The nation's highest tax court decided
last week a contentious construction accounting case in favor of the taxpayer, a California homebuilder, that had been in a decade-long dispute with the IRS over the use of the completed contract method (CCM). While in this case the builder is a residential developer, the precedent may have a broader impact for the tax treatment of long-term construction contracts.
At issue was Shea Homes’ use of the CCM to recognize income only upon nearing completion of its developments, thus deferring taxes on individual home sales. The court determined
that Shea “properly used a permissible method of accounting,” and further found that common improvements and community infrastructure could be factored in to calculations of completion for tax purposes.
ABC Tax Advisory Group (TAG) member Al Clark of Smith, Adcock and Company was quoted by Reuters
on the significance of the decision:
"This is a huge case, not only because of the money involved but because of the definitions," said Alan Clark, an accountant in Atlanta and chairman of the Construction Financial Management Association [Tax and Legislative Affairs Committee.] "This case should help developers. It should help spur investments," Clark said.
ABC has long advocated reforming the tax code to allow the use of CCM by a greater number of construction contractors.
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