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Tax ruling creates opportunities for construction, development companies

March 14, 2014

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What Shea v. Commissioner could mean for you

Recently the U.S. Tax court ruled in favor of Shea Homes LP in the case of Shea Homes, Inc. v. Commissioner, 142 TC No.3 (Access pdf of the ruling).

This ruling could have significant impact on home builders’ ability to defer income. In this case, the court ruled the builder could defer payment of taxes on home sales until nearly all of the homes in the large-scale, life-styled focused developments were sold using the “completed contract method.”

The IRS had wanted Shea to pay taxes on each home, as it was sold, and not wait until 95 percent of the properties in the planned developments were sold.

While the Shea decision gives some clarification for construction companies that use, or plan to use, the completed contract method, there are details about the Shea case that needs to be considered. The most important is how Shea marketed and conceptualized its developments, not just as homes, but as lifestyle communities where “common improvements,” such as amenities (clubhouses, pools, golf courses) were a significant investment. In essence, Shea was saying home buyers were buying more than a home, they were also buying the amenities that were included in the community as a package deal.

Key planning and a thorough understanding of this tax court ruling is key to determining if your construction or development company could take advantage of the potential ability to defer payment of taxes.

Shea Homes, Inc and subsidiaries et al v. Commissioner of Internal Revenue; Docket No. 1400-10.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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