(Corrects to clarify Howard Hughes Corp was spun off by General Growth Properties Inc, add details on liability in 12th paragraph)
By Patrick Temple-West
WASHINGTON, Feb 13 (Reuters) - A California homebuilder has prevailed in U.S. Tax Court in a case involving an accounting method that could help builders and developers defer taxes, industry experts said on Thursday.
Handing a defeat to the Internal Revenue Service, the court ruled that Shea Homes LP could defer payment of taxes on home sales until 95 percent of the homes in its huge, gated-community developments were sold.
The IRS had argued Shea should pay taxes as it sold each home and not wait until its developments, including thousands of properties, were nearly filled, court filings showed.
The Tax Court, which hears most disputes between taxpayers and the IRS, found that Walnut, California-based Shea’s use of the “completed contract method” of accounting was appropriate.
The company “properly used a permissible method of accounting,” Judge Robert Wherry said in an 82-page opinion.
Shea Homes did not immediately respond to requests for comment. The IRS declined to comment on Thursday.
The tax agency has challenged companies for years over the completed contract method. The Shea decision will give more certainty to companies that use the method, experts said.
“This is a huge case, not only because of the money involved but because of the definitions,” said Alan Clark, an accountant in Atlanta and chairman of the Construction Financial Management Association, a construction industry trade group.
“This case should help developers. It should help spur investments,” Clark said.
Shea’s dispute involved $23.7 million in taxes for 2004 and 2005. The housing developments at the center of the dispute were in Arizona, California and Colorado. The case was being watched by other home developers, including Howard Hughes Corp.
Howard Hughes is challenging the IRS over a $144.1 million tax bill over a completed contract method dispute involving home sales. That case, filed in Tax Court, went to trial in November 2012 and is awaiting a decision. Activist investor William Ackman is chairman of Howard Hughes.
Dallas-based Howard Hughes was spun off from General Growth Properties Inc. Though Howard Hughes is the company in court, General Growth Properties is liable for the tax payments if the IRS wins, according to the spinoff agreement. A spokesman for General Growth Properties declined to comment on Thursday.
The case is Shea Homes, Inc and subsidiaries et al v. Commissioner of Internal Revenue; Docket No. 1400-10. (Editing by Kevin Drawbaugh and Richard Chang)