses and avoid having
the payments recharacterized as capital losses.
Revenue Ruling 2005-74
In Amdahl, the employer-sponsored home relocation
buyout program was treated as one sale (from the employee
to the third-party purchaser), not as two separate and distinct
sales. The primary factor relied on by the Amdahl court
was the use of the “blank deed” by the relocation
company. This blank deed prevented the relocation company
(employer) from obtaining legal title to the employee’s
Since Amdahl, employers and relocation companies
have adapted a two-deed approach. The first deed is used
to transfer the residence from the employee to the employer;
the second deed is used when the property is resold to the
ultimate third-party purchaser. IRS auditors, however, have
continued to rely on Amdahl in questioning many
company-sponsored relocation programs. Not willing to accept
defeat in Amdahl, the IRS released Revenue Ruling
2005-74 (2005-51 IRB, 11-30-2005), which states that the
IRS will continue to follow Amdahl in circumstances
involving relocation service programs substantially similar
to those in Amdahl.
In Revenue Ruling 2005-74, the IRS applied the benefits/burden
analysis of Amdahl to three different relocation
scenarios, described below. Under the new standard, if the
sale of the employee’s residence to a third party,
with the assistance of an employee-provided relocation company,
is viewed as two separate sales, then no compensation is
taxed to the employee, even if a blank deed is used. If
the transaction is treated as a single sale between the
employee and the third party, however, then any employer-paid
expenses to the relocation company on the employee’s
behalf are treated as taxable compensation to the employee.
Situation 1. An employer contracts
with a relocation management company (RMC) to provide relocation
assistance, including a home-purchase program, to transferred
employees. Under the contract, the RMC will act as the employer’s
agent in purchasing the employees’ homes at fair market
value (based on its average appraised value) and reselling
them to third-party buyers. The employer will pay the RMC
a fee and reimburse the RMC for all costs incurred in purchasing
and selling the homes. In addition, the employer is liable
for any loss suffered on the resale. Transferred employees
are required to sign a blank deed that is not recorded.
The employee must then vacate the premises and deliver possession
to the RMC. The contract of sale is not contingent or dependent
on any subsequent event (such as finding a qualified third-party
buyer). The RMC then becomes liable for all costs associated
with the home (e.g., outstanding mortgages, taxes, insurance,
Using the Amdahl eight-factor benefits/burden
test of ownership, the IRS concluded that the sale of the
home by the employee to the employer through its agent,
the RMC, results in a complete sale. Accordingly, any amounts
paid by the employer to the RMC will not result in additional
compensation to the employee. This is in sharp contrast
to Amdahl, where the Tax Court found that no sale
took place between the employee and the employer because
the employee retained legal title by using a blank deed.
Could this mean that the IRS will argue, as it did in Amdahl,
that the home, in the hands of the employer, is now a capital
asset and that any future expenses or loss on the home’s
resale will not be ordinary in nature?
Situation 2. The facts are the
same as in Situation 1, except that employees can also list
their homes with a real estate broker under an “amended
value option.” If a potential third-party buyer makes
a bona fide higher offer, then the RMC will amend its contract
of sale with the employee to match the higher offer. The
employee will not sign any contract with nor accept any
deposit from the third party. The RMC may then attempt to
resell the home, through the real estate agent, to a third
party, who may or may not be the potential buyer who made
the offer. Upon resale, any excess profits will be remitted
to the employer.
The IRS viewed this situation as involving two separate
sales. Because the sale of the employee’s home to
the RMC was not contingent on its resale, and because any
additional gain on the resale of the property accrued to
the employer, the IRS concluded that no compensation was
taxable to the employee in this scenario.
Situation 3. The facts are the
same as in Situation 2, except that the RMC is not required
to offer a higher, amended value for an employee’s
home based upon a third-party offer, unless and until the
RMC enters into a sales contract with that third-party buyer.
In addition, the employee retains the right to approve or
reject any offer or counteroffer made in the course of negotiations
between the RMC and the third-party buyer. Any additional
proceeds from the higher amended value are given to the
employee, not the employer or the RMC, but only if and when
the sale to the third party closes.
In Situation 3, the IRS concluded that, in substance, only
one sale took place: by the employee to the third party,
facilitated by the employer with the help of the RMC. Because
of certain factors—the sale was contingent upon the
RMC’s entering into a final contract with the third
party; the employee retained the right to approve any offers
or counteroffers; and any additional proceeds were remitted
to the employee—the IRS found that any expenses paid
by the employer directly or indirectly to the RMC, including
maintenance costs, taxes, insurance, losses, and other costs
associated with the home, were considered paid on behalf
of the employee. As such, those amounts will be taxable
to the employee as additional compensation, and subject
to any related payroll taxes.
Employers and relocation management companies that use
the ERC’s 11 key elements and structure sales to conform
to Situations 1 and 2 of Revenue Ruling 2005-74 should have
no trouble treating the employee buyout as two separate
sales, even if a blank deed is used. Most employers prefer
the use of the blank-deed approach over the separate-deed
approach because in most states the use of one deed will
save significant recording costs.
On the other hand, Situation 3 of the ruling resulted in
only one sale taking place because the benefits and burdens
of ownership were never transferred from the employee to
the employer. In this scenario, the initial sales contract
between the employer and the employee was contingent upon
the employer’s finalizing a second contract with a
third-party buyer; the employee was allowed to negotiate
the final sale; and the proceeds were not given to the employee
until the sale was closed with the third party.
Revenue Ruling 2005-74 does not specifically mention buyer
value options (BVO). A BVO is an amended value program,
similar to Situation 2, but without the initial offer. BVO
programs are popular with employers because they keep the
inventory of employer-owned homes low and they reduce the
costs of ownership to the employer. It would appear that
a properly structured BVO program conforming to the 11 key
elements would not result in compensation to the employee,
especially if the BVO contains an eventual guaranteed appraised
As an alternative to using a home buyout program offered
by a relocation management company, an employer could offer
a transferred employee an employee-relocation loan or a
bridge loan. A bridge loan is an economical and safe alternative
for small companies and for companies with few employee
transfers. IRC section 7872 generally imputes compensation
to an employee who receives a below-market-interest-rate
loan from the employer; the compensation income is equal
to the foregone interest (the difference between the current
rate of interest and the amount charged by the employer).
Treasury Regulations section 1.7872-5T(c) contains an exception,
however, that allows an employer to make a bridge loan to
an employee for purposes of acquiring a new principal residence
in connection with a job change or a transfer, but only
if the move qualifies under IRC section 217.
Under this exception, an employee who receives a below-market-interest-rate
loan will not be charged with compensation income on the
foregone interest if the loan is an employee-relocation
loan that meets the following criteria:
- The loan is secured by a mortgage on the employee’s
new principal residence, bought in connection with his
transfer to a new principal place of employment;
- The loan is a nontransferable demand loan whose benefits
are conditional on the future performance of substantial
- The employee certifies that he will itemize his deductions
each year that the loan is outstanding; and
- The loan agreement provides that the proceeds may be
used only to purchase the employee’s new principal
A loan that fails the first condition (i.e., it is not
secured by the new residence) but satisfies the other three
conditions will be treated as a bridge loan if it meets
these additional conditions:
- The loan must be paid within 15 days following the
sale of the employee’s old principal residence;
- The amount of the bridge loan cannot exceed the employee’s
equity in the old residence; and
- The old residence cannot be converted to business or
investment use pending the sale.
To avoid unfavorable tax consequences, employer-sponsored
home purchase buyout programs should avoid contingent sales
that allow employees to negotiate the terms of the final
Although Revenue Ruling 2005-74 is silent on this point,
the holding period between the two sales should not be too
short. If the two sales are close in time, the IRS may view
them as one.
If a relocation program, especially a BVO, is found to
be deficient in incorporating the ERC’s 11 key elements,
steps should be taken to modify the program. In addition,
the BVO program should include a delayed buyout offer that
takes effect after a stated period of time.
Finally, although Revenue Ruling 2005-74 does not address
this issue, one can assume that in all three situations
the sale of the old principal residence by the employee
will qualify for IRC section 121 exclusion of gain on the
sale of a principal residence ($250,000 if single and $500,000
if married filing jointly).
Nicholas C. Lynch, MSA, is a doctoral
candidate in the school of accountancy at Mississippi State
University, Starkville, Miss.
Michael F. Lynch, CPA, JD, is a professor
of tax accounting at Bryant University, Smithfield, R.I.