By Joseph E. Tierney, IV
The United States Tax Court recently decided in the taxpayer’s favor in a matter pertaining to the taxpayer’s interpretation of the completed contract method of accounting. Under this method, profits from the sale of homes are deferred until the tax year when the builder has incurred 95% of the project’s total cost. In addition, the Tax Court agreed with the taxpayer that the construction contracts consisted of not only the dwelling units, but also the lots and improvements.
The IRS argued that the completed contract method should apply to each home to satisfy the final completion and acceptance test promulgated by the regulations. In essence, the completed contract method, according the IRS should be triggered when each home closed.
The taxpayers interpreted Reg. Sec. 1.460-1(c)(3) differently. The taxpayers took the position that the triggering of the relevant contract completion test was when all the amenities and common areas were completed and the final bond was released.
This decision gives construction contractors additional latitude in how to recognize income, expenses, profits and losses, particularly with larger-scale developments. Like many cases in this area of tax law, the facts and circumstances are critical to the tax treatment.
If you would like assistance in applying this case to current or anticipated development projects, contact your Davis & Kuelthau attorney or Joseph E. Tierney, IV, at 414.225.1471 / Jtierney@dkattorneys.com.
For more details on this case, please see the complete Court decision:
Shea Homes, Inc. v. Commissioner, 142 TC No. 3 (February 12, 2014)