In the case of Shea Homes, Inc. v. Commissioner, 142 TC No.3, the question of the scope of contracts of a homebuilder when making use of the completed contract method was the key issue.  And the IRS did not like the answer that either the Tax Court or the Ninth Circuit Court of Appeals gave, eventually releasing Action on Decision 2017-03 announcing the agency will not acquiesce in the decision, following it only on cases appealable to the Ninth Circuit that cannot be distinguished.

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While most practitioners likely think of the tax percentage of completion method of accounting as something only affecting construction contractors, in fact such provisions can impact other types of contracts under certain conditions. In the case of Basic Engineering, Inc. v. Commissioner, TC Memo 2017-26 the key issue was whether the contract the taxpayer had was really not a construction contract and, if not, whether it would still be required to be accounted for under the percentage of completion method of accounting for tax purposes.

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A construction contract requiring grading and soil compaction of the area for building foundations for houses was found to qualify for completed contract treatment in Technical Advice Memorandum 201650014.

Under IRC §460, the general rule is that long term construction contracts must be reported under the percentage of completion method (PCM) for tax purposes.  However, under IRC §460(e)(1)(A) a home construction contract does not require the use of PCM and the contractor may instead use the completed contract method of accounting.

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In the case of Shea Homes, Inc. v. Commissioner, 142 TC No.3, the question of the scope of contracts of a homebuilder when making use of the completed contract method was the key issue.  The issue would end up not just before the Tax Court, but also be dealt with by the Ninth Circuit Court of Appeals.

The taxpayer developed large planned residential communities which had substantial common area developments and improvements required by the localities in which the developments were located. 

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In the case of The Howard Hughes Company, LLC v. Commissioner, 142 TC No. 20, the Tax Court clarified the limit of its decision in Shea Homes, Inc. v. Commissioner, 142 TC No.3, denying the completed contract method to a developer that did not actually construct homes in this case.  On appeal, the Fifth Circuit accepted the Tax Court’s analysis (The Howard Hughes Company, LLC v. Commissioner, CA5, Nos. 14-60915, 14-60921, AFTR 2d ¶ 2015-5368).