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By Peter Barton, MBA, CPA, JD, professor of accounting, and Roy Weatherwax, PhD, CPA, professor of accounting, University of Wisconsin-Whitewater

In Amdahl Corporation v. Commissioner, a case of first impression, the Tax Court recently ruled that payments a corporation made to relocating employees for losses on the sale of their residences were deductible business expenses. The IRS had argued that the employees had sold the residences to their employer, who had capital losses on their resale.

Sec. 1211(a) allows corporations to deduct capital losses only to the extent of capital gains; whereas Sec. 162(a) business expenses are fully deductible when paid or incurred. Case law has established that a sale occurs for Federal tax purposes when the benefits and burdens of ownership are transferred. The following factors are relevant: whether legal title passes, how the parties treat the transaction, whether the contract creates a present obligation to exchange a completed deed for payments, whether the purchaser has the right of possession, which party pays the property taxes, which party has the risk of loss, and which party receives the profits from the property. Rev. Rul. 82-204, 1982-2 C.B. 192 held that residences sold by employees to their employer are capital assets to the employer, but the criteria for a sale were not discussed.

Amdahl, a computer company, relocates employees to improve its business. Amdahl contracts with relocation service companies (RSCs) to assist these employees with the sale of their residences. Amdahl reimburses each RSC for all its costs plus a commission. The RSC offers to purchase the employees' residences at their appraised value, which is the average of two independent appraisals. The offer expires in 60 days. During this time, the employee can sell the residence to a third party at a higher price. An employee accepting the RSC offer delivers a deed in blank to the RSC in exchange for the appraised value. A purchaser's name is not entered until the RSC sells the residence to a third party, which typically took about five months for the period at issue. If a third party sale does not occur within a year, RSC's name is entered on the deed as purchaser.

Until the third party sale, the RSC pays the mortgage and property taxes even though the employee remains legally responsible for these payments. If the third party sale is for less than the appraised value, Amdahl covers the loss. If it is for more, the employee receives the gain.

From 1983-86, Amdahl deducted payments to the RSC as Sec. 162(a) business expenses. The IRS disallowed over $2 million of these deductions that represented losses on the sale of 188 residences, claiming that they were capital losses. (Amdahl had no capital gains for these years.) The IRS argued that the employees sold the residences to the RSC, which was Amdahl's agent.

The Tax Court ruled that the employees did not sell the residences to the RSC or to Amdahl. Therefore, the residences were not capital assets to Amdahl. The court emphasized the following factors: The employees retained legal title until the residences were sold to third parties, the contracts were executory or incomplete and did not transfer ownership, Amdahl's objectives were to facilitate the transfer of its employees and to quickly sell the residences to third parties, and the employees received any gains from these sales. Amdahl's control of the sales to third parties and its assumption of the risk of loss on these sales were necessary to achieve its objectives. On agency, the court ruled that the RSC was the employees' agent, not Amdahl's. Finally, the court ruled that the losses were deductible Sec.162(a) business expenses.

The Tax Court indicated that it would have ruled on whether the residences were capital assets to Amdahl if it had ruled that the employees had sold the residences to Amdahl. To avoid such a ruling and to be able to deduct losses on the sale of relocating employees' residences to third parties as business expenses, employers should structure their employees' relocation assistance program similar to Amdahl's. However, language in the contracts between the RSCs and employees should emphasize that no sale or transfer occurs until the residences are sold to third parties.

Source: Amdahl Corporation v. Commissioner, 108 T.C., No. 24 (June 17, 1997). *

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