Tax Court Rules Homebuilders Could Apply Completed Contract Method Considering Common Improvement Costs of Entire Housing Development
“In Shea v. Commissioner the U.S. Tax Court decided in favor of the taxpayer, a developer of planned residential communities, and allowed the taxpayer to defer the recognition of income from the sale of homes under its completed contract method of accounting for long-term home construction contracts until 95% of the costs of the development were incurred. That is, in applying the “95% completion” test, the subject matter of the contract was considered to be the entire development or phase of a larger development and not each individual house and lot. Thus, the allocable costs attributable to the subject matter of each contract included the costs of common improvements and amenities of the development, in addition to the costs of the house and lot. This decision addresses a long-standing controversy in this area and could help other builders and developers that currently are using the completed contract method to defer income related to home construction projects.”