the tax court's decision in this case cannot stand unless the subject matter of taxpayers contracts for the sale of individual homes includes all the homes in the developments they developed in the tax years of issue taxpayers to for more than eight hundred million dollars that they received from such contracts in still such time as they had incurred ninety five percent of the cost of the development including the cost to build the other of the tax court found that the subject matter of the contracts in this case which is the basis for applying the completed contract method includes the house the lot the improvements to the lot and the common area and prove meant specifically does not include the other homes and other wads in the development tax court did not appreciate the tax payers method necessarily includes othe authors and the other houses perhaps because taxpayers hid that fact from the court or we did not acknowledge it council was that issue fairly joined before the tax or the issue of whether or not raised both before during and after the trial now so tell me in the way i thought there was a hypothetical raised and that was the premise upon which the proceedings work to proceed and so tell me where the for the first time the precise issue regarding the inclusion of the entire development  government as an issue that was to be decided in the tax court to to respond to your last question first the first time that it was raised in the record it's actually in the commissioner motion for summary judgment which was which was filed in i believe march of two thousand and twelve now the commissioner also square we were a state in its pretrial memorandum and specifically in its post trial briefing its opening brief includes a section that specifically entitled tax payers misapplied the use of ninety five percent completion tests by applying it on a development wide basis i'm certainly or in terms of the motion for summary judgment was raised on pages nineteen and twenty in terms of in terms of the trial briefing or pretrial memo i'm sorry it's raised in our second supplement excerpts of record on page one eighty six in our opening statement at trial it's raised at again our s s e are at one ninety three in our post roping brief it's raised s s e or one ninety nine to two zero one is the section i referenced this is c r one ninety one ninety nine to two thousand and one is the section that i referenced in which is entitled petitioners misapply ninety nine to because it had not raised the forty one a just minutes that would that are necessary in order to capture all the revenue or duction when the change in accounting that point in the way to gauge the taxpayer the commissioner had issued this is a deficiency and final partnership administrative adjustments determining that taxpayers were improperly deferred income now at that point the commissioner had believed that the basis of that the for a was the common area improvements and had not through discovery discovered that the real basis of the defer heater was not the common area improvements and development but all the other houses and watts that had yet to be built and so at the time that had responded to that hypothetical it responded that hypothetical doesn't say anything about other houses and was hypothetical talks about the total alcohol contract cost as being the cost of the house the lot the improvements to the lot and the common area expenses which is what the tax court found and the commissioner does not dispute that that's what they subject matter the contract is but what the hypothetical does not present is the issue that we're here on now which is what about the other houses and watts in the development which at that point the commissioner didn't know that that's what taxpayers were doing in terms of calculating the ninety five percent completion why wouldn't the commission and all that why didn't the commission and all that well your honor this is why i have had no contact with the revenue agents in this case i can't speak directly to what it did know and didn't know i have the  know and i'm asking you why is that true well your honor i think that if you look at the if you look at that notices the again the notice of deficiency in the and the f the final partnership in ministry of adjustment there is reference schedules m one n m three which are basically schedules that certain tax payers must acquire discrepancies between book accounting and taxpayer accounting it also you look at the m ones n m three s and if you look at the id r s which are in the record your honor under i believe it's exhibits i believe it's seventeen through twenty six of the record and the tax payers with tax returns are proceeding that i believe that they're like eight to seventeen but if you look at those that information there's no there isn't enough there to figure out exactly what taxpayers are doing in this calculation when when when did that become apparent to the commissioner when taxpayers were going through the discovery that included there the track pi spreadsheets which is how taxpayers accounted kept kept a salary i'm sorry yeah i'm sorry when taxpayers were going through the accounting spreadsheets that were i'm sorry when commissioner was going through the accounting spreadsheet that's not a good start question what did the commissioner see and when did he see it so that he learned what she was doing all right yes at the very end of two thousand and eleven your honor why because the taxpayers because the commissioner had not gotten and had not understood exactly how taxpayers were applying the use a ninety five percent completion test until that point your honor but this was before the trial right before well before the trial the trial was in july of two thousand and twelve and i'm saying that the commissioner had determined in late two thousand and seven through is this is a process discovery is facilitates refining the party's position it's the the commissioner had determined the taxpayers had improperly deferred income now the basis of that was something that the claim that well we really didn't know and the commissioner didn't understand until twenty eleven the something missing here your honor i am i understand your question was to recognize the income the minute each house was sold regardless of the common areas cost right and he stuck by that and said not only that but the common areas my secondary position is a common area is a secondary matter shouldn't even be considered that was the basis upon which the commissioner started this whole proceeding and to create a trial right then you're telling me that in the middle of this trial the lake goes on and for the first time the commission says all this is really what she's doing he didn't know what she was doing when he issued the nose of the fish and sea shouldn't have done little investigation before then your honor and have been abandoned that i do not i do not argue with that at all your honor the point is that in the process the commissioner had a conception as to what the taxpayers were doing in this case and then in the course of discovery which is what discovery is for the commissioners discovered that taxpayers were in fact doing something in addition and so the commissioner said listen we think you shouldn't exclude the commentary improvements but even if the commentary improvements are part of the subject matters of each of the contracts in any event the taxpayer should not be applying the use of ninety five percent completion test on the development wide basis that's the that's the issue that i'm curious as to where when that was brought before the commission because the commission did not discuss that issue in detail and the decision there was one one reference to it for once small period of where is that in the record it's in the record it's not in the excerpts of record your honor ok so we can well i we don't have access access to that so in the pretrial memo to s c r one eighty six what specifically did you say about this apply the ninety five percent completion test to each individual contract for the construction and sale of a home and i quote again petitioners application of the ninety five percent completion test is not memo i think it's there if you look at the summary judgment briefing our opening statement at trial the point being is that taxpayers had in their petition in their petition to have a tax court tax payers it describe the subject matter subject matter petitioners home construction contracts with its customers include the home the residential watt and any promised or otherwise required common improvements now if that's the subject matter of the individual contract and if as all the parties now agree you have to apply completed you have to apply the test on a contract by contract basis what we're saying is that taxpayers didn't do that they didn't apply the test on a contract by contract basis because they included all the other houses in watts that they were developing in the development on on one s e r s s e r one ninety three there are four separate pages on that list page are you relying upon in your opening deferred the sorry petitioner's deferral runs contrary to the code and regulations because petitioners furred income in so they incurred ninety five percent of all the costs of the development this includes the cost to build all the houses and all of the common improvements in the development right that that was your primary argument about the improvements being included i didn't see where you sent me and  fact the taxpayer did use that accounting methodology if you look at the stipulation stipulation i believe in the excerpts of record from three ninety to four hundred your honor was your one of your main arguments so that's all kind of jumbled together in that particular statement that my concern is whether or not the tax cut was given the opportunity to rule on this precise issue well speaking to that point your honor and i see i'm getting i'm running late into the tax court not only acknowledged the commissioner's argument on its face on page eighty one of the opinion which is also page eighty one of the excerpts of record but we rejected it failing to appreciate that what taxpayers were doing were as including all the houses in watts the in one breath the the tax court said that the subject matter doesn't include the other houses and watson the development and then the next breath says that that  taxpayers the tax court says that the subject matter of each contract is does not include the other houses in watts in the development but at the same time says the tax payers were allowed to apply acknowledged that that would be an inappropriate method of deferring the taxes but that there was no evidence that it happened in the year in questions using question your honor i believe that you're referring to one of the tax payers in two thousand and two had you not calculated the use of ninety five percent completion test using costs at all it had just strictly said and i believe this is slightly earlier  earlier in the opinion what what the taxpayer in that case had done was just said how many houses of i completed let's say i thought it's a hundred house development i've only completed seventy houses and so i'm saying that you haven't gotten to ninety five percent because seventy is own seventy houses in the numerator one hundred houses in the denominator that's seventy percent the tax court said that's wrong you have to calculate the use of ninety five percent completion test on the basis of not on the basis of houses but at the same time is that the taxpayer the tax court goes on to in its opinion squarely addressed the argument that the commissioner had made an erroneous we've rejected rematch because the tax court because it erroneous we rejected our argument that taxpayers can apply the test on a development wide basis never actually calculated what the test would yield independent grounds first that the tax court properly found after the trial in this case the che's method of accounting clearly reflects income and second independently the court conclude that the commissioner has failed to properly propose an alternative method of accounting that shay should have used and i think it's very important to keep those two separate issues distinct here the question of whether shay's income method of accounting properly reflects income goes to what was tried below what is the subject matter of the contract did the tax court properly conclude that the subject matter of the contract included the development in its entirety and that's exactly what the tax court found on page eighty of the excerpts of record it stated that the subject matter of the contract with the development and it recognized that correct it's a matter of law that the subject matter of the contract is the entire development is that correct as a matter of law it's correct your honor and first letter of law while your honor it's a factual determination and that's what the tax court record what is the subject matter of the contract  factual finding the tax court recognized that the commissioner has an appeal that now central if the regulations define contract that the tax court can't define contract differently than the regulation  can it well this isn't a question about interference with the regulation around it's undisputed that the contracts in this case are home construction contracts with that within that and i think what your honor is going to is what is the contract and we had a trial now below and what the tax court concluded was the contract includes is not just the sales and purchase contract it includes all the documents referenced in the contract that's the public reports the conditions and restrictions the c c r the maps and plots the tax court made a finding on that and page fifty five of the excerpts of record that the commissioner has not challenged on appeal and when you think of the contractors including everything the public reports the maps in class that identify each resident and lot in that in the the community then it makes perfect sense to conclude as a tax court did on page eighty that the subject matter of the contract the subject matter includes the development in its entirety now that was shays position below and the tax court recognized that at page forty eight and sixty three of its decision excerpts of records forty eight and sixty three the tax court recognized in its opinion on pages twenty twenty six and twenty eight that shay's method of accounting included all of the costs from the other homes the costs of constructions so the notion that the commissioners trying to float in this court that the tax court was somehow them blues hold that shay's method of accounting was to take the development in its entirety all the costs is simply incorrect we had a trial about that shape presented expert testimony yesterday on page eighty continuing to page eighty one the tax court said the contract does not include the house and lot other than that which is pocket so isn't that in consistent with the concept that  contract includes all of the homes in the development no your honor because as you curio over to eighty one with the with the tax court said i think this is critical to good because the government wants you to focus on the first part of that sentence but the second part says but the subject matter of each individual house still includes the development or phase of development and it's common improvements and then if you go to the footnote to that very paragraph it says the subject matter of the contracts includes the developments and that's because there's a difference between the contract and the subject matter of the contract we've explained in their brief that the law recognizes that difference and many different respects and again i and the commissioner wants you to say that the tax court only found that the subject matter of the contract was included the common enemies that's incorrect the tax court found it's on eighty to eighty one that the subject matter includes the development that's why we had a trial shays position below and it presented expert testimony in this documents video was look we said we planned building develop an entire fifty and all community costs putin and for some bizarre reason nobody buys anymore houses for a year now if all the ways first that didn't happen in the represented developments in this case so the tax court didn't present that situation second as a practical matter what happens in that situation is that shea adjust its budgets for the community so that it would recognize its income earlier and third also as a practical matter that's not that situation is going to arise because the common improvements includes not just the golf courses the parks and the club houses but all the infrastructure that's necessary for the houses the sewers the roads and everything so in the event and again it didn't happen in this case you've got a patch of the community that's not being constructed costs are going to be deferred out that long i mean that the tax court's decision here was very careful and said look i'm looking at the facts and circumstances of this case and i'm not saying that developers have a blank check to for out indefinitely and not saying i'm out allowing a recently long delays but i'm allowing it on the record in this case and the commissioner hasn't challenge a single finding that the tax court made now the other side of this case and it's and it's a completely sufficient basis for this court to affirm is that the commissioner has to come forward and propose its own method of accounting twenty six u s c four four six b obligates the commissioner not just to say that your mouth the taxpayer wrong it doesn't clearly reflect income but here's the math that you should use and here's how we got to the number that we're telling you you under paid in your notice of deficiency and on that the tack that the commissioners position below and i made clear throughout was that you have to you have to method of accounting is the subject that the contract the subject matter of the contract is limited to each house the sticks and bricks of the house and that is it's then that now and that's exactly right your honor that's that they're now proposing a proper method of accounting which would be the houses sold in all the community infrastructure without counting the houses  have been sold or was a leader that's exactly right so that's a that's a brand new math that the first time that they've given is wrong with out of the might make sense well your honor what's wrong with it most fundamentally is we had a trial below they had to put in their position below they made their position if you could look at your honour's case ecological rights foundation what you said there was is that a party can't try one position below come to appeal raise a new position and ask for a retrial and that's both counsel said it was  back comparing the number of homes close an afro in the development to the number of halls projected to be built in the development this calculation one thing incorrect application of the complete contract method of accounting  as opposed to the number of homes that it actually been completed that would be an incorrect application of the law because the key to that sentence your honor is the number he was right you can't just take the number of homes in the budget in the number of home so you have to look at the co shea in terms of the calculation in two thousand and two and two thousand that limited one and we haven't challenge your math but i'm just saying the concept that the tax court recognized that that a test that was used by shady in two thousand and three and two thousand and two was incorrect right but that's different than the method that works plain in an appeal which is a development wide cost basis and the tax court recognized that and that's why it found that shays met that clearly reflected now with respect to judgment with respect to your question about what's wrong with the commissioner challenging a brand new method of accounting on appeal well we're going to have to have a whole new trial in the government maybe the most telling part of it is not to lose we didn't have to have a trial it could be remanded  all right well we're going to we want to retry this we'll will acknowledge that the self you matter includes up to the common amenities and now we're arguing that the ninety five percent completion and use test applies so that's a completely different test so that in itself tells you how much the government's position change and the reason why we're going to need a new trial is that the government spends this in is we only need to look at completion we don't have to look at use but the regulations tell you it's ninety five percent completion in use so under the government's new position we have to go back and determine with respect to each house in the eight thousand contracts that are involved in this case what particular amenities had been completed at that time what particular amenities common improvements were in use that's going to require countless factual determinations that were never made below the evidence is not in the record below because that wasn't the government's theory below i mean if the tax if the taxpayer had come into this court and said i know we made this position below maybe we were a little bit too extreme below we want to come back and present a moderate position let us please remand the case back so we can present that is now if we really end it without further factual development the end you you on your theory you it win because there's nothing in the record that with support the government's position understand your point earlier that you're skeptical that the task or probably reached that fine and we think that the tax court's finding was right and it was supported by the evidence but even if you disagree with that you still have to find that commissioner on appeal can raise a the record that there would have to be an additional fact finding if that's the case then the read man witness require any additional fact finding that you think that the evidence is not in the record and the only the only way that the commissioner can take that position and please ask rebuttal the only way you can take that position is if you exclude the use element of the ninety five percent completion and use test because that's what the commissioner is proposing he's not going to look at you know he said well you didn't look at us below that we didn't have to we took a more conservative position we took we didn't try to delay it out further until everything was in to us but if they're going to take this new position on appeal that the method of a county is completion and use and includes common amenities then they're go test the first part with use of the subject matter of the contract by the customer for its intended purpose and at least ninety five percent so of either one of those is not me at the end the contract is not complete so the government is saying we're relying on the second prong we're not relying on the first promise that ninety five percent of the total cost is for the houses that are completed and not the ones are to be that are to be completed so the use prong is not the argument that's been made by the government well they want to exclude it from the case but it's part of the test it's a requirement it's hard to tell because either one of them isn't met the in the test isn't met so you could focus on either one of them it's just like in if you're doing ineffective assistance of counsel you can either show that there was not an effective assistance of counsel or there was no prejudice and you can go with either prong of that to make your determination a minor issue with re right or conversely if we had incurred the cost but the sewer wasn't working or the golf course was an opening then we would defer those costs in the government's position is oh it doesn't matter when things come into use we just with issues you can't determine the use of each  commonalities without for the reference exactly in the government has said that this is because of a discovery shortcoming in our case that's exactly wrong please look at the sites that it has and footnote four of its reply brief the information that requests it was about the const of never requested information about the use of many of these because this had nothing to do with the government's method of accounting below the government is asking this court to adopt the position of for the commissioner only heads i win tails i get to go again the court should regret that position counsel citation to the record in the pretrial memo the memo and the opening that this issue was adequately all of those sites go to whether or not the government challenged shay's method of accounting and we don't acknowledge that below they argue they took issue with shapes position that the subject matter of the contract including the development a large but none of that has to do with what the government's own proposed method of the county was and that's what's in the letter that they proposed and that's what they had the burden to come forward with they issue a notice of deficiency and they didn't need to know what she was doing all they need to know was what was the commissioner's theory of what method shay should be using so what should the government have issue the government should have said in the letter that our position is is that the subject matter of the contract includes not just the houses and lots but the common amenities of as well and instead what the government said was the exact opposite thing look at supplemental like why should the government have put in a letter regarding the ninety five percent completion when the government has abandoned the issue on a minute so what would have put the tax court on notice in your view that the government was amenities as well and it should use the ninety five percent completion and used has to calculate when the contract is complete and instead what the government said below c r six hundred twenty one s e r one seventeen is the subject matter of the contract is limited to the sticks and bricks at each lot and instead of using the ninety five percent test the only test that applies said this one seventeen c r the only test that applies as the final completion and acceptance so you so you are your position is that the government the ninety five percent completion test into issue before with respect to its own method of accounting that's exactly right it never argued that the commissioners method was to apply the ninety five percent completion  wrong to treat the subject matter of the contract as the entire development yet but that it made that argument but they did also make the argument that shea was incorrect because it included all the homes that it not in complete it did and that's why it did argue that she's met that was incorrect and then it goes back to these two issues what he didn't do was propose the new method of accounting that she was supposed to move to and this goes to the heart of the notice that the taxpayers supposed to get that the i r s issues a nossa deficiency it tells you commission the taxpayer is supposed to do and how it's supposed to do it going forward the taxpayer is completely changed his theory about that going through that is just i understand your argument is that your position that if the commissioner fails to give an alternative method of calculation that fatal to any challenge to the calculation that the taxpayer has shoes yes in the data hudson case is the clearest example that hol thank you your honor so just three points that i'd like to make on rebuttal the first is that of course the commissioner in the commissioner in pointing out the taxpayers misapplied the use of ninety five percent completion test of course that said if you c mean if you that that is always needs to say because if you correct that then applies the test correctly opposing counsel takes a different view it says that you do not challenge the proposition that it's incumbent upon the commissioner to actually propose an alternative calculation or a do you agree with that oh yeah yes the the commissioner has to have put eight tax payers on a method the career we were flex in come under the citation my opposing counsel is cited to for forty six b however in this case both parties agree the taxpayers were entitled to apply the completed contract method of accounting the question is what's the right application and that the i r s commissioner said that it should apply the final completion and acceptance test because the common area improvement should be excluded but in the alternative the commissioner also argued that taxpayers misapplied the use the ninety five percent completion test even if they're entitled to use that not very clearly i mean your are respectfully disagree but the point is is that the i one the title of the section that i just cited is petitioners misapplied the ninety five percent completion test by taking into account the entire development but that was that was basically your argument regarding the a he didn't say anything about all of the homes being completed as opposed to a portion of the homes being completed that's what you are you free find your argument now the problem is that refinements not reflected clearly  the proceedings before the commission by me let me quote what the tax court actually said what the commissioners argument was with respect to this your honor on page eighty of a tax court's opinion responded also contends that petitioners interpretation  subject matter of the contract creates a nonsensical situation of the subject matter of each individual contract for the sale of a house being the entire development and thus including the subject matter of every other past present and that this point that we did argue that taxpayers had misapplied the use of ninety five percent completion test buying applying it development wide which includes all of the other houses and watch and that is not so opposing counsel say if we remain on this case that there would have to be additional evidence taken on the use problem of the calculation regulation what's your response to that my response is your honor just clarify when i was responding on my opening argument i said there would need to be no additional fact finding with respect to that ninety five percent completion prong and if taxpayers want to raise the use prong armory man then they would they would they would be entitled to say that they can argue to the tax court that yeah we might not be able to defer on the basis of the ninety five completion prong which is how they were deferring before but now we want to way to get use and if they wan the house and so they've got the cash and there are differing that cash for periods between one and i think seven years and they have they have the income so you were saying that they weren't entitled to do that the on remand the taxpayer could legitimately ask for the factual development as to the factual issue as to when the use of the commonality common immunities issue at the trial issue you three didn't say prove ninety five percent and they did completion in order to continue not to pay the tax if you done that trial they couldn't enter their evidence  requires use a ninety five percent completion test we said that they're not entitled to defer income and that they were applying they were misapplying the test on on a development wide basis now taxpayers could have said remember what taxpayers did say in response to that argument they initially said below it doesn't matter whether you apply it on a development wide basis or a contract by contract basis because the ratio is the same they have banned that argument now what they're now they could have argued yes but even if we aren't entitled to defer on the basis of a ninety five percent computation we still are entitled to differ on the basis of use now they could have raised that argument and then we would have litigator it we were saying that they're not entitled to defer all and that that determination is has the presumption of correctness by operation of how he needs it ministration procedures operate now if they want to challenge that then is it is their prerogative to be able to assert that ok you got us on the ninety five percent but we think that we still are entitled to some deference under use or deferring or hand you can you if you can show use you don't have to shell the ninety five percent is that what you're by showing use well it again the test is to determine when the contract is complete so if you don't have if you haven't met the use prong you haven't met the ninety five percent completion prong then you don't have completion and so your honor just to finish my thought and apologize for running so far over but x pairs when they applied the ninety five percent completion test never relied on use and we said they never relied on use in their actual like they treated it as a mathematical formula we're going to apply the test we're going to determine completion of the contract by applying whether the total budget call whether we've expended ninety five percent of the total budgeted costs of a development and use was never a factor in that equation now if they want to in tax court now argue that well if we're not entitled to apply the method that way that we applied it and but we do think we could maybe get some deferral based on use then that's something that they have they that they need to raise and they need to litigate and we need to be