What the Tax Court gives with one hand, it can take away with the other.
That’s the lesson one can learn from the pair of cases issued this year dealing with the completed contract method of accounting (CCM). The Tax Court’s opinion in Shea Homes, Inc. v. Commissioner, 142 T.C. No.3 (2014) was a great win for large-scale home
developers like Shea Homes whose contracts to build and develop entire communities can take several years to complete. The IRS had taken the unfortunate position that Shea Homes’ contracts were not long term contracts and that the infrastructure improvements to the roads and building community areas were not included in determining when the contract was completed – which would have forced Shea Homes to recognize all of its income before knowing how much it would ultimately have in expenses. It was a resounding victory for Shea Homes, though, as the Tax Court found that they were long term home
-construction contracts and the contracts were not completed in earlier years when the contracts closed escrow. The Tax Court relied on the facts that the community areas and the infrastructure were part of their contracts with the ultimate home
purchasers and held that those costs were properly included in the tests to determine whether the CCM could be used and when the contracts were completed. A broad reading of that opinion could have been used to support the proposition that builders who only did infrastructure and community improvements could also use the CCM.
That is, until the Tax Court issued its recent opinion in Howard Hughes Company, LLC v. Commissioner, 142 T.C. No. 20 (2014). In what appeared to be less of a sequel and more of a two-part movie, the Tax Court drew a bright line to exclude builders who build infrastructure and community areas, but don’t also construct homes, from the test. The Tax Court made no bones about it, saying:
“Our Opinion today draws a bright line. A taxpayer’s contract can qualify as a home
construction contract only if the taxpayer builds… or installs integral components to dwelling units… . It is not enough for the taxpayer to merely pave the road leading to the home
, though that may be necessary to the ultimate sale and use of a home
While there is some logic to the Tax Court’s opinion, a plain reading of the regulations and the statute don’t give this tax attorney the sense that they are so narrow. Especially in light of the proposed regulations which would broaden the costs that can be included. Proposed Income Tax Regs., 73 Fed. Reg. 45182 (Aug. 4, 2008) (I don’t buy the idea that the IRS can, on the one hand, issue regulations but, on the other hand, say that the regulation is not supported by the terms of the statute. Chevron, anyone? Separation of powers?). I think we can expect the taxpayers in Hughes to appeal, so there will certainly be more to the story. Stay posted.