Shea Homes v. CIR, No. 14-72161 (9th Cir. 2016)
Annotate this CaseThe Commissioner appeals the Tax Court's decision in these consolidated cases that SHI did not have deficiencies for the tax years under consideration and that SHLP and Vistancia had no adjustments to partnership items for their tax years which were under consideration. The tax court determined that the Taxpayers had used an accounting method that clearly reflected their income during the tax years under consideration. The court affirmed the tax court's decision that on the record before it, the Taxpayers used a permissible method of accounting and that method of accounting clearly reflected their income. The Tax Court determined that, as a matter of fact, the subject matter included the house, the lot, “the development . . . and its common improvements and amenities.” In this case, the Tax Court did not clearly err when it determined the subject matter of the Taxpayers’ home construction contracts; the Taxpayers’ application of the 95 percent test and the CCM logically flows from that determination.
Court Description: Tax. The panel affirmed the Tax Court’s decisions that taxpayers Shea Homes, Inc. and Subsidiaries did not have any deficiencies and that taxpayers Shea Homes, LP and Vistancia, LLC had no adjustments to partnership items for certain tax years, based on a challenge to the completed- contract accounting method for home construction contracts. Taxpayers are planned community builders and developers in Colorado, California, and Arizona. Because their projects tended to involve long-term home construction contracts extending across more than one tax year, they applied the completed-contract accounting method to report income, where the completion year is the taxable year in which a taxpayer completes a contract. See 26 U.S.C. § 460(e)(1)(a); 26 C.F.R. §§ 1.460-1–1.460-4. The Commissioner contended that the subject matter of the contracts was limited to the house and lot; the Tax Court determined that, as a matter of fact, the subject matter included the house, lot, development, and its common improvements and amenities. The panel held that the Tax Court did not clearly err in its determination, noting that until taxpayers’ work was complete, they had an obligation to fulfill their promises regarding the development that they had induced the buyers to become a part of. The panel affirmed the Tax Court’s decision that taxpayers had used a 4 SHEA HOMES V. CIR permissible method of accounting that clearly reflected their income. Judge Rawlinson concurred in the judgment, solely on the basis that the Commissioner is bound by the arguments and theories relied upon during the trial before the Tax Court, because “our precedent is replete with cases precluding a party from endeavoring to assert a theory on appeal that was not presented to the trial court.” Judge Rawlinson would affirm the Tax Court’s decision solely on the basis that the Commissioner failed to raise the issue raised in this appeal — whether the subject of each construction contract is the entire development — sufficiently for the Tax Court to rule on it.
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