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Homebuilder Wins Major Tax Court Case

A taxpayer friendly decision in a recent tax court case, Shea Homes, Inc. and Subsidiaries, marked a major victory for homebuilders.  At issue was the application of the completed contract method of revenue recognition for federal income tax purposes. Shea Homes, a developer of large residential communities, contended that they can apply the completed contract method to the entire home development, including common areas and roads.  In contrast, the IRS argued that contracts should be measured as complete on a per home basis.

The Tax Court sided with Shea Homes and reasoned that its decision represents a clear reflection of income.  It was concluded that the land acquisition and “upfront” (pre-construction) costs were a large percentage of the total development costs.  According to the tax court, “Because the projects were longer projects, and given the nature of the home construction industry, costs are difficult to predict, and they could not accurately determine their profit until the development was nearly complete.”  In addition, the court believes this exception to percentage of completion accounting represents “A deliberate choice by congress that home construction contracts should be treated differently and accorded the more generous deferral of the completed contract method.”

The IRS decision is a major victory for homebuilders and will be an important factor when tax planning for homebuilders.


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