Tax Court - Under builder’s completed contract method of accounting, housing development amenities are included 

February 12:  The U.S. Tax Court today issued an opinion, in consolidated cases, that the taxpayers were entitled to use the completed contract method of accounting under section 460 for reporting income and loss from the sales of housing development projects. The Tax Court concluded that the home sale contracts included the development amenities and were not, as the IRS claimed, limited simply to the house and the lot on which the house sat. Shea Homes, Inc. v. Commissioner, 142 T.C. No. 3 (February 12, 2014)

Read the Tax Court’s 82-page opinion: Shea Homes [PDF 259 KB]

Background

The taxpayers (both a corporation and related partnerships) develop large, planned residential communities in California and the southwest United States. The taxpayers develop the land and construct homes and common improvements, including amenities.


For the years at issue, the taxpayers reported income from their contracts for the sale of homes using the completed contract method of accounting.


  • Under the taxpayers’ interpretation of this method of accounting, their contracts were completed when they meet the use and 95% test under Reg. section 1.460-1(c)(3)(A) and incurred 95% of the costs of the development.
  • Also, the taxpayers contended that “final completion and acceptance” under Reg. section 1.460-1(c)(3)(B) did not occur until the last road was paved and the final bond was released.

The IRS disagreed, and instead contended that under the completed contract method, the subject matter of the contracts consisted only of the houses and the lots upon which the houses were built. According to the IRS, the contract for each home satisfied the final completion and acceptance test when there was closure of escrow for the sale of each home.


The IRS also countered that contracts entered into and closed within the same tax year were not long-term contracts under section 460.

Tax Court’s opinion

The Tax Court agreed with the taxpayers that the subject matter of the contracts consisted of the home and the larger development—including amenities and other common improvements.


Accordingly, the Tax Court concluded that the taxpayers were allowed to report income and losses from sales of homes in their planned developments using their interpretation of the completed contract method of accounting.




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