Tax News

CCH (cch.taxgroup.com) reports:

The IRS and Treasury Department have proposed amendments to Reg. §§1.460-3, 1.460-4, 1.460-5 and 1.460-6, that would provide guidance to the home construction industry on accounting for certain long-term construction contracts that qualify as home construction contracts under Code Sec. 460(e)(6). Guidance has also been proposed for taxpayers with long-term contracts under Code Sec. 460(f) regarding certain accounting method changes.
Code Sec. 460(a) requires taxpayers to use the percentage-of-completion method (PCM) to account for taxable income from any long-term contract, but Code Sec. 460(e) exempts home construction contracts from this general requirement. Under Code Sec. 460(e)(6), a "home construction contract" is any construction contract in which 80 percent or more of the total estimated contract costs are reasonably expected to be attributable to the construction of: (a) dwelling units in buildings containing four or fewer dwelling units, and (b) improvements to real property directly related to and located on the site of the dwelling units.
Code Sec. 460(e)(4) defines a "construction contract" as any contract for the building, construction, reconstruction or rehabilitation of, or the installation of any integral component to or improvement of, real property. The proposed regulations would expand the types of contracts eligible for the home construction contract exemption, and amend the rules for how taxpayer-initiated accounting method changes that comply with the regulations can be implemented.
The proposed regulations provide that a contract for the construction of common improvements is considered a contract for the construction of improvements to real property directly related to and located on the site of the dwelling units, even if the contract is not for dwelling unit construction. Thus, a land developer that sells individual lots (and its contractors and subcontractors) might have long-term construction contracts that qualify for the home construction contract exemption. The proposed regulations also permit an individual condominium unit to be considered a "townhouse" or "rowhouse" under the exemption, so that each condominium unit can be treated as a separate building in determining whether the underlying contract qualifies.
Under the current regulations, a taxpayer that uses the PCM or exempt-contract PCM, or elects the 10-percent method or special alternative minimum taxable income (AMTI) method, or that adopts or elects a cost allocation accounting method or changes to another method with IRS consent, must apply the method consistently for all similarly classified contracts until the taxpayer obtains consent under Code Sec. 446 to change to another accounting method. A taxpayer-initiated accounting method change is allowed only on a cut-off basis (i.e., only for contracts entered into on or after the year of change), so a Code Sec. 481(a) adjustment is not permitted or required.
The proposed regulations continue the cut-off method only for taxpayer-initiated changes: (1) from a permissible PCM method to another permissible PCM method for long-term contracts for which PCM is required, and (2) from a cost allocation method that complies with the Reg. §1.460-5 rules to another complying cost allocation method. All other taxpayer-initiated changes under Code Sec. 460 will be made with a Code Sec. 481(a) adjustment.
In determining the hypothetical tax underpayment or overpayment for any year as part of the look-back computation, the proposed regulations provide that amounts reported as Code Sec. 481(a) adjustments must generally be taken into account in the tax year(s) they are reported. In determining whether there is a hypothetical underpayment or overpayment, a taxpayer would use amounts reported under its old method for the years that method was used, and amounts reported under its new method for the years the new method was used, netted against the amount of any required Code Sec. 481(a) adjustments.
Thus, a look-back computation would not be required upon contract completion simply because the taxpayer has changed its accounting method, but would be required if actual costs or the contract price differ from the estimated amounts notwithstanding that an accounting method change occurred. The IRS and Treasury request comments on issues that taxpayers might foresee regarding these proposed rules.
The IRS and Treasury also expect to propose specific severing and completion rules for home construction contracts accounted under the completed-contract accounting method. They request comments specifically on the circumstances in which it would be inappropriate to require severing and completion of a home construction contract to be determined on a dwelling-unit-by-dwelling-unit or lot-by-lot basis, or on the basis of when the taxpayer receives payment(s) under the contract.
A public hearing on the proposals has been scheduled for December 5, 2008, beginning at 10:00 a.m. Written comments must be received by November 3, 2008. Outlines of topics to be discussed at the public hearing must be received by November 13, 2008.
Proposed Amendments of Regulations, NPRM REG-120844-07, 2008FED ¶49,825
Other References:
Code Sec. 460
CCH Reference - 2008FED ¶21,554CE
CCH Reference - 2008FED ¶21,555CE
CCH Reference - 2008FED ¶21,556CE
CCH Reference - 2008FED ¶21,557CE
Tax Research Consultant
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