Contracts Were Not Home Construction Contracts, So Completed Contract Method Not Available.

The petitioner was in the land development business and sold land to builders for home construction.  The petitioner accounted for the income from the sales under the completed contract method which applies to home construction contracts and other real estate construction contracts if the taxpayer estimates that the contracts will be completed within two years of the contract commencement date and the taxpayer satisfies a $10 million gross receipts test under the Treasury Regulations.  Under the completed contract method, no income is reported until the contract is complete irrespective of when contract payments are actually received.  The IRS asserted that the contracts didn't qualify for the completed contract method of accounting because the contracts could not be considered long-term and were not construction contracts because the taxpayer did no construction activities.   The court determined that the custom lot and bulk sale contracts were long term contracts and were construction contracts.  However, the court determined that none of the contracts were home construction contracts because the taxpayer merely paved the road leading to a home.  Thus, gain under the contracts could not be reported under the completed contract method.  The court also determined that none of the contracts involved a general contractor or subcontractor relationship.  The Howard Hughes Company, LLC v. Comr., No. 14-60915, 2015 U.S. App. LEXIS 18726 (5th Cir. Oct. 27, 2015), aff'g., 142 T.C. No. 20 (2014).

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