Shea Homes, Inc. And Subsidiaries v. Commissioner
142 T.C. No. 3
| Tax Ct. | 2014Background
- Shea Homes, LP (SHLP), Shea Homes, Inc. (SHI), and Vistancia, LLC developed large planned residential communities and sold houses using the completed-contract method under IRC §460.
- Buyers signed purchase-and-sale agreements but also received and acknowledged public reports, CC&Rs, homeowners association documents, and recorded plats; municipalities required performance bonds for common improvements.
- Petitioners treated each home contract’s “subject matter” as the home plus allocable share of common-development improvements and deferred income until either (a) 95% of allocable contract costs were incurred or (b) final completion and acceptance of the development/phase/bond release.
- Respondent argued the contract subject matter was only the house and lot, so completion occurred at escrow close (final completion and acceptance), disallowing petitioners’ deferrals and prompting proposed §481 adjustments.
- The Tax Court held the contract documents read together included development amenities and common improvements (not secondary items), so petitioners could use the completed-contract method and include allocable common-improvement costs in the 95% test.
Issues
| Issue | Plaintiff's Argument (Shea etc.) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| What documents constitute the contract for §460 purposes? | Purchase agreement plus public reports, CC&Rs, plats, HOA docs — all incorporated and part of the contract. | Integration clauses mean the purchase agreement alone is the entire contract. State real-estate rules limit subject to the lot/home. | The agreements incorporated the other documents; contract comprises the house/lot plus development documents and amenities. |
| What is the “subject matter of the contract”? | The subject matter includes the house/lot and the development or development phase (common improvements/amenities). | The subject matter is only the house and the lot; common improvements are separate or secondary. | The subject matter includes common improvements and amenities; not limited to bricks-and-sticks. |
| May allocable common-improvement costs be included in the 95% completion test? | Yes — regulations allow including an allocable share of common improvements; petitioners reasonably computed 95% on development-wide allocable costs. | No — if common improvements are secondary items they must be excluded for the 95% test; completion often occurs at escrow close. | Petitioners may include allocable common-improvement costs in the 95% numerator/denominator; 95% test may be met before final acceptance. |
| Are common improvements “secondary items” under the regs requiring separate accounting? | No — evidence shows amenities were integral to marketing, buyer expectations, governmental approvals, and bonded obligations. | Yes — common improvements are subordinate to the house and should be treated as secondary. | Common improvements are primary, not secondary; they need not be separated for CCM accounting. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (establishes taxpayer burden of proof principle)
- Commissioner v. Hansen, 360 U.S. 446 (agency discretion when determining whether accounting method clearly reflects income)
- Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (Commissioner has broad discretion to require accounting methods that clearly reflect income)
- Auer v. Robbins, 519 U.S. 452 (deference to agency interpretation of its own regulations discussed)
- Photo-Sonics, Inc. v. Commissioner, 357 F.2d 656 (9th Cir.) (noting a taxpayer may retain an accounting method that clearly reflects income)
- Pinnacle Museum Tower Ass’n v. Pinnacle Market Dev. (US), 282 P.3d 1217 (Cal. 2012) (CC&Rs referenced in purchase agreements are binding on purchasers)