Rev. Rul. 78-388

ISSUE

Whether certain moving expenses and the loss attributable to abandoned leasehold improvements are deductible under sections 162 or 165 of the Internal Revenue Code of 1954 when a taxpayer is required to relocate its business.

FACTS

The taxpayer, a domestic corporation, uses the accrual method of accounting and files its federal income tax returns on a calendar year basis. The taxpayer operated in a leased facility until July 1976 when the facility was taken by the State Highway Authority under its power of eminent domain for the construction of an interstate highway. The taxpayer relocated its business to a new site in the same taxable year.

The taxpayer deducted moving and packing expenses in 1976 as ordinary and necessary business expenses under section 162 of the Code. In that year, it also deducted the undepreciated cost of abandoned leasehold improvements as a loss under section 165.

In 1976 the taxpayer requested a relocation payment for the moving expenses and the undepreciated costs of abandoned leasehold improvements under the provisions of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, 42 U.S.C. sections 4601-4655 (Relocation Act), Pub. L. 91-646, 1971-1 C.B. 540. The Relocation Act is intended to provide for uniform and equitable treatment for persons displaced from their homes, businesses, or farms by federal and federally assisted programs and to establish uniform and equitable land acquisition policies for such programs. The request for relocation payment was approved by the responsible agency in the same year that the relocation costs were incurred. Although the actual payment was not received by the taxpayer until 1977, the taxpayer had, before the expenses and loss were incurred, written authorization to incur the expenses up to the amount approved by the agency.

LAW AND ANALYSIS

Section 165(a) of the Code allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 162 of the Code provides that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Generally, moving expenses incurred in relocating a trade or business are ordinary and necessary business expenses within the purview of section 162 of the Code. See Fowler and Union Horse Nail Co. v. Commissioner, 16 B.T.A. 1071 (1929). However, a taxpayer is not allowed a deduction for an expense for which it has a right to reimbursement through insurance or otherwise. See Burnett v. Commissioner, 356 F.2d 755 (5th Cir. 1966), cert. denied, 385 U.S. 832 (1966), in which advances by an attorney using the cash method of accounting to a client were not deductible where the advances were made only with the expectation that they would be substantially repaid even though the right to reimbursement was contingent; Flower v. Commissioner, 61 T.C. 140 (1973), aff'd mem., No. 7432-70 (5th Cir. Dec. 12, 1974), in which business expenses of a sales representative who used the cash method of accounting were not deductible when the agreement provided for the reimbursement of such expenses in the future. Compare Electric Tachometer Corp. v. Commissioner, 37 T.C. 158 (1961), acq., 1962-2 C.B. 4, in which the expense of moving machinery and equipment to a new business location by a taxpayer using the accrual method of accounting was deductible under section 162 because the taxpayer's right to receive reimbursement was not sufficiently fixed to justify the application of the general principle.

In Charles Baloian Co. v. Commissioner, 68 T.C. 620 (1977), nonacq. on other issues, page 3, this Bulletin, the United States Tax Court held, in a factual situation similar to that in this Revenue Ruling, that the moving expenses, to the extent reimbursed, were not deductible by the taxpayer in its fiscal year because the taxpayer's right to reimbursement was fixed in that fiscal year without substantial contingency when the governmental agency issued its written authorization to incur moving expenses in a specified amount.

In the present situation, the taxpayer also had a fixed right to reimbursement for the moving expenses and for the loss with respect to abandonment of leasehold improvements in the same taxable year that the expenses were incurred and the loss was sustained.

HOLDING

The moving expenses incurred and the loss sustained with respect to the leasehold improvements to the extent reimbursable are not deductible under either section 162 or 165 of the Code.