108 T.C. 507">*508 GERBER, Judge: Respondent determined deficiencies in petitioner's Federal income tax as follows:

After concessions, the issue for decision is whether payments made by petitioner to relocation service companies to assist in the disposition of the homes of its employees who relocate in connection with their1997 U.S. Tax Ct. LEXIS 33">*35 employment are deductible against ordinary income or must be treated as a capital loss.

FINDINGS OF FACTS ¹

Petitioner is a Delaware corporation with its principal place of business in Sunnyvale, California. It develops, manufactures, markets, and services large-scale computer systems, storage products, communications systems, software, and educational services. Petitioner also provides product and software support for its systems, engages in research and development, and provides consulting services.

During the years in issue, petitioner had approximately 6,600 to 7,200 employees worldwide, with about 70 percent 108 T.C. 507">*509 of its employees in the United States. Petitioner relocates both current and newly hired employees as its business needs dictate. Petitioner transfers employees to locations where it has installed mainframe computers to provide maintenance services to its customers. Petitioner also relocates employees as it1997 U.S. Tax Ct. LEXIS 33">*36 expands into new geographic markets to ensure that it has employees at the new location who are familiar with the company, its products, and its customers.

To induce employees to relocate, petitioner provides various kinds of employee benefits to assist in the move. Petitioner reimburses employees for moving costs, including the costs of a house-hunting trip to the new location; shipment costs for household goods, personal effects, household pets, and family vehicles; certain expenses incurred en route to the new location; temporary living expenses; the costs of a return trip by the employee to the former location; and additional income tax incurred as a result of the relocation. As part of its relocation program, petitioner also offers financial assistance to employees in the sale of their homes at their former locations and in the acquisition of new homes. Petitioner has provided various forms of home disposal assistance to relocating employees for the past 20 years. Petitioner's competitors in the computer mainframe business provide similar home disposal services to their employees.

Petitioner's employee relocation program is part of its human resource department and is administered1997 U.S. Tax Ct. LEXIS 33">*37 by a relocation administrator under the supervision of a relocation manager. The relocation administrator provides information to relocating employees about available relocation benefits, including the home disposal assistance. The relocation administrator and manager also arrange for shipment of household goods, temporary lodging, and car rental, and reimburse employees for their moving expenses.

To assist employees in the sale of their homes, petitioner contracts with unrelated relocation service companies. Pursuant to petitioner's contract with a relocation service company (RSC), the RSC offers to purchase the residences of eligible relocating employees and resell the residences to third parties. Petitioner compensates the RSC for all costs incurred in assisting relocating employees in the sale of their homes and also pays the RSC a fee for its services. At various times during 108 T.C. 507">*510 the years in issue, petitioner used either Transamerica Relocation Service, Inc. (Transamerica), VanRelco, Inc. (VanRelco), or Intergroup Management Co. and its successor, Associates Intergroup Management Co. (each, Intergroup) as its RSC. Generally, petitioner's contracts with Transamerica, VanRelco, and1997 U.S. Tax Ct. LEXIS 33">*38 Intergroup provide for substantially similar home disposal assistance.

When petitioner extends a relocation offer to an employee, petitioner informs the employee of its relocation benefits and gives the employee a brochure describing the relocation assistance that petitioner offers. The brochure provides that petitioner will assist in the sale of the employee's home with the aid of a "third-party agent". If an employee who is eligible for home disposal assistance agrees to a proposed transfer, petitioner notifies the RSC to offer to purchase the employee's home in accordance with petitioner's contract with the RSC. An employee's eligibility for home disposal assistance depends on criteria defined in petitioner's corporate policies and procedures. Petitioner does not take into consideration whether residences will appreciate in value in deciding to provide home disposal assistance to relocating employees. Petitioner has not based its decision to provide relocation assistance on whether employee residences will appreciate in order to offset the costs to petitioner for relocation.

In addition, the RSC does not have discretion over whether to purchase a particular employee's residence. 1997 U.S. Tax Ct. LEXIS 33">*39 The RSC must offer to purchase an employee's residence if the residence satisfies certain requirements set forth in petitioner's contract with the RSC. Eligible employees are not required to accept the RSC's offer for the residences or to participate in the home disposal program. If a relocating employee decides to participate, petitioner becomes obligated to assist in the disposition of the employee's home.

Pursuant to the contract between petitioner and the RSC, the RSC offers to purchase relocating employees' residences at fair market value. Fair market value is determined by averaging two qualified, independent appraisals. The employees choose independent appraisers from a list provided by the RSC. If more than two appraisals are obtained, fair market value is the average of the two closest appraisals. The RSC sends copies of all appraisals to petitioner and informs it of 108 T.C. 507">*511 the appraised value. The RSC's offer expires after a set period, which is generally 60 days.

Relocating employees may market their residences during this offer period. Employees who market their homes must insert language in the listing agreement that permits them to accept the RSC's offer without paying a 1997 U.S. Tax Ct. LEXIS 33">*40 commission to the listing broker. If an employee receives a bona fide third-party offer that exceeds the RSC's offer during the offer period, the employee may accept the third-party offer and assign the third-party contract to the RSC (assigned sale). The employee assigns the third-party contract by sending the following to the RSC: (1) An executed third-party offer, signed by the employee as seller and the third party as buyer; (2) a contract of sale with the RSC as buyer and the employee as seller; (3) an assignment addendum to the contract of sale with the RSC; (4) a power of attorney; and (5) an authorization for the RSC to receive funds from trust accounts on the employee's behalf. After the assignment, the RSC handles all remaining details of the third-party sale and agrees to take all actions necessary and appropriate to complete the sale. The RSC pays seller's closing costs.

If an assigned third-party sale does not close and the RSC's offer has not expired, the employee may attempt to find another buyer during the remaining offer period and assign the sale to the RSC. If the RSC's offer has expired, the employee may accept the RSC's offer or cancel the contract of sale with1997 U.S. Tax Ct. LEXIS 33">*41 the RSC and return all money received from the RSC. Petitioner is liable to the RSC for any amount not returned. During the years in issue, all assigned sales closed as provided in the third-party sales contracts.

Relocating employees who do not receive offers from third parties may accept the RSC's offer (regular sale) before it expires. An employee accepts the RSC's offer by completing a contract of sale with the RSC as buyer and the employee as seller, a power of attorney, and an authorization for the RSC to receive funds from trust accounts on the employee's behalf. In the contracts of sale, the RSC agrees to purchase and the employees agree to sell their residences. The employees do not transfer legal title of the residences to the RSC or petitioner. The contracts of sale between the RSC and the employees require the employees to transfer marketable title of the residences within 1 year to a person designated by the RSC. 108 T.C. 507">*512 Generally, the designated person is the third-party purchaser. If a third party has not purchased a residence within 1 year, title passes to the RSC or an affiliate of the RSC.

To facilitate the transfer of title to the third-party purchaser, the employee signs1997 U.S. Tax Ct. LEXIS 33">*42 and delivers a deed in blank to the RSC when the employee accepts the RSC's offer. The deed in blank contains a legal description of the property and includes the relocating employee's signature as grantor and a notary acknowledgment. Everything else in the deed, including the name of the grantee, is left blank. Neither the deed nor the contract of sale with the RSC is recorded. The RSC will not return a deed to an employee unless told to do so by petitioner. The RSC holds the unrecorded deed until it finds a third-party purchaser for the residence. At that time, the name of the third-party purchaser is entered onto the deed as grantee. The relocating employee retains legal title to the residence until the sale of the residence to a third party.

Under the terms of their contracts of sale with the RSC, relocating employees generally vacate their residences within 60 days of accepting the RSC's offer. Under the Intergroup and VanRelco contracts of sale, employees who continue to occupy the residences after 60 days must pay rent. Employees are responsible for maintenance of the residences until they move out. Thereafter, the RSC pays for the maintenance costs of the residences, including1997 U.S. Tax Ct. LEXIS 33">*43 the costs of insurance, general property maintenance, utilities, snow removal, mortgage payments, and property taxes. However, employees remain legally responsible for the mortgage payments and taxes. In assigned sales, employees may elect to deliver possession of the residences directly to the third-party buyers rather than the RSC. If an employee delivers possession to the third-party buyer, the employee remains responsible for the maintenance costs until the third-party sale closes.

On the day the employees move out of the residences, the RSC pays them their equity in the residences. The RSC may pay up to a specified percentage (typically 90 percent) of the equity prior to the vacate date if an employee needs the money to purchase a new residence. In such a case, the RSC pays the balance of the employee's equity on the vacate date. In a regular sale, the equity payment is the appraised value of the residence as of the vacate date less the prorated 108 T.C. 507">*513 unpaid balances of all loans secured by the property, prorated accrued interest, prorated real property taxes, prorated owner's dues, fees, and maintenance charges, and certain estimated costs of repairs recommended by a recognized termite1997 U.S. Tax Ct. LEXIS 33">*44 or pest control company. In an assigned sale, the equity payment is computed using the appraised value as of the estimated closing date for the third-party sales contract. When an assigned sale closes, the RSC pays the employee the difference between the equity payment and the net sales price from the third-party sale.

In a regular sale, the RSC lists the residence for sale through a real estate broker. The RSC recommends repairs, improvements, and maintenance that would expedite the residence's sale. Petitioner must authorize the repair or improvement, and the RSC makes the appropriate arrangements. The RSC also advises petitioner of its activities in connection with the sale of the residences and informs petitioner of any offers that it receives. Petitioner's contract with the RSC gives the RSC authority to reject or accept any bona fide third-party offer. Petitioner must approve any offers that are below a specified percentage (either 92 or 94 percent) of the appraised value. In practice, however, the RSC consults with petitioner and follows petitioner's recommendations regarding all third-party offers.

In general, the RSC sends the net sales proceeds from the third-party sale1997 U.S. Tax Ct. LEXIS 33">*45 to petitioner when the sale closes. If a third party purchases the residence at a price below the appraised value, the RSC charges the loss from the sale to petitioner's account. Conversely, the RSC credits a gain from a third-party sale to petitioner. Petitioner then pays the gain to the employee who owns the residence.

Petitioner reimburses the RSC for the equity payments and for all costs that the RSC incurs in connection with the disposition of relocating employees' residences. Reimbursed costs include expenses for: appraisal and inspection, repair and maintenance, improvements, utilities, insurance, property taxes, homeowner association fees, mortgage payments, other expenses directly attributable to specific residences, interest charged on direct and indirect expenses, gain or loss on the sale to third parties, broker commissions, and other closing costs. In addition, petitioner pays the RSC a fee of 1.25 percent of the appraised value of the residences in 108 T.C. 507">*514 regular sales, and either .5 percent (Intergroup) or 1 percent (Transamerica and VanRelco) of the appraised value in assigned sales. The RSC bears no risk of loss in connection with the sale of the residences.

During the1997 U.S. Tax Ct. LEXIS 33">*46 years in issue, petitioner provided home disposal assistance to at least 188 employees, 176 of which are in issue. Approximately 74 percent of the home sales in issue were regular sales, and 26 percent were assigned sales. Petitioner did not intend to acquire legal title to the residences. It viewed the costs associated with assisting relocating employees in the sale of their residences as an expense of conducting its computer business and did not intend to profit from the sale of the residences to third parties. Petitioner was primarily concerned with inducing employees to relocate and ensuring that the residences were sold quickly. Petitioner generally does not hold itself out as the owner or purchaser of the employees' residences. ²

1997 U.S. Tax Ct. LEXIS 33">*47 For regular sales during the years in issue, the average length of time between acceptance of the RSC's offer and passage of title to the third-party purchaser was as follows:

For assigned sales during the years in issue, the average length of time between assignment of the third-party contract to the RSC and passage of title to the third-party purchaser was as follows:

108 T.C. 507">*515 During the years in issue, gross proceeds from sales of residences to third parties in regular and assigned sales were as follows:

Petitioner did not report any portion of the sales proceeds as gross receipts on its income tax returns for the years in issue. Petitioner deducted certain payments to the RSC as ordinary and necessary business expenses, including the loss from sales of residences to third parties at a price below the appraised value. Respondent disallowed the deduction against ordinary income on the ground that the payments were capital losses. Respondent1997 U.S. Tax Ct. LEXIS 33">*48 increased petitioner's taxable income in the following amounts: ³

Petitioner did not report any capital gain or loss during the years in issue.

108 T.C. 507">*516 OPINION

Petitioner contends that its payments to the RSC to assist relocating employees in selling their residences are a form of employee benefits and are fully deductible under section 162(a). 1997 U.S. Tax Ct. LEXIS 33">*49 ⁴Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Sanford v. Commissioner, 50 T.C. 823">50 T.C. 823, 50 T.C. 823">826 (1968), affd. per curiam 412 F.2d 201">412 F.2d 201 (2d Cir. 1969). Losses from the sale of capital assets by corporate taxpayers are deductible only to the extent of capital gains. Secs. 165(f), 1211(a). Deductions are a matter of legislative grace, and taxpayers bear the burden of proving that they are entitled to the deductions claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79">503 U.S. 79, 503 U.S. 79">84 (1992).

Respondent contends that petitioner acquired ownership of the residences of its relocating employees in both regular and assigned sales and that in petitioner's1997 U.S. Tax Ct. LEXIS 33">*50 possession the residences are capital assets. Accordingly, respondent argues that petitioner cannot deduct the payments to the RSC against ordinary income under section 162. Although petitioner never took title to its employees' residences, respondent determined that in substance petitioner, by its control over the property, was the owner. Respondent's position thus follows the ruling position that relocating employees' homes purchased by their employer to assist the employees in the sale of the residences are capital assets under section 1221 when resold by the employer. Rev. Rul. 82-204, 1982-2 C.B. 192. Respondent infers that petitioner structured these relocation transactions to convert capital loss into deductions against "ordinary" income. To determine whether petitioner is entitled to deduct the payments to the RSC, we first address the threshold question of whether petitioner acquired ownership of the residences. If petitioner were found to be the owner of the residences, we would then need to determine whether the residences were capital or ordinary income assets.

The economic substance of a transaction, rather than its form, controls1997 U.S. Tax Ct. LEXIS 33">*51 in determining whether the transaction constitutes 108 T.C. 507">*517 a sale for Federal tax purposes. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465 (1935); Derr v. Commissioner, 77 T.C. 708">77 T.C. 708 (1981). We consider the objective economic realities of a transaction to determine its tax consequences. Frank Lyon Co. v. United States, 435 U.S. 561">435 U.S. 561, 435 U.S. 561">573 (1978); Houchins v. Commissioner, 79 T.C. 570">79 T.C. 570, 79 T.C. 570">589 (1982). Whether petitioner became the owner of the residences for Federal tax purposes is a question of fact to be determined from the written agreements and all relevant facts and circumstances. Reinberg v. Commissioner, 90 T.C. 116">90 T.C. 116, 90 T.C. 116">132 (1988); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221">77 T.C. 1221, 77 T.C. 1221">1237 (1981). Respondent argues that the transactions between the RSC and relocating employees constitute sales of the employees' residences to the RSC. Respondent further contends that the RSC acted as petitioner's agent, making petitioner the owner of the residences. Petitioner denies that the RSC was its agent and asserts that the RSC was1997 U.S. Tax Ct. LEXIS 33">*52 the agent of relocating employees to transfer ownership of the residences from the employees to third-party purchasers.

The term "sale" is given its ordinary meaning and is generally defined as a transfer of property for money or a promise to pay money. Commissioner v. Brown, 380 U.S. 563">380 U.S. 563 (1965). For Federal tax purposes, State law controls whether a taxpayer has an ownership interest in property, and the tax consequences of property ownership are then determined under Federal law. United States v. National Bank of Commerce, 472 U.S. 713">472 U.S. 713, 472 U.S. 713">722 (1985). However, a sale occurs for Federal tax purposes upon the transfer of the benefits and burdens of ownership rather than upon the satisfaction of technical requirements for the passage of title under State law. Yelencsics v. Commissioner, 74 T.C. 1513">74 T.C. 1513, 74 T.C. 1513">1527 (1980); Clodfelter v. Commissioner, 48 T.C. 694">48 T.C. 694, 48 T.C. 694">700 (1967), affd. 426 F.2d 1391">426 F.2d 1391 (9th Cir. 1970).

Whether the benefits and burdens of ownership have been transferred is a question of fact. In 77 T.C. 1221">Grodt & McKay Realty v. Commissioner, supra,1997 U.S. Tax Ct. LEXIS 33">*53 we identified the following factors to consider in determining whether a transaction constitutes a sale:

(1) Whether legal title passes; (2) how the parties treat the transaction; (3) whether an equity was acquired in the property; (4) whether the contract creates a present obligation on the seller to execute and deliver a deed and 108 T.C. 507">*518 a present obligation on the purchaser to make payments; (5) whether the right of possession is vested in the purchaser; (6) which party pays the property taxes; (7) which party bears the risk of loss or damage to the property; and (8) which party receives the profits from the operation and sale of the property. * * * [77 T.C. 1221">Id. at 1237-1238; citations omitted.]