Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-72161/USCOURTS-ca9-14-72161-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellant
Shea Homes, Inc. And Subsidiaries
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

SHEA HOMES, INC. AND

SUBSIDIARIES,

Petitioner-Appellee,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 14-72161

Tax Ct. No.

29271-09

SHEA HOMES, LP; JF SHEA, LP, FKA

JF Shea LLC, Tax Matters Partner,

Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 14-72162

Tax Ct. No.

1400-10

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 1 of 22
2 SHEA HOMES V. CIR

VISTANCIA, LLC; SHEA HOMES

SOUTHWEST, INC., Tax Matters

Partner,

Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 14-72163

Tax Ct. No.

1401-10

OPINION

Appeals from Decisions of the

Tax Court

Argued and Submitted June 7, 2016

Pasadena, California

Filed August 24, 2016

Before: Ferdinand F. Fernandez, Johnnie B. Rawlinson,

and Carlos T. Bea, Circuit Judges.

Opinion by Judge Fernandez;

Concurrence by Judge Rawlinson

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 2 of 22
SHEA HOMES V. CIR 3

SUMMARY*

Tax

The panel affirmed the Tax Court’s decisions that

taxpayers Shea Homes, Inc. and Subsidiaries did not have any

deficiencies and that taxpayers Shea Homes, LP and

Vistancia, LLC had no adjustments to partnership items for

certain tax years, based on a challenge to the completedcontract accounting method for home construction contracts.

Taxpayers are planned community builders and

developers in Colorado, California, and Arizona. Because

their projects tended to involve long-term home construction

contracts extending across more than one tax year, they

applied the completed-contract accounting method to report

income, where the completion year is the taxable year in

which a taxpayer completes a contract. See 26 U.S.C.

§ 460(e)(1)(a); 26 C.F.R. §§ 1.460-1–1.460-4. The

Commissioner contended that the subject matter of the

contracts was limited to the house and lot; the Tax Court

determined that, as a matter of fact, the subject matter

included the house, lot, development, and its common

improvements and amenities. The panel held that the Tax

Court did not clearly err in its determination, noting that until

taxpayers’ work was complete, they had an obligation to

fulfill their promises regarding the development that they had

induced the buyers to become a part of. The panel affirmed

the Tax Court’s decision that taxpayers had used a

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 3 of 22
4 SHEA HOMES V. CIR

permissible method of accounting that clearly reflected their

income.

JudgeRawlinson concurred in the judgment, solely on the

basis that the Commissioner is bound by the arguments and

theories relied upon during the trial before the Tax Court,

because “our precedent is replete with cases precluding a

party from endeavoring to assert a theory on appeal that was

not presented to the trial court.” Judge Rawlinson would

affirm the Tax Court’s decision solely on the basis that the

Commissioner failed to raise the issue raised in this appeal —

whether the subject of each construction contract is the entire

development — sufficiently for the Tax Court to rule on it.

COUNSEL

Andrew M. Weiner (argued) and Richard Farber, Attorneys,

Tax Division; Caroline D. Ciraolo, Assistant Attorney

General; Department of Justice, Washington, D.C., for

Respondent-Appellant.

Gregory G. Garre (argued), Gerald A. Kafka, Sean M. Akins,

and Benjamin W. Snyder, Latham & Watkins LLP,

Washington, D.C.; Robert A. Long, Jr. and Kevin King,

Covington &BurlingLLP, Washington,D.C.; for PetitionersAppellees.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 4 of 22
SHEA HOMES V. CIR 5

OPINION

FERNANDEZ, Circuit Judge:

The Commissioner of Internal Revenue

(“Commissioner”) appeals the decisions of the United States

Tax Court in these consolidated cases that Shea Homes, Inc.

and Subsidiaries (“SHI”) did not have any deficiencies for the

tax years under consideration and that Shea Homes, LP

(“SHLP”) and Vistancia, LLC (“Vistancia”) had no

adjustments to partnership items for their tax years which

were under consideration.1 Hereafter, SHI, SHLP and

Vistancia are collectively referred to as “the Taxpayers.”2

The decisions flowed from the Tax Court’s determination3

that the Taxpayers had used an accounting method4that

clearly reflected their income during the tax years under

consideration. We affirm.

BACKGROUND

The Tax Court found that the Taxpayers are builders and

developers of planned communities “ranging in size from 100

1 For SHI those were tax years 2004 and 2005. For SHLP those were

tax years 2003, 2004, 2005, and 2006. For Vistancia, those were tax years

2004 and 2005.

2 We recognize that, technically, SHLP and Vistancia do not themselves

pay taxes. We use “the Taxpayers” for convenience of reference only.

3

Shea Homes, Inc. v. Comm’r, 142 T.C. 60 (2014). We note that many

of the background facts were stipulated to by the parties and incorporated

into the Tax Court’s decision.

 

4

See 26 C.F.R. § 1.460-1(c)(3)(i)(A); see also id. § 1.446-1(a)(1).

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 5 of 22
6 SHEA HOMES V. CIR

homes to more than 1,000 homes in Colorado, California, and

Arizona.” Shea Homes, 142 T.C. at 64. It further determined

that:

[The Taxpayers] pride themselves on

providing their customers with more than just

the “bricks and sticks” of a home and

emphasize the features and lifestyle of the

community to potential buyers. For example,

at the Reunion at Parkside community they

advertised using the themes “live well, work

well, play well” and “the pursuit of

happiness”.

[TheTaxpayers] purchased land in various

stages from completely raw to finished lots in

developed communities. Their business

involved the analysis and acquisition of land

for development and the construction and

marketing of homes and the design and/or

construction of developments and homes on

the land they acquired. The costs incurred in

their home construction business included, by

partial example: (1) acquisition of land;

(2) financing; (3) municipal and other

regulatory approvals of entitlements;

(4) construction of infrastructure;

(5) construction of amenities; (6) construction

of homes; (7) marketing; (8) bonding; (9) site

supervision and overhead; and (10) taxes. 

Their primary source of revenue from the

home development business was from the sale

of houses.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 6 of 22
SHEA HOMES V. CIR 7

Id. at 65. Because of the magnitude of those undertakings,

the process tends to extend across more than one tax year. 

See 26 U.S.C. § 460(f)(1); 26 C.F.R. §§ 1.460-1(b)(5)–(6),

1.460-3(a).

Although the Internal Revenue Code generally requires

that a taxpayer report income in “the taxable year in which [it

was] received,” 26 U.S.C. § 451(a), it also provides special

rules for reporting taxable income from long-term contracts,

id. § 460. “A long-term contract generally is any contract for

the . . . construction of property if the contract is not

completed within the contracting year. . . .” 26 C.F.R.

§ 1.460-1(b)(1); see also 26 U.S.C. § 460(f)(1). Typically,

taxable income from long-term contracts must “be

determined under the percentage of completion method” of

accounting. 26 U.S.C. § 460(a). But home construction

contracts are exempt from that requirement. Id.

§ 460(e)(1)(A); 26 C.F.R. § 1.460-3(b)(1). Instead, the

regulations prescribe several acceptable methods of

accounting for home construction contracts (and other

contracts exempt from the percentage-of-completion method

of accounting), one of which is the completed-contract

method (“CCM”) of accounting. 26 C.F.R. § 1.460-4(c)(1);

see also id. (a).5

5 Under the percentage-of-completion method of accounting, a taxpayer

must generally recognize as income a portion of the contract price in each

taxable year covered by the long-term contract. See 26 C.F.R. § 1.460-

4(b)(1). By contrast, under the CCM, a taxpayer generally does not

recognize any income from a long-term contract until the contract is

complete. See id. § 1.460-4(d)(1). The CCM is thus more favorable to

taxpayers because it generally defers the taxation of income relative to the

percentage-of-completion method.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 7 of 22
8 SHEA HOMES V. CIR

The parties agree that the contracts at issue here are longterm home construction contracts. See 26 U.S.C.

§ 460(e)(1)(A), (6)(A). The Taxpayers applied the CCM to

report income from their home construction projects. “[A]

taxpayer using the CCM to account for a long-term contract

must take into account in the contract’s completion year, as

defined in § 1.460-1(b)(6), the gross contract price and all

allocable contract costs incurred by the completion year.” 

26 C.F.R. § 1.460-4(d)(1). “The completion year is the

taxable year in which a taxpayer completes a contract as

described” by the applicable regulation. Id. § 1.460-1(b)(6). 

That regulation, in turn, provides that:

A taxpayer’s contract is completed upon the

earlier of—

(A) Use of the subject matter of the contract

by the customer for its intended purpose

(other than for testing) and at least 95 percent

of the total allocable contract costs

attributable to the subject matter have been

incurred by the taxpayer; or

(B) Final completion and acceptance of the

subject matter of the contract.

Id. § 1.460-1(c)(3)(i).6 The date of contract completion

should be “determined without regard to whether one or more

secondary items have been used or finally completed and

accepted.” Id. § 1.460-1(c)(3)(ii).

 

6

 We refer to these alternative methods as the “95 percent test” and the

“final completion test,” respectively.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 8 of 22
SHEA HOMES V. CIR 9

During the tax years at issue here, the Taxpayers reported

their income using the CCM. They applied the 95 percent

test to determine the year of contract completion and, hence,

the year in which they recognized income from their longterm home construction contracts. The Taxpayers took the

position that the subject matter of their home construction

contracts included the development in which the home was

situated. For each tax year, the Taxpayers would calculate,

on a development-by-development basis, whether they had

incurred at least 95 percent of the budgeted costs of the

development, including the costs of the houses and the

common improvements and amenities.

If the incurred costs were equal to or greater

than 95% of the budgeted costs, then [the

Taxpayers] reported income for that tax year

from homes that had closed in escrow up to

that date. If the incurred costs did not exceed

95%, then [the Taxpayers] deferred any

income from homes that closed in escrow that

year.

Shea Homes, 142 T.C. at 76.7

7 Two matters bear mentioning. First, SHLP incorrectly applied the 95

percent test in tax years 2002 and 2003: It calculated a development’s

completion ratio by comparing the number of homes built to the number

of homes projected to be built, when it should have compared the costs

incurred to the projected costs. However, this error was immaterial. See

Shea Homes, 142 T.C. at 107. Second, with respect to certain large

developments, the Taxpayers applied the 95 percent test on a phase-byphase basis, rather than a development-wide basis. See id. at 107–08. In

other words, for purposes of applying the 95 percent test, the Taxpayers

treated certain large developments as if they comprised several smaller

developments, and applied the 95 percent test to each sub-development. 

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 9 of 22
10 SHEA HOMES V. CIR

In 2009, the Commissioner issued a notice of deficiency

to SHI for the tax years 2004–2005, and notices of final

partnership administrative adjustments to SHLP for

2003–2006 and to Vistancia for 2004–2005. Each notice

provided the same explanation for the Commissioner’s

action: that is, the “amounts can not be deferred under the

completed contract method of accounting until the

completion of a future common improvement” because “the

primary subject matter of the contract” was the home, and

“[t]he cost of common improvements and any future

obligations are secondary items and do not impact when a

contract is completed on the subject matter.” In effect, the

Commissioner took the position that for purposes of applying

the CCM, the subject matter of a contract for sale of a house

in a planned community development was limited to the

house and lot alone and that anything else—for example, the

common improvements—constituted “secondaryitems” to be

ignored in determiningwhen the contract was completed. See

26 C.F.R. § 1.460-1(c)(3)(ii). Thus, in the Commissioner’s

view, the Taxpayers’ home construction contracts were

complete, under the final completion test, once a home

purchase closed in escrow. That meant that contracts entered

into and closed in escrow in a single tax year were not longterm contracts at all, and that income from home construction

contracts entered into in one tax year but closed in another tax

year had to be recognized for tax purposes once the home

purchase closed in escrow, even if the Taxpayers had not yet

finished the development or the common improvements and

amenities to which the buyer was entitled pursuant to his sale

contract with the Taxpayers.

This reduced the deferral of taxable income that would have resulted if the

Taxpayers had applied the 95 percent test on a development-wide basis.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 10 of 22
SHEA HOMES V. CIR 11

The Taxpayers disagreed and pointed out that the subject

matter of their contracts with their buyers went beyond a

mere house and lot sale, but included much more; the subject

matter included the common improvements and the other

requirements needed to create a house within the particularly

oriented planned community development that the buyer had

bargained for. Therefore, they said, they had properly applied

the 95 percent test to determine the date of contract

completion, and their method of accounting reflected the

subject matter of their home construction contracts and

clearly reflected income. The Taxpayers contended that the

Commissioner’s proposed method—that is, recognizing

income upon closing of a home purchase in escrow—did not

clearly reflect income.

The Tax Court essentially agreed with the Taxpayers. In

a careful and detailed opinion, the Tax Court concluded that

on the evidence before it all aspects of the planned

community development were understood by the Taxpayers

and their buyers to be what was bargained for, and that the

documents reflected that understanding. As the Tax Court

put it: “[The Taxpayers] and the buyers of their homes

understood and believed that the parties had contracted for

the entire lifestyle of the development and its amenities.” 

Shea Homes, 142 T.C. at 95. Ultimately, it concluded that

“[t]he contract does not include the houses and lots other than

that which is purchased; but the subject matter of each

individual purchased house still includes the development or

phase of development and its common improvements and

amenities.” Id. at 109. Thus, the decisions in favor of the

Taxpayers were entered, and these consolidated appeals by

the Commissioner followed.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 11 of 22
12 SHEA HOMES V. CIR

On appeal, the Commissioner has taken a different

approach from the one he took at the Tax Court. The

Commissioner concedes that the TaxCourt correctlyheld that

the subject matter of the Taxpayers’ home construction

contracts includes more than just the house and lot purchased. 

He accepts the notion that the subject matter of the contract

also includes the common improvements of the planned

community development in which the house is situated,

which improvements the Taxpayers are contractually

obligated to build. But the Commissioner now takes issue

with how the Taxpayers applied the 95 percent test. During

the relevant tax years, the Taxpayers deemed their home

construction contracts complete for purposes of the CCM

when they had incurred 95 percent of the budgeted costs for

building the entire community, including the costs of building

all of the houses in the community. See 26 C.F.R. § 1.460-

1(c)(3)(i)(A). In the Commissioner’s current view, the

subject matter of the contract includes the house, lot and

common amenities, but does not include the other houses in

the community. Accordingly, he argues that the 95 percent

test should be met when the Taxpayers incur 95 percent of the

budgeted costs of the contracted-for house, lot and common

amenities, but not the costs of the other houses. See id. We

discuss this late-blooming argument further below.

JURISDICTION AND STANDARDS OF REVIEW

The Tax Court had jurisdiction pursuant to 26 U.S.C.

§§ 6213(a), 6214(a), 6226, 7442. We have jurisdiction

pursuant to 26 U.S.C. § 7482(a) and 28 U.S.C. § 1291.

We review decisions of the Tax Court “‘on the same basis

as decisions in civil bench trials in district court.’” Estate of

Ashman v. Comm’r, 231 F.3d 541, 542 (9th Cir. 2000). We

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 12 of 22
SHEA HOMES V. CIR 13

review conclusions of law and mixed questions of law and

fact de novo; we review findings of fact for clear error. 

Meruelo v. Comm’r, 691 F.3d 1108, 1114 (9th Cir. 2012);

Ball, Ball & Brosamer, Inc. v. Comm’r, 964 F.2d 890, 891

(9th Cir. 1992). A mixed question of law and fact is one in

which the “primary facts are undisputed and ultimate

inferences and legal consequences are in dispute.” Suzy’s

Zoo v. Comm’r, 273 F.3d 875, 878 (9th Cir. 2001).

DISCUSSION

The United States Internal Revenue Code allows a

taxpayer some discretion in selecting an accounting method

by which to report his income,8but that method must “clearly

reflect income.”9If the Commissioner determines that the

taxpayer’s method does not clearly reflect income, the

Commissioner “has wide discretion in choosing an incomereconstruction method” for the taxpayer. Palmer v. IRS,

116 F.3d 1309, 1312 (9th Cir. 1997). The Commissioner’s

determinations are entitled to a presumption of correctness,

although the taxpayer may prove them wrong. Id.; see also

26 U.S.C. § 446(b). In the event that the Commissioner

issues a deficiency notice (or a final partnership

administrative adjustment), as he did here, a taxpayer may

petition the Tax Court for a redetermination,10as the

Taxpayers did here. There are two somewhat separate

questions involved in accounting cases: Did a taxpayer’s

method of accounting clearly reflect income, and, if not, did

 

8

See 26 U.S.C. § 446(a), (c); 26 C.F.R. § 1.446-1(a)(2).

 

9

 26 U.S.C. § 446(b).

 

10 26 U.S.C. §§ 6213(a), 6226(a).

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 13 of 22
14 SHEA HOMES V. CIR

the Commissioner choose a method that did? The Taxpayers

assert—and the Commissioner does not argue

otherwise—that a taxpayer can prevail in the Tax Court by

“show[ing] either that its accounting method resulted in a

clear reflection of income or that the Commissioner’s method

does not.” Dayton Hudson Corp. & Subsidiaries v. Comm’r,

153 F.3d 660, 664 (8th Cir. 1998); see also 26 U.S.C.

§ 446(b); Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 120,

50 S. Ct. 273, 274–75, 74 L. Ed. 733 (1930); Harden v.

Comm’r, 223 F.2d 418, 421 (10th Cir. 1955); Prabel v.

Comm’r, 91 T.C. 1101, 1112–13 (1988).

Here the Commissioner continues to claim that the

Taxpayers’ method does not clearly reflect income, and

asserts that we should review that as a mixed question of fact

and law. We do not agree. No doubt there are times when

the issue is one where the facts are undisputed and only what

amount to legal consequences are involved. See Suzy’s Zoo,

273 F.3d at 878. Before the Tax Court, the Commissioner

argued that the issue presented was “a question of fact to be

determined on a case-by-case basis.” He agreed that the Tax

Court principally had to decide what the subject matter of the

Taxpayers’ home construction contracts was as a matter of

fact—that is, what were the Taxpayers obligated to provide

to the buyers. See Sparkman v. Comm’r, 509 F.3d 1149,

1157 (9th Cir. 2007); see also Smith v. Comm’r, 300 F.3d

1023, 1028 (9th Cir. 2002). Thus, his argument amounted to

a dispute about the subject matter content of the contracts, but

the Commissioner took the very crabbed view that the subject

matter was limited to the house and the lot.11 However, the

Tax Court determined that, as a matter of fact, the subject

matter included the house, the lot, “the development . . . and

 

11 He now concedes that his limited view was in error.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 14 of 22
SHEA HOMES V. CIR 15

its common improvements and amenities.” Shea Homes,

142 T.C. at 109; see also Pullman-Standard v. Swint,

456 U.S. 273, 287–88, 102 S. Ct. 1781, 1789–90, 72 L. Ed.

2d 66 (1982). We review those underlying factual

determinations for clear error, which means that “we may

reverse the Tax Court only if we have a ‘definite and firm

conviction’ that the tax court’s factual finding was wrong.” 

Meruelo, 691 F.3d at 1114. And, “[t]o have a definite and

firm conviction that the Tax Court erred, we must find that

the TaxCourt’s conclusion was ‘(1) illogical, (2) implausible,

or (3) without support in inferences that may be drawn from

the facts in the record.’” Id.; see also DJB Holding Corp. v.

Comm’r, 803 F.3d 1014, 1022 (9th Cir. 2015). In this case,

we cannot make those determinations. On the contrary, the

evidence is sufficient to support the Tax Court’s factual

determinations.

The Tax Court found that the subject matter of the

contracts between the buyers and the Taxpayers encompassed

more than the mere “‘bricks and sticks’”12of the homes; the

buyers were purchasing “the entire lifestyle of the

development”13fostered by the carrying out of the promises

regarding what the development would be, and the Taxpayers

incurred costs and obligations accordingly.

14 Those are

reflected in, among other things, common improvements,

bonding requirements, the creation of homeowners’

associations in which each buyer had rights, and in the

covenants, conditions and restrictions (“CC&R’s”) that ran

 

12 Shea Homes, 142 T.C. at 90.

 

13 Id. at 95; see also id. at 90–91.

 

14 Id. at 91–92.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 15 of 22
16 SHEA HOMES V. CIR

with the land and affected not only the buyer but also other

prospective buyers and the properties they were purchasing. 

This was not a simple case of buyers purchasing homes and

having no substantial interest in whether the development

would be and remain the kind of development that they

wished to live in for some time in the future. It was not like

a situation where a person bought a product but had no

interest in other products sold by the same seller to other

purchasers. Nor could the Taxpayers assume that they could

sell other houses in the development without considering the

promises made to the initial buyers regarding what the overall

development would be like. The Taxpayers’ promises gave

buyers justifiable expectations regarding what would be

promised to those who came later. In other words: “If a

purchaser did not want to live in one of the planned

developments with its accompanying amenities, it is likely he

or she could have paid much less for an otherwise comparable

dwelling outside of a development and with no sellerprovided amenities.” Shea Homes, 142 T.C. at 91 (footnote

omitted). The Tax Court’s determinations were not clearly

erroneous.

The Commissioner complains that the Tax Court focused

on the house, lot and common amenities in its opinion. The

Commissioner then suggests that when the Tax Court

mentioned the development as a whole, it was, somehow,

being inconsistent. The Commissioner overlooks the fact that

hisfocus was on those specific aspects, and those are what he

specifically pointed to when he was stating his position for

purposes of the trial of this case at the Tax Court. We suspect

that the Commissioner was satisfied that his position on those

points would win the day and, therefore, that he need not

concentrate his firepower on the overall planned community

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 16 of 22
SHEA HOMES V. CIR 17

development aspect of the contracts. The resulting outcome

was due to his misperception rather than a Tax Court mistake.

The Commissioner also argues that a buyer of a house

cannot himself use other homes and, therefore, the

development as a whole could not be part of the subject

matter of the buyer’s contract. That not only begs the

question but also is a non sequitur. Each person in the

planned community would, indeed, have an interest in the use

of other property in the development, and that would include

not only the common amenities but also the use that others in

the development made of their own properties. That is at

least one reason for the CC&R’s and the mandated

homeowners’ associations. It is not a question of living in

another’s home; it is a question of assuring that the planned

lifestyle is followed to some degree. And until the

Taxpayers’ work was complete, they had an obligation to

fulfill their promises regarding the development that they had

induced the buyers to become a part of.

To the extent that the Commissioner asserts that the Tax

Court has approved of an aggregation of contracts by the

Taxpayers, he does not elaborate or precisely illuminate what

he means. We assume he means that the question of whether

a contract with a buyer is complete refers to that contract

alone, and cannot be combined with other contracts in

deciding the question of individual contract completion. Cf.

26 U.S.C. § 460(f)(3); 26 C.F.R. § 1.460-1(e). If so, as

applied to the facts of this case, that argument is simply

another allotrope of the Commissioner’s argument to the Tax

Court that a buyer’s contract cannot encompass more than the

house and lot or, as a fall-back position, more than the house,

the lot, and the common improvements. It likewise fails. 

“[The Taxpayers] did not aggregate contracts. Rather, they

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 17 of 22
18 SHEA HOMES V. CIR

tested completion dates of individual contracts using . . . the

subject matter of those contracts.” Shea Homes, 142 T.C. at

104. As the Tax Court further noted, in answer to the

Commissioner’s jeremiad about that outcome: “Here, the

subject matter of [the Taxpayers’] contracts includes the

development. In a different case, under different facts,

similar treatment of an unreasonably long-term development

may in essence be an aggregation.”15Id. at 109 n.23; see also

id. n.24.

In other words, the Tax Court did not clearly err when it

determined the subject matter of the Taxpayers’ home

construction contracts; the Taxpayers’ application of the 95

percent test and the CCM logically flows from that

determination. That being so, we need not and do not

consider whether the Commissioner’s methods could clearly

reflect income, although we note that the Commissioner

himself has abandoned those specific methods on appeal.16

15 The Commissioner argues that Congress did not intend that the 95

percent test would apply as it was applied here. He cites no authority for

that proposition. Indeed, he points to a lack of legislative history on the

point. At root, the Commissioner’s congressional intent point is yet

another variant of his argument at the Tax Court that only an individual

house and lot could be considered, despite the fact that the contract with

the buyer encompassed much more. The Tax Court noted that to the

extent legislative history existed, it pointed to Congress’special concerns

about homebuilders. See Shea Homes, 142 T.C. at 101 n.19. As the Tax

Court pointed out, Congress’ concern stemmed from builders’ need to

better match income to expenses. Id. That is, Congress wanted to help

them clearly reflect their income. In fine, the Commissioner’s allusion to

congressional intent does not buttress his argument.

16 The Commissioner now asks that we remand the case so that he can

offer an approach that would undermine the TaxCourt’s ultimate decision

and demonstrate that there are deficiencies and required adjustments after

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 18 of 22
SHEA HOMES V. CIR 19

CONCLUSION

The Commissioner assessed deficiencies or adjustments

against the Taxpayers. They sought relief in the Tax Court,

which ruled in their favor. We affirm the Tax Court’s

decision that on the record before it, the Taxpayers “used a

permissible method of accounting” and “that method of

accounting clearly reflect[ed] [their] income.” Shea Homes,

42 T.C. at 106; see also id. at 106–09. In short, they were

“permitted to report income and loss from the sales of homes

in their planned developments using the completed contract

method of accounting” in the manner “consistent with [its]

Opinion.” Id. at 109. Perhaps the Commissioner wishes that

he had approached the proceeding before the Tax Court in a

different way. In any event, he asks for relief. We have none

to offer; he must thole the result. Nevertheless, we would be

remiss if we did not close this opinion with the Tax Court’s

admonition: “We are cognizant that our Opinion today could

lead taxpayers to believe that large developments may qualify

for extremely long, almost unlimited deferral periods. We

would caution those taxpayers a determination of the subject

all. We decline to do so because we do notfind exceptional circumstances

that would justify allowing the case to proceed on the basis of a new

factual theory not actually properly presented to the Tax Court. See

Armstrong v. Brown, 768 F.3d 975, 982 (9th Cir. 2014); cf. Hormel v.

Helvering, 312 U.S. 552, 556–57, 61 S. Ct. 719, 721, 85 L. Ed. 1037

(1941); El Paso v. Am. W. Airlines, Inc. (In re Am. W. Airlines, Inc.),

217 F.3d 1161, 1165 (9th Cir. 2000). We see no reason to accede to the

Commissioner’s desire to attempt to prevail by retrying this case based on

a new methodological approach. See Riggs v. Prober & Raphael,

681 F.3d 1097, 1104 (9th Cir. 2012).

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 19 of 22
20 SHEA HOMES V. CIR

matter of the contract is based on all the facts and

circumstances.” Id. at 109 n.24.

AFFIRMED.

RAWLINSON, Circuit Judge, concurring in the judgment:

I concur in the judgment affirming the decision of the Tax

Court. However, I do so solely on the basis that the

Commissioner of the Internal Revenue Service

(Commissioner) is bound by the arguments and theories

relied upon during the trial before the Tax Court. As noted

by the majority, the Commissioner advocated before the Tax

Court that, for purposes of determining the taxable income

from the home construction contracts at issue, the subject

matter of the construction contract was only the purchased

house and the lot upon which the house was sited. 

Specifically, the Commissioner argued that none of the

amenities included in the housing development were part of

the contract, and that any amenities were secondary items

unrelated to completion of the contract.

The Tax Court rejected the Commissioner’s argument on

both fronts, ruling that each construction contract included

the amenities within the development, and that those

amenities were not secondary items. On appeal, the

Commissioner does not challenge these rulings by the Tax

Court. Rather, the Commissioner now seeks to argue that the

Tax Court erroneously permitted the Taxpayers to include the

entire development when performing the calculation under

the 95 percent completion test.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 20 of 22
SHEA HOMES V. CIR 21

Our precedent is replete with cases precluding a party

from endeavoring to assert a theory on appeal that was not

presented to the trial court. See, e.g., Stewart v. Comm’r of

Internal Revenue, 714 F.2d 977, 986 (9th Cir. 1983)

(“Without question, the most appropriate times for the

Commissioner to inform a taxpayer of the legal theories on

which he intends to rely are first in the notice of deficiency

and then in the Commissioner’s answer in the Tax

Court. . . .”) ( citation omitted); Ecological Rights Found. v.

Pac. Gas & Elec. Co., 713 F.3d 502, 511 (9th Cir. 2013)

(“The Court will not allow a party to raise an issue for the

first time on appeal merely because a party believes that he

might prevail if given the opportunity to try a case again on

a different theory.”) (citation and alteration omitted); Tibble

v. Edison Int’l., 820 F.3d 1041, 1046 (9th Cir. 2016) (“We

recognize a general rule against entertaining arguments on

appeal that were not presented or developed before the

district court. . . . [A]n issue will generally be deemed

waived on appeal if the argument was not raised sufficiently

for the trial court to rule on it.”) (citations and internal

quotation marks omitted).

We need go no further than consulting this precedent to

resolve the instant appeal. I would not, and do not, go so far

as to adopt the Taxpayers’ contention that the subject of each

construction contract is the entire development. For starters,

the concept of the contract encompassing all of the homes in

the development ignores the singular language of the

governing regulation, which references “the subject matter of

the contract.” 26 C.F.R. §1.460-4(d)(1) (emphasis added). 

It is undisputed that each home purchaser signs an individual

contract and becomes obligated for the purchase price of the

home at the time the individual contract is signed. Yet, the

Taxpayers argued that until the cost of 95 percent of the

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 21 of 22
22 SHEA HOMES V. CIR

entire development has been incurred, no reportable income

has been realized. The Tax Court appeared to recognize the

fallacy in this contention as a general premise, noting that it

would be improper to apply the 95 percent completion test

“by comparing the number of homes closed in escrow in the

development to the number of homes projected to be built in

the development.” Nevertheless, the fact remains that a

Taxpayer could readilymanipulate the 95 percent completion

test by deliberately incurring development costs of less than

95 percent and deferring the balance of the costs indefinitely,

correspondingly deferring taxes indefinitely. I am not

persuaded that this interpretation of the regulation is

consistent with its plain language. For that reason, I would

affirm the Tax Court’s decision solely on the basis that the

Commissioner failed to raise this issue sufficiently for the

Tax Court to rule on it. I would reserve resolution of this

important issue for a case where it was fairly joined.

 Case: 14-72161, 08/24/2016, ID: 10098172, DktEntry: 57-1, Page 22 of 22