Scott E. Vincent
Vincent & Fontg LLC
Kansas City

The IRS recently issued Revenue Ruling 2005-74 clarifying whether an employee's sale of a home to his or her employer through a relocation management company (RMC), and the subsequent sale of the property to a third party is one or two sales for federal tax purposes. This distinction is important in determining whether the employer or employee reports interim capital gains or losses before a sale to the next homeowner, and also whether payment of carrying charges before the final sale to the next homeowner should be considered compensation income because the employee retains "the benefits and burdens of ownership." The ruling outlines three different factual circumstances clarifying these different results (as reported in CCH Federal Tax Weekly, December 8, 2005).

Situation 1: Blank deed

In the first situation, the employer contracts with a relocation management company (RMC) to provide relocation assistance, including a home purchase program, to its employees. RMC agrees to purchase employee homes at fair market value and then sell the homes to third party buyers. An employee transfers his or her home to RMC for an agreed-upon price and executes a deed to the property on which the name of the grantee is left blank. RMC has the option of inserting its own name as grantee or inserting the name of the third party buyer. RMC lists the home for sale through a real estate broker and locates a third party buyer, who purchases the home. RMC inserts the name of the third party buyer in the deed and conveys title directly to the buyer without ever recording a deed in RMC's name.

The IRS concludes that these circumstances result in two sales for federal tax purposes. Any loss payments made or selling expenses realized by employer on the second sale will not be deemed compensation or taxable gain to the employee. This situation is intended to clarify facts involving a blank deed, and the IRS noted specifically that the use of a blank deed will not, by itself, result in employees being treated as retaining the benefits and burdens of ownership of the homes. The IRS thereby distinguishes these facts from prior cases involving blank deeds and relocation companies that did not hold themselves out to the public as the purchaser or owner of the homes.

Situation 2: Amended value option

In a second set of facts, an amended value option allows the employee to list the home with a real estate broker. Under this program, the employee selects the broker from a list maintained by RMC. Third party buyer offers are then forwarded by the broker to RMC. The RMC matches bona fide offers, and the employee accepts the amended offer and transfers the home to RMC by executing a blank deed. RMC enters into a new listing agreement with the broker to market the home to a third party buyer, who may or may not be the same potential buyer who made the previous offer. As with the blank deed in situation 1, RMC sells the home to a third party buyer by inserting the buyer's name on the deed as grantee and recording the deed.

In this situation, the IRS concludes that the amended value option (along with another use of a blank deed) does not change the fact that there are two sales for federal tax purposes.

Situation 3: Employee maintains control

Situation 3 provides that an employee may select an amended value option but RMC is not required to offer a higher, amended value for the employee's home. The employee also retains the right to approve or reject any offer or counter-offer made in the course of negotiations between RMC and a third party buyer. Finally, the proceeds from any higher sale price are distributed to the employee only if and when the sale to the third party buyer closes.

In this circumstance, the IRS concludes that the employee retains the benefits and burdens of ownership, and the result is only one sale for federal tax purposes.

Conclusions

The IRS concludes that Situation 1 and Situation 2 are substantially similar relocation service programs and are treated as sales of a home by the employee to the employer through the relocation management company as the employer's agent. Therefore, these situations involve two independent sales. However, the IRS holds that Situation 3 involves an employee who retains benefits and burdens of ownership, and a home that is not transferred to the employer. This transaction is simply one sale of a home by the employee to a third party buyer.