The U.S. Court of Appeals For the 9th Circuit Denied Deficiencies the IRS Assessed, and Adjustments to Partnership Items For What the IRS Considered as an Improper Accounting Method (Shea Homes, Inc. v. CIR)

• Taxpayers, a Corporation and its subsidiaries operating as a Limited Partnership and as an LLC, are planned community builders and developers in Colorado, California and Arizona. The construction projects include building the house, and developing the common improvements, and amenities, which extend across more than one tax year.
• They applied the completed-contract accounting method to report income. Under that method, taxpayers report the income from the development contract in the year the development is completed. And the development is completed when Taxpayers incurred, for each development, at least 95% of the budgeted costs of the development, including the costs of the houses and the common improvements and amenities.
• For the IRS, income from home construction contracts entered into in one tax year but closed in another tax year had to be recognized for tax purposes once the home purchase closed in escrow, even if the Taxpayers had not yet finished the development or the common improvements and amenities to which the buyer was entitled pursuant to his sale contract with the Taxpayers.

The Court of Appeals affirmed the Tax Court’s decision that:

• The Taxpayers used a permissible method of accounting that clearly reflects their income during the tax years under consideration. Taxpayers were permitted to report income and loss from the sales of homes in their planned developments using the completed contract method of accounting
• Each construction contract included the amenities within the housing development. Therefore, the Taxpayers are permitted to include the entire development when performing the calculation under the 95% completion test.

Please contact us to find out how the Court’s decision may benefit your business, if you are a builder or developer.