Tax News

CCH (cch.taxgroup.com) reports:

  The taxpayer corporation and its subsidiary companies were entitled to use the percentage-of-completion (PCM) method to report income from a highway project as income from a long-term contract. The contract fell within the purpose of Code Sec. 460 because it created long-term construction obligations on behalf of the corporation without regard to any proof of defect. Although the corporation did not directly perform any construction work, it designed the road, managed its construction and was fully responsible for the final constructed product; thus, it bore the obligations of a general contractor.

  The corporation also bore the entire expense for the reconstruction, rehabilitation and preventive maintenance work needed to assure the road's performance over the next two decades. Both parties to the agreement knew with certainty that extensive construction work would occur in the future; they were only uncertain of the amount or timing of the future costs. Further, pavement and structure "warranties" in the agreement were not traditional warranties which would not have been eligible for PCM treatment. The corporation's duties were greater than those under a standard warranty and were not incidental to the underlying obligation. Instead, the provisions at issue were performance warranties that were separately negotiated and priced. The label was not controlling or even relevant; the substance and actual obligations incurred by the corporation indicated that the provisions were part of a long-term contract.

Koch Industries, Inc., DC Kan., 2008-2 USTC ¶50,465

Other References:

 
Code Sec. 460

  CCH Reference - 2008FED ¶21,560.30

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 33,100