Two Deed or Not Two Deed: A 2011 Perspective

1 M O B I L I T YI N S I G H T SF E B R U A R Y 2 0 1 1 Two deed or Not Two deed : A 2011 PerspectiveRelocation programs are commonly structured to take full advantage of tax laws affecting the purchase and sale of employee homes. At the federal level, the IRS validated tax protection for an amended value program utilizing a deed -in-blank in Revenue Ruling 2005-74. As welcome as the ruling was, it suddenly brought state tax issues to the forefront because, regardless of any federal tax rulings permitting use of a single deed , some states require two Tax & Legal Brief outlines the key issues that grow out of real estate practices that can vary widely from state to state.

2 It also presents the Cartus Blended Option, which allows clients to capture available cost savings by using a single deed in certain states while still taking prudent steps to manage legal and tax risk by using two deeds in , although most states still require only one deed , companies should anticipate that the crushing financial burden delivered by the economic downturn may well make the additional revenues available from real estate transactions too attractive for some states to pass h e S t a t e Ta x I s s u e i n P e r s p e c t i v eWhen the IRS issued its 2005 ruling stating that in a typical relocation real estate transaction the use of a deed -in-blank was acceptable from a federal tax Perspective , it became immediately clear that companies could save considerably by adopting a one- deed program wherever feasible.

3 The savings vary widely. In some states, the added expense amounts to a relatively few hundred dollars in deed preparation and recording fees; in others, it can amount to thousands of dollars when transfer taxes are taken into account. In fact, individual states treat the transfer of real estate in various ways, some invoking transfer taxes and others adding reporting and withholding provisions that add administrative burdens. Taking all of these issues together, the decision whether to use one deed or two requires a close study of state tax that the clarity of the IRS s ruling merely raised the prominence of a complex state-by-state decision process, ERC drafted a document in 2006, Use of Blank deed : State Factors, listing the state issues that would need to be considered in order to determine when to use one or two deeds.

4 This communication does not itself contain specific state-by-state solve the problem of how to treat the variety of state practices and to accommodate inevitable future changes, Cartus in the same year recommended the Blended Option reflecting what we believe most clients would consider the best balance of cost and risk. P A G E 1 O F 5 Information from Cartus on Relocation and International Assignment Trends and PracticesP A G E 2 O F 5F E B R U A R Y 2 0 1 1M O B I L I T YI N S I G H T SThe clear advantage is that clients are not required to examine the choices individually by state in order to institute a new practice that reduces overall program costs.

5 If they wish, however, clients may choose a more conservative approach by communicating their preference for an across-the-board two- deed selecting the Blended Option, clients invoke a minor degree of administrative risk that might arise if the local officials executing the tasks involved in these transactions or a buyer s attorney raised objections founded on an incomplete understanding of these issues. In such an event, defaulting to the use of two deeds is always an available option, one whose cost is insignificant compared to the savings that can be realized by using a single deed in the majority of N e w C h o i c eConceptually, the Blended Option calls for the use of one deed in all states that do not have special requirements (explained later in this Tax & Legal Brief) where legal, rather than cost, issues make it advisable to use two deeds.

6 These special states are: Washington, New York, and Pennsylvania (where two transfer taxes are levied even if only one deed is used); Delaware and Nevada (states with False Claim and Qui Tam statutes); Kentucky (where using one deed exposes the company to possible criminal liability); Texas (where both the deed and the loan documents must be dated on the same day); and Oklahoma (where a negotiated settlement requires that two deeds be used).The actual list of states in each category is provided l e n d e d O p t i o nOne- deed States (41*): Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming (*plus the District of Columbia and Guam) Two- deed States (9*).

7 Delaware, Kentucky, Nevada, New Hampshire, New York, Oklahoma, Pennsylvania, Texas, and Washington (*plus Puerto Rico)T h e C a s e f o r Tw o D e e d sIf tax and legal protection is paramount, the use of two deeds in all states supports the case for tax insulation most strongly. On the other hand, using two deeds does not in and of itself eliminate risk for the following reasons:1. The client s program must align closely with the description outlined in Revenue Ruling 2005-74 in order to gain the benefit even of a two- deed mechanism (in other words, using two deeds does not cure an otherwise flawed program); and2.

8 IRS agents must, in practice, interpret the client s program on audit in a way that is consistent with the ruling (which cannot be guaranteed).O n e / Tw o D e e d I s s u e s t o C o n s i d e rThe greatest source of savings comes in the ability to avoid a second closing, and the largest factor contributing to those savings is the presence of a transfer tax in a number of states. Nevertheless, savings are available in states both with and without a transfer tax. We will first set out the transfer tax issue, since it is the key cost variable, and then explain any other tax and legal factors that influence the actual state-by-state choice.

9 It is important to note that this information is intended as a reference for clients and their tax advisors, and is not meant as tax advice from . Tr a n s f e r Ta x I s s u e s .States With a Transfer Tax. (AL, AR, AZ, CA, CO, CT, DE, FL, GA, HI, IL, IA, KY, ME, MD, MA, MI, MN, NE, NV, NH, NJ, NY, NC, OH, OK, OR, PA, RI, SC, SD, TN, VT, VA, WA, WV, WI = 37, plus DC) In these states, a transfer tax is imposed on the conveyance of property. The transfer tax varies by state and sometimes even within a state and ranges from to 5%. If two deeds are employed, this tax must be paid twice.

10 Therefore, in most states with a transfer tax, the savings by moving to one deed would be substantial. The presence of a transfer tax is thus the primary inducement to adopt a single- deed program in that state but is not the sole determinant; other title transfer costs and issues should be New York, Washington, and Pennsylvania, the state imposes a transfer tax not on the recorded conveyance of the property but on the transaction itself. Thus, these states tax the transfer of the property from the employee to the employer/relocation management and from the employer/relocation management company to the ultimate marketplace buyer, whether the parties use one deed or two.