- quote -

There is nothing transitory about it.

The bank must do what the contract requires. Based on what
was said earlier, I presumed that buying the house at market
value was required by the contract. Presumably that was
what was done. In that case they were following the
contract. Since the original contract was an arm's length
transaction, so was performance under that contract.

If the employer paid more than market value, that's another
story. And as I said before, if they paid more than market
value, the excess does not qualify for the $250,000
exclusion. Instead it is taxable as salary.

- quote -

They're two separate transactions, and have two separate tax
effects.

- quote -

It doesn't. It's just fairly common in those situations.

- quote -

Those kinds of deals are generally given to people who have
to relocate to California, and get sticker shock when they
see the price of housing here. It's not limited to that, of
course. And if it can be shown that more than fair value
was paid, without good reason, the shareholders would
certainly have the right to complain. But in my experience
that is not what happens.

- quote -

Every deal is different. The employee may have asked for
that to work for the company, and they wanted him enough to
give it to him.

- quote -

What's wrong with that?

Stu

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- quote -

(I'm only responding because I consider this a "tax
akademik" learning opportunity and not a real-life
situation).

That's the first I've heard of the transitive property of
arm's-length transactions. For example, since my mortgage
contract was entered into as an arm's-length transaction,
does that mean that if the bank calls in my loan early and I
must sell my house by the end of the month to avoid
foreclosure, that the sale is therefore also an arm's-length
transaction?

But more to the point, I'm still hung up on the taxable
differences between an employment contract and a real estate
sales contract.

- quote -

Which appears to be a concern of the OP from the beginning....

- quote -

Why does relocation need to be involved? If it is this
simple and easy, why don't Silicon Valley firms routinely
offer their execs a clause that says, "if we decide to end
your employment early, we'll hire an appraiser (wink, wink)
and buy your house immediately (but no sooner than the
minimum Section 121 time period) at FMV", even if the
exiting employee will simply turn around and buy the house
next door? It seems to me that not only the tax collector
but the stockholders might want to know more about the money
changing hands as a result of this transaction.

I just went and did a quick Google search of "golden
parachute relocation" and while mention of relocation
assistance or interest-free loans for housing are mentioned,
outright purchases are not. The closest I found was
something like this:

"The Company will make available to Executive the
opportunity to sell his present primary residence at
appraised value through a relocation firm mutually
acceptable to Executive and the Company".

The use of a third-party makes more sense to me than the
company buying the property outright, and in that case I
suspect there would be clearer tax implications. However,
it also seems common for firms to gross up the severance
payouts to cover taxes, so I guess it's moot in the end (and
a much cleaner solution than the one proposed by the OP).

- quote -

No, of course not....oops, wait, well yes they are taxed on
the savings (ignoring section 121 exclusion), since they
don't get to deduct any selling expenses in that case. But
it still seems like he received something of value from his
employer (a "free" real estate transaction) in exchange for
services provided as an employee.

- quote -

Would a Circular 230 practitioner need to disclose a
position to the IRS if preparing this return?

-Mark Bole

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Mark Bole <makbo[at]pacbell.net> wrote:

- quote -

The original employment contract was an arms-length
transaction. So when the employer purchased the fired
employee's home for fair market value, it was a legitimate
price.

The fact that the property later sold for less doesn't prove
that the purchase price from the employee was too high. But
if they did pay more than the actual value at that time, the
balance would be taxable as salary.

- quote -

It's actually a common provision in contracts where the
employee is required to relocate. If it doesn't work out,
he doesn't want to have to have the hastle of hanging around
until the place sells - he just wants to move back where he
can from. There's nothing wrong with that.

As far as avoiding transaction costs, lots of people do that
by selling their own homes. Should they be taxed on the
amount they saved when they do that?

- quote -

I'd guess that an auditor might well look into whether the
sale was for fair market value. The IRS often challenges
values put on things by taxpayers.

Stu

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Seth wrote:
- quote -


- quote -

For the same reason companies give fired executives golden
parachutes -- to induce them to go quietly, for the sake of
future business relationships, and so on. My point was this
seems like some kind of tax-free golden parachute payment.

We're using the term "fired" here loosely -- if he was truly
fired for cause (theft, gross violation of company policy,
etc) then in I think all employment agreements are off. If
he was "let go", that's a different matter. Even
rank-and-file employees who are laid off are often
unilaterally offered severance payments if they sign off to
not sue the company. Those payments are taxable
compensation.

- quote -

But it certainly wasn't an arm's-length transaction, due to
the employment contract, and in fact even their interests
were not necessarily adverse, since the relationship between
company and CEO encompassed much more than just this real
estate transaction.

- quote -

Certainly it was common knowledge in 2006 that residential
real estate had peaked in late 2005 and that local "bubbles"
were in the process of deflating, if not bursting. A true
FMV transaction would have taken this knowledge into
account.

That begs the question -- why would the company bother
committing to such a thing in the first place? A commitment
to buy an asset at FMV has an economic value of zero, since
by definition you can always sell an asset at FMV without
any prior commitment from anyone. Of course the company
helped the employee avoid the transaction costs, which again
seems to me like a taxable reimbursement.

I'm just wondering, in an audit situation, would the
tax-free nature of this transaction between an employer and
employee be questioned? As previously noted in another
reply, this seems more like a contrived class exercise than
a real-life situation.

-Mark Bole

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Mark Bole <f6ke8r$rfl$1[at]panix1.panix.com> wrote:
- quote -

There's no guarantee of profit from sale of the house at
FMV, either.

- quote -

Why? Presumably the company got an appraisal in order to
determine FMV prior to purchasing the house. Why do you
think it might invent an arbitrarily high "FMV" in order to
give more money to a _fired_ employee?

- quote -

The company and the ex-employee have adverse interests: the
purchase price is a 0-sum game.

- quote -

Again, since the market weakened a lot between the company's
purchase and sale, perhaps the selling expenses the
ex-employee would have seen would have been a lot lower.

- quote -

If the market had risen between the company's purchase and
sale, the company would have made money, with the "transfer"
being in the opposite direction.

Seth

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tax akademik <goldl...[at]hotmail.com> wrote:

- quote -

While I encourage my students to read this news group I make
it clear that an answer to assignment based solely on posts
here is insufficient for a passing grade. I hope your
instructor has told you and your fellow students the same.

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Paul Thomas, CPA wrote:

(snipped)

As to the house:

- quote -

Interesting take on the issue, Paul. To my way of thinking,
it seems to be an asset they would have "purchased", and
therefore a schedule d item. Could go either way of
course.

I wonder.....

ChEAr$,
Harlan Lunsford, EA n LA

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Paul Thomas, CPA wrote:
- quote -

My first thought is that it would be compensation, but for
the taxpayer's sake I hope I'm wrong. There is no guarantee
of income or profit from nonstatutory stock options either
-- what's the difference?

At the very least, I would expect some difficulty in showing
that the purchase was truly at FMV. Normally that requires
parties with adverse interests in an arm's-length
transaction. The $22,000 of selling expenses that the
company paid seems to me like a form of taxable
reimbursement.

Somehow this sounds too good to be true -- a tax-free
transfer of money from employer to employee under terms of
an employment contract.

-Mark Bole

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tax akademik <goldluvn[at]hotmail.com> wrote:

- quote -

Your consequences:
Assuming that you made no improvements to that house and you
had no buying or selling expenses you have a long term
capital gain of $125,000 but since this was your principal
residence for two of the last 5 years your gain is exempt
from taxation. You will still need to do a Schedule D

Companies consequences:
They can take a loss of $125000 + $22000. They will
probably do it as a write down.

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"tax akademik" <goldluvn[at]hotmail.com> wrote

- quote -

I wouldn't look at it as compensation, because you didn't
have to do anything for them to be obligated to buy your
house, and income or profit wasn't guaranteed.

The sale of the house seems to qualify for the gain
exclusion under Section121.

- quote -

I'm sure they'll find a way to deduct it all.

It seems it would be a cost of doing business, and not a
capital transaction.

--
Paul A. Thomas, CPA
Athens, Georgia

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I was hired four years ago in 2003 by the NE Corp. to serve
as the CEO for their company. I relocated from Chicago to
Boston to accept the position. As part of my employment
contract, if they fired me, then they agreed to purchase my
residence at FMV. Last year, in 2006 NE Corp, unsatisfied
with my performance, fired me, and purchased my residence
for $625,000.00. I purchased the house for $500,000.00 back
in 2003. NE Corp immediately listed the house with a real
estate agency. But soon after the purchase, the real estate
market in the area experienced a serious decline, especially
in higher priced homes. NE Corp sold the house in 2006 for
500,000.00 and paid selling expenses of $22,000.00.

My questions are:
a. What are my tax consequences? (i.e., how much is the
gain/loss that is realized and /or recognized on the sale of
my residence; and does any portion of the transaction
qualify as compensation?)

b. What are the tax consequences to the company, NE Corp?
(i.e., how much is the gain or loss realized and or
recognized on the sale of the residence; and does this
qualify as an ordinary and necessary business expense or is
it a capital loss?

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