Greater Cincinnati Relocation
Council-Spring Meeting 3/13/12
Tax & Legal Update
Peter K. Scott
Worldwide ERC Tax Counsel
Topics
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Payroll Tax Legislation
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What didn’t happen
What might happen
BVO’s-Audit and other issues
Relocation Short Sales
New Foreign Asset Reporting Requirements
Privacy Issues
Severed Mineral Rights-why you should care
Payroll Tax Legislation
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Payroll Tax Cut Extension
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Extends reduction in employee contribution to
Social Security from 6.2% to 4.2%
Extends cut from February 29 to December 31,
2012
Cost of extension is $93.2 billion over ten years
Funds are shifted from general treasury to Social
Security
Funds from general treasury are not offset and
thus increase the federal deficit
Payroll Tax Legislation
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Extension eliminates complications for
payroll administrators created by twomonth cut
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Those earning more than the $110,000
maximum subject to FICA would have had
to pay back to the system with income tax
return
Systems would have had to be
reprogrammed in mid-year
Payroll Tax Legislation
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Unemployment Benefits Extension
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Extends long-term unemployment benefits until
December 31, 2012
Benefits gradually reduced starting in June from
average of 93 weeks to 63 weeks depending on
rate of unemployment in that state
Cost of extension is $30 billion over ten years
Extension offset by proceeds of wireless spectrum
auction and increase in contribution for new
civilian federal employees to federal pension
program
Payroll Tax Legislation
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What didn’t happen:
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Expired provisions were not addressed
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Deduction for state sales taxes
Deduction for mortgage insurance
Alternative Minimum Tax
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Exemption amounts are not indexed for inflation,
Congress has been temporarily raising them every year
Needs to do so again for 2012, but hasn’t done so
If it doesn’t, more than 30 million middle-class taxpayers
will owe additional taxes for 2012
Gross-up issue for Mobility industry
Tax Reform
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“A tax loophole is something that benefits the
other guy. If it benefits you, it is tax reform.”
Russell B. Long
“I was working on a flat tax proposal, and I
accidentally proved there’s no God.” Homer
Simpson
“This idea that you start with a clean slate
and end up with a beautiful, logical tax
system just isn’t democracy.” John L. Knapp
Tax Reform
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Both parties continue to talk about
Probably will be more hearings
Absolutely nothing will happen during election year
Possible could happen next year
Most popular notion is to reduce/eliminate tax breaks
that cost money, reduce/flatten rates somewhat
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Mortgage interest deduction
State/local income tax deduction
Foreign income exclusion
Home sale capital gain exclusion
Moving expense deduction
BVO’s
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“The Opera reminds me of my tax
audit. It was in a language I didn’t
understand, and it ended in tragedy.”
Jeff McNelly’s “Shoe”
BVO’s
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IRS agents still sometimes contend BVO with no
appraisal, guaranteed buyout, not within Rev. Rul.
2005-74
Good case they are wrong, but ERC continues to
recommend addition of delayed AV process
Position of IRS lawyers who wrote Rev. Rul. 2005-74
unclear
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Have expressed some skepticism that BVO works, but no
definite position
No indication yet that issue has resurfaced as part of
the IRS’s ongoing special employment tax audits, but
caution advised
BVO’s
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Delayed AV Process-Example
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Employee markets with BVO for 90 days
If no offer, company does appraisals or BMA’s,
determines an appraised value
Offers employee appraised value, or some realistic
percentage of it (e.g., 90%), but
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Employee must continue to market for 60 days before
accepting
Must market at no more than realistic percentage of
appraised value (e.g., 102%)
IRS invariably accepts this process as a
qualifying AV
BVO’s
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Generally, audits less frequent than in
past, but still a number every year
Audits focus not only on basic BVO, but
procedures used (also in AV)
Poor audit results are almost always the
result of questionable risk reduction
procedures used by company
BVO’s-questionable procedure
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In both AV and BVO, companies often have
waited to enter contract with transferee until
inspections are complete, all contingencies
are removed from outside contract
Transferee is usually involved in negotiating
inspection results
Company does not sign contract with
transferee until very shortly before outside
closing, resulting in a “holding period” of no
more than 1-3 days
BVO’s-Questionable Procedure
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IRS consistently maintains that this practice falls
within “situation 3” of Rev. Rul. 2005-74 and that the
program fails. Company has simply not assumed any
significant ownership risk for any significant period of
time
Companies should NOT engage in practices that
artificially create short holding periods. They should
also NOT wait for inspections to be completed before
contracting with employee. Better practice is to do
own inspections up front, do not rely on buyer
inspections to set price for purchase from employee
BVO’s-Audit Results
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“We try to cooperate fully with the IRS,
because, as citizens, we feel a strong
patriotic duty not to go to jail.” Dave
Barry
Tax Lawyer’s Golden Rule: If somebody
has to go to jail, make sure it’s the
client
BVO’s-Audit Results
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In audits, IRS invariably asks for complete list of
purchase and sale dates
IRS invariably concludes that all purchases/sales
within a few days of each other fail
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Some success for taxpayer when it can be shown that
nothing other than transferee vacate date causes some to
be close together
However, if procedures force short periods, IRS always
sticks to disallowance
Settlements usually involve company conceding all
transactions where purchase/sale within some agreed
number of days of one another
Relocation Short Sales
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“If you owe the bank $100 that’s your
problem. If you owe the bank $100
million, that’s the bank’s problem.” J.
Paul Getty
A short sale addresses the latter
problem
Relocation Short Sales
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Many potential transferees owe more than their
equity in the home
If they are incapable of paying off this “negative
equity,” they may be able to negotiate a “short sale”
with the lender(s), under which the house is sold for
its fair market value and the lender(s) agree to
forgive the deficit amount
It is possible to take these homes into a relocation
home sale program (some companies will do so,
others won’t), but some issues must be addressed
Relocation Short SalesDisclosure
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Any transferee who must make a short sale may still have
relocation home sale benefits, such as Loss on Sale, Bonus, or
payment of sale expenses
Lender may claim fraud if employee has relocation benefits
going into the employee’s pocket that are not disclosed
If lender claims it was misled, it may seek to undo the short
sale approval, leaving the employer with liability for the full loan
amount
Employer should inform employee in writing that relocation
benefits must be disclosed to the lender
Employer should also advise Realtor® who is dealing with the
lender to insure that such benefits are disclosed
Relocation Short Sales
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In a relocation short sale, still must have two separate,
independent sales for tax purposes
In a homesale program, companies must be extremely careful
that the amount of negotiation and finalization of the outside
sale between transferee and buyer does not violate the “two
transaction” requirement for favorable tax treatment
 Lender ordinarily willing to base acceptance of short sale on
offer from employer, provided it can be satisfied amount is
FMV
 In an AV or GBO, there will be appraisals
 In a BVO, need contract with outside buyer to establish
value.
Relocation Short Sales
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But company must protect itself in event
lender approval to reduce debt is not
obtained
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If company buys house without reduced debt, will
become liable for entire debt
Excess debt over FMV of house will be wage
income to employee, subject to withholding, FICA
Same result as if employer had paid negative
equity on employee’s behalf
Relocation Short Sales
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How to protect company:
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DO NOT include clause in sale contract with outside buyer
making that contract contingent on employee obtaining debt
reduction
DO include clause in purchase contract with employee
making that transaction dependent upon employee obtaining
debt reduction
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This is no different than standard clause in such contracts
requiring that employee pay negative equity
DO include clause in Addendum with buyer making entire
contract contingent upon company ability to obtain
ownership of the home
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This is a standard clause in all relocation sales
Relocation Short Sales
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If a short sale is done in a home sale
program, must carefully examine lender
approval letter
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Some lenders are inserting clauses that
allow them to withdraw the approval under
certain circumstances
If approval withdrawn after employee
cashed out, employer is stuck with the
negative equity
Relocation Short Sales
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Other factors:
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Lenders should actually prefer relocation short sales over
not only foreclosures, but over other short sales
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Unlike other short sales, company is paying sale costs, they
don’t come out of proceeds and reduce lender share
Sometimes lenders don’t understand this, have to be reminded
Some lenders continue to have issues with corporate
purchasers, or with fact there will be a “flip” within a short
period
Lenders sometimes include various representations in
affidavits that purchaser must sign that are problematic
because company doesn’t know all the facts relating to
outside buyer
Foreign Asset Reporting
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“American tax laws are constantly
changing as our elected representatives
seek new ways to ensure that whatever
tax advice we receive is incorrect.”
Dave Barry
Foreign Asset Reporting
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Foreign Bank Account Reports are required to
be made to Treasury each June 30 if a U.S.
person has foreign accounts aggregating
$10,000 or more at any time during the
preceding year (Form TD F 90-22.1, the
“FBAR”)
New regulations make clear that the reporting
obligation extends to individuals who have
signature authority (but no personal interest)
in foreign accounts, such as company officers
and employees
Foreign Asset Reporting
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U.S. expats with bank account signature authority in
foreign country must be made aware of this new
requirement
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Notice gives such individuals until June 30, 2012, to file
reports for 2010 and prior years
Includes accounts in foreign branches of U.S. banks
Companies must make sure their employees
understand these rules and comply; penalties for
noncompliance are substantial
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Basic penalty up to $10,000 (not willful, but no reasonable
cause)
Willful failure: Greater of $100,000 or 50% of amount in
account
Foreign Asset Reporting
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Taxpayers must also check a box in Schedule
B of the Form 1040 if they have foreign
accounts, including signature authority
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Must check box even if no FBAR required
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This is a change from prior years
Must answer “yes” if required to file FBAR
Employers who have employees with
reportable signature authority should inform
employees before 2011 tax return is due so
employees can accurately fill out schedule B
Foreign Asset Reporting
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Also, for 2011 there is a new reporting
requirement with the tax return itself if
foreign accounts aggregate more than
$50,000 at any time during the year
 Form 8938
These forms must be filed with 2011
tax return
Foreign Asset Reporting
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Part of ongoing government crackdown
on taxpayers who hide assets offshore
“Taxpayers who neglect paying tax on
offshore income out of ignorance must
be educated. Taxpayers who do it on
purpose must be scared.” Martin A.
Sullivan
Foreign Asset Reporting
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Regulations in December, 2011, provide helpful rules
 Reporting only if assets aggregate $75,000 at any
time, or $50,000 at end of year
 For expats who qualify for earned income
exclusion (section 911), reporting only if assets
exceed $300,000 at any time, or $200,000 at end
of year
 If married filing joint, $600,000 and $400,000
Regulations make clear this report is not required of
those with only signature authority
But penalties quite severe for those who are required
to report but fail to do so
Privacy
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Law of Probability:
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The probability of being watched is directly
proportional to the stupidity of your act
Privacy
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Handling Personally Identifiable
Information (PII) is an ongoing issue
for anyone receiving or supplying
services in the relocation industry
Myriad of privacy laws (both domestic
and international), increased incidence
of identity theft, and heightened
concern by individuals over privacy
Privacy
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Definition of PII
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Information which, alone or in combination with other data,
can be used to distinguish or trace an individual’s identity,
such as:
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Full name (usually in combination with other elements)
SS#
Biometric records
IP address
Drivers license
Credit card numbers
Address
Date of birth
Bank account information
Privacy
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AICPA and Canadian Institute of
Chartered Accountants (CICA) have
published “Generally Accepted Privacy
Principles” (GAPP)
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Standards to be used in auditing for
privacy
Ten principles
Privacy
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GAPP principles: the entity
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Defines, documents, communicates, and assigns
accountability for privacy
Provides notice about privacy, identifies purposes and uses
Provides choices to individual
Restricts collection only to purposes identified in notice
Limits use to identified purposes
Grants individuals access to PII
Discloses to third party only for identified purposes and uses
Protects PII against unauthorized access
Insures accuracy of PII
Monitors its own procedures for compliance
Privacy
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New Standards for Auditing - AICPA SSAE16 replaces
SAS 70
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Privacy is one of the five principles that are being audited
Showing up as an issue in RFP questions
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Example - How do you protect our employee’s personal information
Example – How do you handle the purging of our employee’s
personal information
Privacy
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How are your suppliers handling PII you provide to them?
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Contract terms
Supply chain management
Tracking and monitoring PII in the hands of your suppliers
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Applies to corporate users of relocation services
Applies to RMC’s management of their supply chains
Not just a matter of satisfying business partners.
 Many industry companies collect, or have access to, private,
nonpublic information of transferring employees; this
information must be kept securely. The law and regulations
demand tight security of private financial data, and thefts or
leaks of this information inevitably lead to lawsuits.
Severed Mineral Rights
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Old country song about separation:
“I’m so miserable without you, its just
like you were still here”
Severed Mineral Rights
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Many states permit severance of the surface estate
(the house and land) from the underlying mineral
rights (like gas & oil), and each can be sold
separately
As search for more energy escalates, and more
methods are devised for extraction (e.g. “fracking”
for natural gas in Eastern and Mid-Atlantic states like
PA), exists almost nationwide
Is becoming a more common fact of life in relocation
Creates two serious problems for relocation
properties
Severed Mineral Rights
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Owner/lessee of mineral rights has right to
access the surface to do what is necessary to
extract mineral
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Could involve drilling, piping, or other activities
that significantly detract from usability of the
home
May not use surface, but indirectly conduct
activities beneath home
Possibility that this could occur is a problem in
itself, may create buyer stigma
Severed Mineral Rights
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Valuation of properties is difficult
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Value is diluted by lack of mineral rights
Value also may be compromised by
perception that use may be disrupted by
extraction activities
Few appraisers qualified to determine
amount of negative value adjustment
Severed Mineral Rights
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Definition of Fair Market Value:
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“The value arrived at in negotiations
between a willing tax lawyer and a willing
revenue agent, neither of whom has ever
bought or sold anything of consequence in
his life.”
Severed Mineral Rights
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What to do? Suggestion:
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Properties with severed mineral rights are not
eligible for home sale program, unless
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Employee has a home that was purchased with mineral
rights already severed
Home is in an area where this status is common, and
severed properties are readily marketable
Home can be reasonably valued and appraised by
qualified professionals
Employee should not be allowed to use the
relocation to sell the home to employer, and the
mineral rights to someone else
The End
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Old saying: “Knowledge is knowing the
tomato is a fruit. Wisdom is not putting
it in a fruit salad.” However,
Murphy’s First Minor Law:
 Anything you try to make absolutely
clear will confuse everybody
Therefore:
QUESTIONS!!! (And Answers)
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Rules:
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Has to be one I can answer (but not necessarily
on the subjects we covered)
Questioner cannot be on permanent “banned” list
(you know who you are)
No “stump the tax nerd”
No questions such as “how much do you weigh”
Contact information:
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pkslawoffice@gmail.com
910-579-5332