Shea Homes, Inc. v. Commissioner
142 T.C. 60
| Tax Ct. | 2014Background
- Shea Homes, LP and affiliates (SHI, SHLP, Vistancia) develop large planned residential communities and sold homes using the completed-contract method for the years at issue.
- Buyers signed purchase-and-sale agreements but also received and acknowledged public reports, CC&Rs, tract maps, and homeowners-association documents; municipalities often required bonds securing completion of common improvements.
- Petitioners treated each home contract as including an allocable share of development-wide costs (roads, sewers, clubhouses, amenities) and used a development/phase-wide 95%-of-costs test (or final bond/road completion) to recognize income.
- IRS (Commissioner) argued the subject matter of each contract is only the specific house and lot, so final completion/acceptance occurs at escrow closing and sales are not long-term contracts when entered and closed in same year.
- Tax Court held the contract documents, read together, incorporate public reports, CC&Rs, maps and obligations and that the subject matter includes common improvements; common improvements are not secondary items for section 460 tests.
Issues
| Issue | Plaintiff's Argument (Shea) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| What documents constitute the contract for section 460 purposes? | Contract includes purchase agreement plus incorporated documents (public report, CC&Rs, tract maps, HOA docs) provided/acknowledged to buyers. | Integration clauses in purchase agreements mean the written sale contract alone is the entire agreement. State real‑property rules show subject is the real estate conveyed. | Contract documents read together are the contract; referenced public reports, CC&Rs, maps and HOA docs are incorporated and material to the contract. |
| What is the "subject matter of the contract" for completion tests under sec. 1.460-1? | Subject matter includes the house/lot and common improvements (development or phase) — allocable common‑improvement costs count toward the 95% test. | Subject matter is only the house and lot; common improvements are not part of the contract subject matter for completion. | Subject matter includes common improvements; the 95% allocable‑cost test may include development/phase common‑improvement costs. |
| Are common improvements "secondary items" under sec. 1.460-1(c)(3)(ii) and excluded from the completion test? | No — amenities and infrastructure are primary, central to buyer's decision, and not treated as secondary. | Yes — common improvements are subordinate to the house and should be treated as secondary items and accounted for separately. | Common improvements are primary, not secondary; they need not be separated and may be included in the completion test. |
| Does the completed-contract method, as applied by petitioners, clearly reflect income so Commissioner cannot require change under sec. 446(b)? | Yes — the method (including allocable development costs and phase/development testing) reflects the economics and legal obligations of large developments and was intended by Congress as an exception for home construction. | No (alternative): Commissioner would impose his narrower reading that final completion at closing requires income recognition at escrow close. | The Court held petitioners' completed-contract accounting (including development/phase treatment of common improvements) is permissible and clearly reflects income; decisions for petitioners. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (tax deficiencies presumed correct absent taxpayer proof)
- Commissioner v. Hansen, 360 U.S. 446 (deference to Commissioner on whether an accounting method clearly reflects income)
- Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (Commissioner has broad discretion re accounting methods)
- Auer v. Robbins, 519 U.S. 452 (deference to agency interpretations of their own regulations)
- Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (framework for judicial deference to agency statutory/regulatory interpretations)