Attorney-at-Law

MEDAL COUNT

In Uncategorized on 02/12/2014 at 19:40

Taypayers 2, IRS 0

If you’re like me, you probably have lost interest in Sochi, so we turn our attention to Tax Court today, where the results of different events have been posted.

First event, the statute of limitations race. Question: when is IRS “notified”, to start the clock? Well, says Judge Chiechi, in the case of the excise tax in Section 4979(a) where a disqualified person holds stock in an ESOP during the first nonallocation year, thus triggering the tax, because neither Section 4979 nor the regulations define “notified”, it’s when all of the details in connection with the disqualifying holding is filed with IRS before the time or at the time the taxpayer’s annual income tax return is filed.

And Judge Chiechi gets there by borrowing from the Section 1033 involuntary conversion regulations.

So Law Office of John H. Eggertsen P.C., 142 T. C. 4, filed 2/12/14, beats the three-year statute of limitations, because the returns filed in 2006 (date not specified) preceded IRS’ SNOD by about 5 years.

Next up is Shea Homes, Inc. and Subsidiaries, et al., 142 T. C. 3, filed 2/12/14, in the accounting method scramble. The question here is recognition of income, and it’s a big question for homebuilders who sell more than “sticks and bricks”, that is, whose developments include recreation facilities, meetingplaces, nature walks, private roads and what are called “amenities” outside the four walls and backyards of the houses they sell. And who may be closing houses and taking in money years before the job is finished.

Shea says they recognize when 95% of costs expended and the homes are “used”, that is, a certificate of habitability (or what we call a C of O, certificate of occupancy), is issued by the municipal authorities. And the 95% of costs means the last road is paved and the last performance, payment or labor-and-materials bond is exonerated.

IRS says no, of course; when the home itself gets the C of O, and Shea gets cash, that’s it. You’re selling homes; the amenities are “secondary”, which means you can count the separate cost for them (but not land acquisition, site preparation, or permitting) later.

Judge Wherry, anything but whimsical here, gives a course in real estate development and real estate sales, from site location and acquisition, through construction and marketing, with a strong dose of governmental restrictions and bonding requirements, which I strongly recommend to those interested. In short, what Shea sells is a package, not just a house.

Judge Wherry: “Purchasers of homes in their developments were conscious of the elaborate amenities and would have understood that the price they paid for a home included the amenities of the development. If a purchaser did not want to live in one of the planned developments with its accompanying amenities, it is likely he or she could have paid much less for an otherwise comparable dwelling outside of a development and with no seller-provided amenities.” 142 T. C. 3, at pp. 51-52. (Footnote omitted, but read it. Amenities accounted for around 25% of indirect costs of each project, and “To believe that the consumer homebuyer did not view the fruits of these expenditures as an integral aspect of their home purchase decision strains credibility.”).

Actually, it strains credulity, Judge, but it’s all the same.

And while IRS has broad latitude to change accounting methods to reflect income and expenses accurately, and gets a stronger-than-usual presumption in its favor when it does mandate a change, it can’t make a taxpayer change from one inaccurate method to another, nor can IRS force a change from a clearly-acceptable method.

And the whole thing goes off on…drumroll…facts and circumstances.

So Judge Wherry gives us a massive exegesis, and decides that Shea’s accounting is correct. Shea is selling more than bricks-and-sticks. Shea hasn’t dragged its feet to avoid recognizing income.

Taxpayers are two-for-two today in the big events.

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