Fifth Circuit upholds Tax Court: Land developer contracts are not home construction contracts

In Howard Hughes Co., LLC v. Commissioner, No. 14-60915 (5th Cir. 2015), the Fifth Circuit Court of Appeals on Oct. 27 upheld the decision of the Tax Court that a land developer was not eligible to use the completed contract method for certain contracts.

The taxpayer in the case sold property to commercial builders or individual buyers who would then construct homes on the property. Under the land sale contracts, the taxpayer was obligated to construct infrastructure and other common improvements for the property; however it did not build homes, perform any home construction work or make improvements within the boundaries of any specific lot. The taxpayer took the position that the contracts met the requirements of home construction contacts under Section 460 and therefore entitled the taxpayer to use the completed contract method for computing gain.  

The Fifth Circuit upheld the decision of the Tax Court that a contract is a home construction contract for purposes of Section 460 only if “the taxpayer builds, constructs, reconstructs, rehabilitates, or installs integral components to dwelling units or real property improvements directly related to and located on the site of such dwelling units.” Because the taxpayer could not meet this test, it was not entitled to use the completed contract method.

Sharon Kay
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Ellen Martin
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