Employer allowed ordinary loss for relocation services.

In Amdahl Corp., 108 TC 507 (1997), the Tax Court allowed an employer to take as an ordinary deduction losses and other housing-related expenses incurred in connection with relocating employees.

To induce employees to transfer to new locations, a large computer manufacturer contracted

with relocation service companies to assist employees in selling their homes. Under its contract with the relocation companies, the computer manufacturer would pay a service fee and all costs the companies incurred in helping relocating employees sell their homes. As part of its arrangement with each employee, the relocation company offered to acquire the employee's residence at fair market value. If the offer was accepted, an employee would be paid the net equity on the date he vacated the residence. The relocation company paid the monthly mortgage, property taxes and other expenses until it sold the residence. The relocating employee, however, remained legally responsible for the mortgage and real estate taxes. The employer absorbed all the relocating company's costs, including a loss on sale, but paid any gains on the sale to the relocating employee.

Consistent with Rev. Rul. 82-204, the IRS disallowed the ordinary deduction claimed on the taxpayer's return and allowed a capital loss. In allowing the deduction, the Tax Court held that the manufacturer did not acquire beneficial ownership in the residences, and the costs should be viewed as costs of conducting its business.

Observation: Other employers providing similar relocation services for their employees should closely review the facts of this case with their tax advisers and be on the alert for potential appeal by the Service.

From Tom Bottiglieri, CPA, New York, NY