IRS does not acquiesce to Stine and Shea Homes

The IRS issued two actions on decisions (AODs) related to Stine, LLC v. U.S., No. 13-03224, 2015 WL 403146 (W.D. La. Jan. 27, 2015) and Shea Homes, Inc., 834 F.3d 1061 (9th Cir. 2016), aft’g 142 T.C. 60 (2014).

In AOD 2017-2 the IRS announced that it does not acquiesce to the holding in Stine. In Stine, the IRS asserted that two retail buildings were not placed into service for purposes of qualifying for Gulf Opportunity Zone (so-called GO Zone) tax incentives because the buildings were not open for business to customers. The two buildings had received certifications of completion and occupancy, which established that the buildings were substantially completed and that limited occupancy was granted. The court held that a building is placed in service when it is substantially complete, meaning in a condition of readiness and availability to perform the function for which it was built — in this instance to house and secure racks, shelving and merchandise.

In AOD 2017-3 the IRS announced that it does not acquiesce to the holding in Shea Homes. In Shea Homes, the IRS took the position that the subject matter of the contract was each individual home in the development and that each such contract was completed upon the sale of the home. The taxpayers took the position that the subject matter of the contracts was broader and encompassed the entire development, and the completion and sale of the home was only a part of the development phase. Under such an interpretation, the costs of the contract included all common improvements associated with the development. After applying the applicable provisions of state law, the Tax Court found that the method of accounting used by the taxpayers clearly reflects income and that that IRS was not permitted to change their method of accounting, even to a method that more clearly reflects income.

Notably, the IRS Large Business and International division (LB&I) announced in January that it would be pursuing an audit campaign against large land developers that construct in residential communities that may be improperly using the completed contract method. While the IRS and Treasury are working on regulations in the area, LB&I announced that it would address this issue through the development of a practice unit, issuance of soft-letters, and a follow-up with issue-based examinations when warranted.

Sharon Kay

Partner, Washington National Tax Office
+1 202 861 4140

Ellen Martin
Partner, Washington National Tax Office
+1 202 521 1558

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