Shea Homes, Inc. & Subsidiaries v. Commissioner
834 F.3d 1061
| 9th Cir. | 2016Background
- Shea Homes, Inc. and related entities ("Taxpayers") develop planned-home communities and used the completed-contract method (CCM) to report home-sale income.
- Under CCM, the Taxpayers applied the 95% completion test on a development-by-development basis, including common improvements, amenities, and all houses in the development when determining contract completion.
- IRS issued deficiency and partnership adjustment notices, arguing the subject matter of each home sale contract was only the house and lot (and that common improvements were secondary items), so income should be recognized upon closing or based on a narrower 95% test.
- The Tax Court found as fact that each buyer’s contract encompassed the development and its common improvements and amenities, and that applying the 95% test to that subject matter clearly reflected income.
- On appeal the Commissioner conceded that the subject matter included common improvements but argued the 95% test should exclude the costs of other houses in the development; the Ninth Circuit affirmed the Tax Court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Taxpayers' CCM clearly reflected income | Taxpayers: CCM applied to the full subject matter (house + lot + development amenities) and their use of the 95% test clearly reflected income | Commissioner: CCM did not clearly reflect income; subject matter limited to house and lot (so income recognized on closing) | Court: Taxpayers' method clearly reflected income given Tax Court's factual findings about contract subject matter; affirmed |
| Proper definition of "subject matter" for the 95% test | Taxpayers: subject matter includes development and common improvements bargained for by buyers | Commissioner: subject matter is house and lot (and on appeal conceded amenities but not other houses' costs) | Court: Tax Court's factual finding that subject matter includes development and amenities is not clearly erroneous; 95% test application was consistent with that finding |
| Whether Taxpayers improperly aggregated multiple contracts to defer income | Commissioner: treating development-wide costs effectively aggregates separate purchase contracts | Taxpayers: they tested completion of each individual contract against that contract’s subject matter (which includes the development) | Court: No improper aggregation on these facts; Taxpayers tested individual contracts against their subject matter; factual finding upheld |
| Whether Commissioner may raise a new theory on appeal (narrower 95% test excluding other houses) | Taxpayers: Commissioner waived alternative method because not presented below | Commissioner: sought to advance new approach on appeal | Held: Ninth Circuit refused remand or consideration of a new theory not raised before Tax Court; issue not preserved |
Key Cases Cited
- Shea Homes, Inc. v. Comm'r, 142 T.C. 60 (T.C. 2014) (Tax Court opinion finding contracts include development and amenities)
- Palmer v. IRS, 116 F.3d 1309 (9th Cir. 1997) (Commissioner has discretion to choose income-reconstruction method)
- Meruelo v. Comm'r, 691 F.3d 1108 (9th Cir. 2012) (standard of review for Tax Court factual findings — clear error)
- Suzy's Zoo v. Comm'r, 273 F.3d 875 (9th Cir. 2001) (distinction between questions of law and mixed fact-law)
- Lucas v. Ox Fibre Brush Co., 281 U.S. 115 (U.S. 1930) (tax accounting methods must clearly reflect income)
- Pullman-Standard v. Swint, 456 U.S. 273 (U.S. 1982) (deference to trial-court factual findings)