Relocation reimbursements excluded but reimbursed costs yield no deduction or basis

Plain-English summary

A partnership-owned business had to relocate because a state agency acquired part of its premises for a federally assisted highway project. The business received payments under the Uniform Relocation Assistance and Real Property Acquisitions Policies Act for moving, replacement equipment, installation, and related costs. The IRS ruled that federal law excluded those payments from the business's gross income. Because the business had a fixed right to reimbursement, it could not deduct reimbursed relocation expenses under section 162 or include reimbursed equipment costs in basis under section 1012.

Ruling snapshot

• Question: How are federal relocation reimbursements treated for income, deduction, and equipment-basis purposes?
• Outcome: Approved
• Key authorities: IRC §§ 61, 162, 1012; 42 U.S.C. §§ 4601, 4621-4638

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201617002                                              Third Party Communication: None
Release Date: 4/22/2016                                        Date of Communication: Not Applicable
Index Number: 61.00-00, 61.13-00, 61.13-
              06, 162.00-00, 1012.00-00                        Person To Contact:
                                                               ---------------------------, ID No. ---------------
------------------------                                       ----------------
-----------------------------------                            Telephone Number:
------------------------------------------------               --------------------
------------------------------------------                     Refer Reply To:
 ---------------------------                                   CC:ITA:B05
                                                               PLR-130280-15
                                                               Date:
                                                               January 20, 2016


                  TY: -------------------

Legend
Taxpayer                            = -----------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
State Agency                        = -----------------------------------------------
State A                             = ------------
State B                             = --------
DE                                  = -----------------------------------------------------------------------------
                                    ----------------
Business Premises                   = -----------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ---------------------------------------------------------------------------------
                                    ----------------------------------------------------------
New Location                        = -------------------------------------------------
Highway                             = ----------------
Date 1                              = -------------------
Date 2                              = -----------------
Date 3                              = ----------------
Date 4                              = --------------------------
$a                                  = ----------------
$b                                  = --------------
$c                                  = --------------
$d                                  = --------------
$e                                  = ----------------
$f                                  = ------------
$g                                  = ------------
$h                                  = ------------
$i                                  = --------------

PLR-130280-15                                   2

$i                         = --------------
Tax Year 1                 = -------------------------
Tax Year 2                 = -------------------------
Tax Year 3                 = -------------------------

Dear -------------:

This letter is in response to a request for a private letter ruling dated September 14,
2015, submitted on behalf of Taxpayer by your authorized representative. Specifically,
you are requesting that the Service rule that (i) Payments received by Taxpayer from
State Agency under Title II of the Uniform Relocation Assistance and Real Property
Acquisitions Policies Act, Pub. L. No. 91-646, as amended by the Uniform Relocation
Act Amendments of 1987, Title IV of Pub. L. No. 100-17 (“Relocation Act”), 42 U.S.C.
§§ 4601 et seq. are not includible in Taxpayer’s gross income under § 61 of the Internal
Revenue Code (“Code”); (ii) Taxpayer’s relocation and related expenses will not be
deducted under § 162 to the extent those expenses do not exceed Relocation
Payments and Additional Payments (as discussed below) received; and (iii) Taxpayer
will not take a depreciable basis under § 1012 in any new equipment acquired to
replace certain non-movable equipment or improvements (as discussed below) with the
relocation assistance payments received under the Relocation Act to the extent those
costs do not exceed Relocation Payments and Additional Payments received.

STATEMENT OF FACTS

Taxpayer is a State A limited liability company that is classified as a partnership for
federal income tax purposes under Treas. Reg. § 301.7701-3(b)(1)(i). Taxpayer owns
all of the membership interests in DE, a State A limited liability company that is
disregarded as an entity separate from its owner under Treas. Reg. § 301.7701-
3(b)(1)(ii). Taxpayer uses the accrual method of accounting for federal income tax
purposes and reports on a calendar year-end accounting period.

Taxpayer conducts certain business through DE in State B. During the time in issue,
Taxpayer held title to Business Premises. Taxpayer owned all operating assets and
property, plant, and equipment located at the Business Premises, including machinery,
furniture, fixtures, information technology equipment, buildings and other improvements.

As State B grew, State Agency determined that the main lanes of Highway had to be
expanded. Consequently, Business Premises became subject to an asserted right of
eminent domain undertaken by State Agency related to the acquisition of a right of way
for construction of improvements to Highway. Taxpayer represents that the expansion
of Highway is a Federally-assisted project. Funding for the expansion of Highway is
provided by a combination of sources including State Agency funds and earmarked
Federal assistance, thereby characterizing payments from State Agency to Taxpayer as
eligible payments for moving expenses pursuant to Title II of the Relocation Act.

PLR-130280-15                                3


On Date 1, Taxpayer received a notice of intention from State Agency as part of the
expansion of Highway pursuant to State Agency’s authority to acquire real property for
controlled-access highways. On Date 2, Taxpayer and State Agency executed the
Memorandum of Agreement of Date 3 (the “MOA”) for the compensation payable to
Taxpayer for the partial taking of the Business Premises, including a taking of the main
office building and a warehouse.

The MOA also required Taxpayer to remove its business operations from the
condemned portion of the Business Premises no later than Date 4. Taxpayer was
required to: (i) relocate its business operations – including inventory, machinery, and
equipment -- from the condemned portion of Business Premises to a new site (or to a
portion of Business Premises that was not condemned); (ii) sell any heavy operating
equipment not readily movable; and (iii) abandon certain improvements.

To accomplish the relocation, Taxpayer will acquire land and construct improvements at
a new location, which will ultimately hold part of the relocated business operations at
New Location. As part of the relocation, Taxpayer may relocate some operations or
equipment to a warehouse located on that part of the Business Premises that was not
condemned, whereas other operations and equipment will be relocated to more distant
pre-existing locations owned by Taxpayer inside and outside State B. In addition,
certain equipment that cannot be moved economically or efficiently will be replaced with
substitute equipment to be installed at New Location or other locations (“Pre-Existing
Locations”) before Taxpayer relocates from Business Premises. Any equipment
replaced with substitute equipment will be dismantled and moved at a later date or sold
by Taxpayer to third parties.

Taxpayer ultimately entered into several agreements with State Agency for the
reimbursement of Taxpayer’s anticipated costs to relocate from Business Premises.
Under these agreements, Taxpayer will receive agreed-upon Relocation Act
compensation payments from State Agency for the costs of moving and reinstalling
specific pieces of machinery and equipment (“Relocation Payments”). Taxpayer and
State Agency have agreed to Relocation Payments in the total amount of $a. Under the
agreement with State Agency, Taxpayer will also receive compensation payments from
State Agency for all other business relocation-related costs not included in Relocation
Payments (“Additional Payments”). Taxpayer estimates that Additional Payments to be
received from State Agency will approximate $b. Taxpayer expects to acquire
substitute equipment for the assets which require replacement and incur moving and
installation expenses and other related expenses.

Taxpayer expects to receive Relocation Payments and Additional Payments from State
Agency during Tax Year 1, Tax Year 2, and Tax Year 3. Taxpayer has already incurred
$c in relocation costs during Tax Years 1 and 2 in connection with replacement site

PLR-130280-15                                4

location selection, business property appraisal, equipment purchases, and relocation-
related professional fees. Taxpayer received Relocation Payments in the amounts of
$d in Tax Year 1; $e in Tax Year 2; and $e in Tax Year 3. Taxpayer received Additional
Payments of $f in Tax Year 1; $g in Tax Year 2; and $h in Tax Year 3. Taxpayer
incurred relocation costs in Tax Year 1 of $i and in Tax Year 2 of $j. Taxpayer has
already taken a position on its Federal income tax return for Tax Year 1 with respect to
the Relocation Payments and the Additional Payments. Therefore, Taxpayer is not
requesting a private letter ruling with respect to Relocation Payments and Additional
Payments received in Tax Year 1. Instead, this ruling request is limited to Relocation
Payments and Additional Payments received in Tax Year 2 and Tax Year 3.

Taxpayer represents that all payments received under the Relocation Act from State
Agency will be expended on moving existing equipment, buying substitute equipment,
installation of existing equipment or substitute equipment, relocation expenses incurred
at New Location or Pre-Existing Locations, and professional and service fees related to
the relocation, including negotiating the MOA with State Agency.

LAW AND ANALYSIS

Income Ruling:

Section 61(a) provides generally that except as otherwise provided, gross income
means all income from whatever source derived. The Supreme Court has long
recognized that the definition of gross income sweeps broadly and reflects Congress'
intent to bring within its purview all accessions to wealth, unless excluded by another
section of the Code. Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 (1955);
Commissioner v. Schleier, 515 U.S. 323, 327 (1995).

Title II of the Relocation Act was enacted to establish a uniform policy for the fair and
equitable treatment of all affected persons displaced as a result of federal and federally-
assisted programs and projects in order that such persons shall not suffer
disproportionate injuries as a result of programs designed for the benefit of the public as
a whole and to minimize the hardship of displacement of such persons. 42 U.S.C. §
4621.

Under 42 U.S.C. § 4622(a), whenever a program or project undertaken by a displacing
agency will result in displacing any person, the head of such agency shall provide for
the payment to the displaced person of (1) actual reasonable expenses in moving
himself, his business or other personal property; (2) actual direct losses of tangible
personal property as a result of moving or discontinuing a business, but not to exceed
an amount equal to the reasonable expenses that would have been required to relocate
such property, as determined by the head of the agency; and (3) actual reasonable
expenses in searching for a replacement business.

PLR-130280-15                                 5

Under 42 U.S.C. § 4601(6), a "displaced person" includes any person who moves from
real property, or moves his personal property from real property, as a direct result of a
written notice of intent to acquire or the acquisition of such real property, in whole or in
part for a federal and federally-assisted program or project.

Under 42 U.S.C. § 4601(11), the term "displacing agency" includes any state agency
carrying out a program or project with federal financial assistance, which causes a
person to be a displaced person.

Under 42 U.S.C. § 4636, no payment received under 42 U.S.C. §§ 4621-4638 shall be
considered as income for purposes of Title 26.

Pursuant to 42 U.S.C. § 4636, Taxpayer does not include in gross income under § 61 of
the Code the Relocation Payments and Additional Payments received by it from State
Agency pursuant to 42 U.S.C. §§ 4621-4638.

Deduction Ruling:

Section 162(a) of the Code generally allows a deduction for the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.
See also § 1.162-1(a) of the Income Tax Regulations.

Moving expenses incurred to relocate a business are generally ordinary and necessary
business expenses deductible under § 162(a) provided that they are not subject to
capitalization under another section of the Code. Electric Tachometer Corporation v.
Commissioner, 37 T.C. 158, 161 (1961), acq., 1962-2 C.B. 4 (expenses to move
machinery or equipment from one location to another, in contrast to improvements
added or new installations made at the time of the move, are ordinary and necessary
business expenses).

However, taxpayers are not allowed deductions under § 162(a) for expenditures for
which they have a right or expectation of reimbursement. Burnett v. Commissioner, 356
F.2d 755, 759 (5th Cir. 1966); Rev. Rul. 80-348, 1980-2 C.B. 31. In Charles Baloian
Co., Inc. v. Commissioner, 68 T.C. 620, 628-29 (1977), nonacq. on other grounds,
1978-2 C.B. 3, the Tax Court held that moving expenses were nondeductible to the
extent they were reimbursed by a Government agency because the taxpayer's right to
reimbursement was fixed and matured without substantial contingency prior to the move
when the agency issued a written authorization to incur moving expenses in a specified
amount.

In Rev. Rul. 78-388, 1978-2 C.B. 110, an accrual method taxpayer incurred expenses to
move its business as a result of its property being taken by the State under its eminent
domain power. The taxpayer’s request for a relocation payment under the Uniform
Relocation Assistance and Real Property Acquisition Policies Act of 1970 was approved

PLR-130280-15                                6

by the responsible Government agency during the taxable year the move occurred and
the relocation costs were incurred. The taxpayer received the payment in a subsequent
year. The Service held that the moving expenses were not deductible to the extent that
they were reimbursable. See also Rev. Rul. 79-263, 1979-2 C.B. 82 (farmer denied
§ 162 deduction for portion of replacement feed expenditures for which farmer received
prior approval by Government agency for partial reimbursement since farmer suffered
no economic detriment with respect to these expenditures).

If, on the other hand, there is a possibility or a contingency that at some future date the
taxpayer might receive reimbursement in whole or part, the taxpayer is entitled to
deduct its expenditure. Electric Tachometer Corporation, 37 T.C. at 161. See also
Varied Investments, Inc. v. United States, 31 F.3d 651, 653 (8th Cir. 1994). In Electric
Tachometer Corporation, the taxpayer was allowed to deduct moving expenses in the
year paid for moving machinery as the result of a condemnation action since there was
no fixed right of reimbursement but only an indefinite and general right to recover its
expenses. Electric Tachometer Corporation, 37 T.C. at 161-62. In Varied Investments,
the taxpayer was entitled to a § 162 deduction in the taxable year it transferred money
to a trust to provide for the satisfaction of a judgment, as it had no fixed right to
reimbursement after three insurers denied coverage, even though the taxpayer later
recovered some insurance proceeds. Varied Investments, 31 F.3d at 653.

In this case, Taxpayer has represented that: (i) State Agency has agreed to pay
Taxpayer a specified amount of Relocation Payments and Additional Payments for
other business relocation-related costs, pursuant to the Relocation Act; (ii) Taxpayer will
use the Relocation Payments and Additional Payments received under the Relocation
Act for moving existing equipment, purchasing substitute equipment, installing existing
equipment or substitute equipment, relocation expenses incurred at the New Location or
Pre-Existing locations, and professional and service fees related to the relocation; (iii)
Taxpayer has not deducted the relocation expenses it incurred in Tax Year 1 on its Tax
Year 1 federal income tax return; and (iv) Taxpayer will not deduct under § 162 its
relocation and related expenses to the extent the Relocation Payments and Additional
Payments under the Relocation Act are sufficient to cover those expenses.

Therefore, Taxpayer is not entitled to deduct under § 162 the relocation expenses that
are otherwise deductible under that section to the extent those expenses do not exceed
the Relocation Payments and Additional Payments made to it by State Agency under
the Relocation Act, as these payments are directly connected to the relocation
expenses Taxpayer represents it has incurred and will incur in Tax Years 2 and 3.

Basis:

Taxpayer is requesting a ruling that it will not take a depreciable basis under
§ 1012 in any new equipment acquired with the relocation assistance payments
received by it from State Agency under the Relocation Act to the extent of the net

PLR-130280-15                               7

amount of reimbursements received and amounts spent on relocation and related
expenses.

Section 1012 provides that the basis of property shall be the cost of such property,
except as otherwise provided in subchapters O, C, K and P. Cost, in turn, is defined by
regulation as the amount paid for the property in cash or other property. Section
1.1012-1(a) of the Income Tax Regulations.

Taxpayer may not allocate any Relocation Payment or Additional Payment to the basis
in property it purchases with such payments. Because these payments reimburse
Taxpayer for the cost of such property, Taxpayer did not incur a cost to acquire said
property. Therefore, Taxpayer cannot assign a basis under § 1012 to any property
acquired with such payments. Wolfers v. Commissioner, 69 T.C. 975 (1978).
Accordingly, Taxpayer cannot not take a depreciable basis under § 1012 in any new
equipment acquired with the Relocation Payment or Additional Payment received by it
from State Agency under the Relocation Act to the extent those costs do not exceed
Relocation Payments and Additional Payments received.

CONCLUSIONS

Based solely on the facts as represented and the applicable law, we conclude as
follows:

(1) Pursuant to 42 U.S.C. § 4636, Taxpayer does not include in gross income under
§ 61 of the Code the Relocation Payments and Additional Payments described in § 42
U.S.C. §§ 4621-4638 it receives from State Agency.

(2) Taxpayer cannot deduct under § 162 moving expenses for existing equipment,
purchasing substitute equipment, the installation of existing and substitute equipment,
relocation expenses incurred at the New Location and pre-existing locations and
professional and service fees related to the relocation, including negotiation of the MOA
with State Agency to the extent such costs are reimbursed with Relocation Payments or
Additional Payments from State Agency.

(3) Taxpayer cannot assign any basis under § 1012 to substitute equipment acquired to
replace non-movable equipment and leasehold improvements at the New Location to
the extent such costs are reimbursed with Relocation Payments or Additional Payments
from State Agency.

Except as expressly stated in Conclusions 1, 2, and 3 in the preceding paragraphs, we
do not express or imply an opinion concerning the tax consequences of any aspect of
any transaction or item discussed or referenced in this letter.

PLR-130280-15                                 8

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Enclosed is a copy of the letter showing the deletions proposed to be made when it is
disclosed under § 6110.

In accordance with the Power of Attorney on file with this office, we are sending a copy
of this letter to the taxpayer's authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                       Sincerely,



                                       William A. Jackson
                                       Branch Chief, Branch 5
                                       (Income Tax & Accounting)

Enclosure (1) Copy of letter for section 6110 purposes