14 2 T.C. No . 3

UNITED STAT ES TAX COURT
SHEA HOMES, INC. AND SUBSIDIARIES, ET AL., Pet it io ne rs v. 1 COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 92 71 -0 9, 1 40 0- 10 , Fil edFeb ru ary 12 , 20 14
.

14 01 -1 0.

Co rp or at io n C an d p artne rs hi ps S an d V d ev el op lar ge , pl anne d res id en ti al co m

m un it ie s. Th ey

de ve lo p the lan d a ndco ns tru ctho m es an d c omm on im

pr ov em en ts , in cl ud in g a m en it ie s. Fo r th e y ears at is su e th ey rep orte d i nc om e fro m

th ei r co nt ract s fo r th e sa le of h om es us in g the co m

pl et edco nt ractm etho d o f acc ou nt in g. Un de r th ei r in te rp ret at io n o f th is m etho d o f acc ou nt in g, the ir c on tra ct s ar e co m pl et e whe n the y

m eetth e u se an d 9 5% t es t p ur su an t t o s ec. 1 .46 0- 1( c)(3 )(A), In co m e Tax Reg s., an d i nc ur95 % of t he co st s o f th e de ve lo pm en t. The y

co nt en d tha t fi na l co m

pl et io n a ndacce pt an ce pu rs uantto sec . 1.4 60 -1 (c)( 3) (B), In co m e Tax Reg s., d oe s n otoc cu r (aft er ex cl ud in g s eco nd ary it em s, i f an y , pu rs ua ntto sec . 1.4 60
- Cas es of t he fol lo win g p et it io ne rs are co ns ol id at edhe rewi th : Sh ea Ho m es , 1 LP, J F Sh ea, LP, f.k .a. J F Sh ea, LLC, Tax M at te rs Partne r, do ck etNo. 1 40 0- 10 ; an d Vi st an ci a, LLC, She a Hom es So ut hwe st , Inc ., Tax Ma tt ers Partne r, do ck etNo. 14 01 -1 0.- 2 -

1( c)(3 )(B) (ii ), In co m e Tax Reg s.) u nt il th e la stroa d i s p av edan d the fin al bo ndis rel eas ed . R see ks to pl ace C , S, andV onhi s in te rp ret at io n o f th e co m

pl et edco nt ractm etho d. R co nt en ds th atth e subjec t m atte r of

th e co nt ract s o f C, S, an d V co ns is ts on ly of th e ho us es an d the lo ts up on whi chth e h ou se s ar e b ui lt . Und er R’s in te rp ret at io n, the co nt ractforeach ho m e m eet s the fin al co m pl et io n an d a ccep tanc e te stup on th e cl os e o f es cro w forth e sa le of e ach ho m e. R al so all eg es th atco nt ract s en te redin to an d c lo se d wi th in th e sa m e ta xabl e y ear a re n otlo ng -te rm co nt ract s und er I.R.C . sec . 46 0. Held : Th e subjec t m at te r of th e co nt ract s co ns is ts of t he ho m e an d the lar ge r de ve lo pm en t, i nc lu di ng am en it ie s an d o th er co m m on im pr ov em en ts . Held , furth er, C, S, an d V ar e p erm it te d t o re po rt i nc om e an d lo ss es fro m

sal es of h om es inth ei r pl an ne d d ev el op m en ts us in g the ir in te rp ret at io n o f th e co m

pl et edco nt ractm etho d o f acc ount in g.
Geral d A. Kafk a, Ri taA. Cava na gh , Cha d D. Nard ie ll o, an d S eanM. Aki ns , fo r pe ti ti on ers . Mel is saD. Lang , All anE. Lang , Davi d R ak on it z, an d Ni ch ol as D. Dou ka s, fo r res po nd en t.

W HERRY, Ju dg e: Thes e co ns ol id at edcas es are b efo re the Co urt o n a pe ti ti on forred et erm in at io n o f de fic ie nc ie s i n i nc om e ta x re sp on de ntde te rm in ed fo r pe ti ti on er Sh ea Ho m es , Inc ., andSubs id iarie s’ 20 04 an d 2 00 5 t ax y ears ; a pe ti ti on forrev ie w of n ot ic es of f in al pa rtn ers hi p a dm in is tra ti ve ad jus tm en t- 3 -

res po nd en t i ss ue d fo r th e 2 00 4, 2 00 5, an d 2 00 6 t ax y ears of S he a Hom es , LP; an d a p et it io n fo r rev ie w of n ot ic es of f in al pa rtn ers hi p a dm in is tra ti ve ad jus tm en t res po nd en t i ss ue d fo r th e 2 00 4 a nd20 05 tax y ears of Vi st an ci a, LLC. The ul ti m at e is su e fo r de ci si on inth es e cas es is whet he r Sh ea Ho m es , Inc ., an d S ub si di ari es , She a Hom es , LP, andVis tanc ia , LLC, pro pe rly repo rte d i nc om e an d l os s fr om

th e sa le of h om es inth ei r pl an ne d d ev el op m en ts us in g the
co m pl et edco nt ractm etho d o f acc ou nt in g p ro vi de d fo r in sec ti on 46 0. The 2
res ol ut io n o f th is is su e tu rn s o n the de te rm in at io n o f whe th er the ho m e sa le
co nt ract s i nc lu de th e d ev el op m en t am en it ie s o r are li mit edto th e h ou se an d the lo t on whi chitsi ts . FINDINGS OF FACT The pa rti es ’ st ip ul at io n o f fac ts an d the acco m pa nyin g e xh ib it s ar e in co rp or at edhe rei n b y

th is refe ren ce. Pet it io ne rs Pet it io ne r in do ck etNo. 2 92 71 -0 9, Sh ea Ho m es , Inc . (SHI), an d Subs id iarie s, i s an affi li at edgro up of c or po rat io ns with the co m

m on paren t, SHI, Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 2 Rev enue Co de of 1 98 6 (C od e), as am en de d a ndineffe ctforth e ta xabl e y ear at is su e, an d a ll Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d Pro cedur e. All m on et ary am ou nt s ar e ro un de d t o the ne ares t d ol lar un le ss ot he rwis e n ot ed
.- 4 -

or ga ni zedun de r th e laws o f Del aware . At al l re le va ntti m es SHI m ai nt ai ne d i ts pr in ci pa l o ffi ces inW al nu t, Ca li fo rn ia . SHI us edth e acc ru al m etho d a s i ts ov eral l
m etho d o f acc ou nt in g fo r th e y ears at i ss ue . The pa rtn ers hi p i n d oc ke t No . 14 00 -1 0, Sh ea Ho m es , Lim it edPartne rs hi p (SHLP), i s a l im it edpa rtn ers hi p o rg an iz edun de r th e la ws o f Cal ifo rn ia . J F Sh ea, LP, f.k.a. J F Sh ea, LLC (J FLP), i s the tax m at te rs pa rtn er o f SHLP. At al l 3 rel ev an t t im es SHLP m ai nt ai ne d i ts pri nc ip al off ic es inW al nu t, Ca li fo rn ia . SHLP
us edth e acc ru al m etho d a s i ts ov eral l m etho d o f acc ount in g fo r th e y ears at i ss ue . The pa rtn ers hi p i n d oc ke t No . 14 01 -1 0, Vi st an ci a, LLC (Vis tanc ia ), is a li mit edli ab il ity

co m pa ny org an iz edun de r th e la ws o f Del aware . She a Hom es So ut hwe st , Inc . (SHSI), i s the tax m at te rs pa rtn er o f Vis tanc ia . At al l re le va nt ti m es Vis tanc iam ai nt ai ne d i ts pri nc ip al off ic es inSco tt sd al e, Ariz on a. Vis tanc ia
us edth e acc ru al m etho d a s i ts ov eral l m etho d o f acc ount in g fo r th e y ears at i ss ue . Dur in g the tax y ears at i ss ue , SHI, SHLP, andVis tanc iade ferr edrev enue , co st s o f sa le s, an d i nc om e fro m th e co nt ract ed -fo r sa le s o f ho m es th atclo se d i n es cro w as fo ll ows :

Effect iv e Apr il 1, 2 00 5, J FLP was co nv ert edfro m a Delaware l im it ed 3 li ab il ity co m pa ny, kno wn as J F Sh ea, LLC, to it s cu rren t fo rm as ali m it ed pa rtn ers hi p.- 5 - 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 S H I R e v e n u e - - - - - - $ 8 1 , 0 6 6 , 6 9 3 $ 1 2 2 , 2 3 7 , 5 2 5
- - - C o s t o f s a l e s - - - - - - 6 4 , 0 0 5 , 1 6 9 8 0 , 6 3 8 , 8 0 8
- - - I n c o m e $ 9 , 2 6 0 , 9 9 3 1 7 , 0 6 1 , 5 2 4 4 1 , 5 9 8 , 7 1 7 V i s t a n c i a R e v e n u e - - - - - - 9 2 , 3 4 8 , 2 4 6 3 1 0 , 2 1 8 , 5 1 3
- - - C o s t o f s a l e s - - - - - - 6 6 , 5 6 1 , 9 1 8 2 1 2 , 6 2 1 , 2 4 1
- - - I n c o m e - - - 8 , 8 3 5 , 7 1 6 2 5 , 7 8 6 , 3 2 8 9 7 , 5 9 7 , 2 7 2
- - - S H L P R e v e n u e - - - 2 8 9 , 7 6 1 , 2 8 3 5 6 3 , 9 6 2 , 2 3 7 9 4 4 , 9 9 9 , 6 9 5 9 5 6 , 9 2 1 , 3 7 3 C o s t o f s a l e s - - - 2 3 5 , 4 7 7 , 0 5 9 4 1 7 , 3 6 8 , 5 6 8 6 7 8 , 1 7 3 , 0 3 8 7 3 9 , 9 8 1 , 8 4 3 I n c o m e $ 1 8 2 , 0 0 0 5 4 , 2 8 4 , 2 2 4 1 4 6 , 5 9 3 , 6 6 9 2 6 6 , 8 2 6 , 6 5 9 2 1 6 , 9 3 9 , 5 2 9

1 In20 02 , SHLP def

erre d $ 3,1 49 ,53 7 o f in co m e. It the n d et erm in edth atit 1 ha d e rro ne ou sl y

de ferr ed$2 ,96 7,5 37 of t ha t am ou nt ; an d ra th er tha n fi le an am en de d re tu rnfor

20 02 , itin cl ud edth e $ 2,9 67 ,53 7 i n i nc om e o n the 20 03 return, whi chres po nd en t ac cep te d. Th e rem ai ni ng $1 82 ,00 0 h as ap pa ren tl y no t yet be en reco gn iz ed . In ad di ti on , th e p art ie s s ti pu la te d tha t the in co m e cal cu lati onforth e 20 06 y ear c on ta in s a r ou nd in g e rro r. The i nc om e cal cu la ti on forth e 2 00 5 year al so li ke ly con ta in s a r ou nd in g e rro r. Fo r th e ta x years a t i ss ue , SHI, SHLP, andVis tanc iade ferr edso m e in co m e fro m th e sa le s o f ho m es inth e ta x years t he co nt ract s fo r th os e sa le s cl os edin
es cro w andth enreco gn iz edpa rt o f th atin co m e fo r Fed eral in co m e ta x p ur po se s i n fo ll owi ng y ears as f

ol lo ws:- 6 - Year de ferr ed Deferred

in co m e Year

reco gn iz ed Am ou nt

reco gn iz ed SHI 20 03 $9 ,26 0,9 93 20 07 $9 ,26 0,9 93

20 04 17 ,06 1,5 24 20 07 17 ,06 1,5 24 20 05 41 ,59 8,7 17 20 07 41 ,59 8,7 17 Vis tanc ia 20 03 8,8 35 ,71 6 20 09 8,8 35 ,71 6

20 04 25 ,78 6,3 28 20 09 25 ,78 6,3 28 20 05 97 ,59 7,2 72 20 09 97 ,59 7,2 72

1 SHLP 20 02 3,1 49 ,53 7 20 03 2,9 67 ,53 7

20 03 54 ,46 6,2 26 20 04 35 ,12 7,8 18

2 20 05 18 ,23 4,9 51

20 06 1,1 03 ,45 7 20 04 14 6,5 93 ,66 9 20 05 40 ,81 7,2 88

3 20 06 10 1,5 77 ,42 2

20 07 4,1 98 ,95 8 20 05 26 6,8 26 ,65 9 20 06 60 ,55 6,8 13 20 07 48 ,35 0,5 67 20 08 33 ,37 4,1 88 20 09 21 ,21 5,9 92 20 06 21 6,9 39 ,52 9 20 07 32 ,89 6,0 05 20 08 64 ,55 7,4 54 20 09 49 ,31 0,8 72 20 10 39 ,17 3,3 87- 7 -

Para gr ap h 4 2( c) o f th e p art ie s’ st ip ul at io n o f fac ts rep orts th e am ou nt 1 de ferr edas $ 97 ,59 7,2 72 . Parag rap h 7 9 o f th e st ip ul at io n re po rts th e am ou nt de ferr edas $ 97 ,59 7,2 73 . This $1 di sc rep an cy m ay be th e res ul t o f ro un di ng . Thi s amoun t i s d eri ve d fr om pa rag rap h 7 9 o f th e p art ie s’ st ip ul at io n o f 2 fact s an d i s i n p art ia l co nf li ctwith the $5 4,2 84 ,22 6 a m ou ntsp eci fie d b y parag rap h 46 (c) o f th e st ip ul at io n. Th is di sc rep an cy is th e ap pa ren t re su ltof t he $1 82 ,00 0 o f de ferr edbu t n oty etreco gn iz edin co m e. See s up ra p . 5, t ab le no te 1. Para gr ap h 4 8( c) o f th e p art ie s’ st ip ul at io n o f fac ts rep orts th e am ou nt 3 de ferr edas $ 14 6,5 93 ,66 9. Parag rap h 7 9 o f th e st ip ul at io n re po rts th e am ou nt de ferr edas $ 14 6,5 93 ,66 8. Th e $ 1 d is crep an cy m ay be th e res ul t o f ro un di ng . Defi ci en ci es an d Ad

jus tm en ts to Inc om e Res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s wi th res pe ctto th e Fed eral in co m e ta x o f SHI:

Year Defi ci en cy Add it io na l am en de d a m ou nt 20 04 $5 ,97 1,5 33 $3 ,24 1,3 48 20 05 14 ,55 9,5 51
--- The ad di ti on al am en de d a m ou ntinth e ab ov e tabl e rep res en ts th e am ou nt res po nd en t as se rte d i n a n a m en dm en t t o h is an swe r. Res po nd en t as se rts th atth is ad di ti on al tax du e am ou ntis ne ces sa ry un de r se ct io n 4 81 (a) t o p rev en t i ts pe rm an en t ex cl us io n fr om Fed eral in co m e ta xa ti on be cau se of r es po nd en t’s ch an ge inSHI’s m etho d o f acc ou nt in g. Res po nd en t al so pro po se d the fol lo win g a dju st m en ts to pa rtn ers hi p i nc om e with re sp ectto SHLP an d Vi st an ci a:- 8 -
Year Adju st m en ts to pa rtn ers hi p i nc om e it em s Add it io na l am en de d a m ou nt s SHLP 20 03 $5 4,2 84 ,22 6 $1 82 ,00 0

20 04 11 1,4 65 ,85 0
--- 20 05 26 6,8 26 ,65 9
--- 20 06 21 6,9 39 ,52 9
--- Vis tanc ia 20 04 25 ,78 6,3 28 8,8 35 ,71 6

20 05 97 ,59 7,2 72
--- Aga in , th e ad di ti on al am en de d a m ou nt s o f ta xabl e in co m e are th e am ou nt s res po nd en t al le ge s, b y

way of am en de d a ns wer, are ne ces sa ry un de r se ct io n 48 1( a). W e al so no te th atth e p artne rs hi p a dju st m en ts to th e Fed eral tax ab le in co m e o f SHLP an d Vi st an ci a wou ldha ve ul ti m at el y res ul te d i n a dd it io na l ta xabl e in co m e to th e p artne rs an d m ay ha ve res ul te d i n s ig ni fic an t ad di ti on al tax du e atth e p artne r le ve l. Res po nd en t ca lc ul at edth e ab ov e am ou nt s b y in cl ud in g i n i nc om e am ou nt s SHI, SHLP, an d Vi st an ci a d eferredus in g the co m pl et edco ntractm etho d o f
acco un ti ng as r ep orte d o n s ch edul es att ach edto th ei r ta x re tu rn s an d a s s up po rte d by the ir u nd erl y in g wo rkpape rs . Thes e am ou nt s d o n otrefl ectvario us co m pu ta ti on al , correl at iv e ad

jus tm en ts . Peti ti on ers , SHI, JFLP, an d S HSI, ti m el y pe ti ti on edth is Co urt fo r rev ie w, anda tr ia l was he ldinW as hi ng to n, D.C.- 9 -

Co m pa ny Back gr ound The Sh ea fa m il y

ha s b eeninth e h om e d ev el op m en t b us in es s fo r m or e th an 40 y ears . The h om e d ev el op m en t b us in es s was op erat edth ro ug h s ev eral en ti ti es , in cl ud in g S HI, SHLP, andVis tanc ia . Duri ng th e y ears at i ss ue th e Sh ea fa m il y co m pa ni es were o ne of t he lar ge stpri va te ho m eb ui ld ers inth e Uni te d S ta te s. Bu si ne ss Mo de l SHI, SHLP, an d Vi st an ci a are bu il de rs /d ev el op ers of p lann edco m m un it ie s, ran gi ng insi ze fr om

10 0 h om es to m or e th an1,0 00 ho m es inCo lo rad o, Ca li fo rn ia , an d Ari zo na . Duri ng th e y ears at i ss ue th ey so ldho m es in11 4 d ev el op m en ts . For th e p ur po se s o f th es e cas es , th e p art ie s h av e se le ct edeig htrep res en ta ti ve de ve lo pm en ts an d h av e ag reedth atth e Co urt’s fi nd in gs of f actba se d o n do cu m en ts an d i nf

orm at io n fr om

th es e sa m

pl e d ev el op m en ts wil l b e co nt ro ll in g fo r al l d ev el op m en ts . 4 The eig htde ve lo pm en ts are ea chrep res en ta ti ve of adi vi si on . They are: (1) Tril og y at La Qu in ta ; (2 ) Vis tanc ia ; (3 ) Park si de at R eu ni on ; (4 ) Bre ak ers at Po in te Mari n; (5) Co st a Azu l; (6) Azur e; (7) Co un try Lane; an d (8 ) So m m ers etat Mo rg anHil l. SHI, SHLP, an d Vi st an ci a co nduc te d the ir h om e d ev el op m en t The ag reem en t i s s ub

ject t o a n e xc ep ti on wher e itis ne ces sa ry forth e Co urt 4 to m ak e sp eci fic fin di ng s p ert ai ni ng to th e ad jus tm en ts at i ss ue , correl at iv e ad jus tm en ts , or any oth er co m pu ta ti on al fin di ng s.- 10 -

bu si ne ss th ro ug h d iv is io ns , org an iz edon th e b as is of t he ge og rap hi c lo cat io ns of th ei r de ve lo pm en ts , exc ep t i n the cas e o f th e Act iv e Adu lt s Di vi si on , whi chwas ba se d o n the type o f de ve lo pm en t. The se di vi si on s wer e as fol lo ws: (1) Acti ve Adu lt s Di vi si on ; (2 ) Ariz on a Div is io n; (3) Co lo rad o Di vi si on ; (4 ) North ern Cal ifo rn iaDiv is io n; (5) So uthe rnCal ifo rn iaDiv is io n; (6) SanDieg o Di vi si on ; (7 ) In landEm

pi re Di vi si on ; an d (8 ) Sac ram en to Div is io n. SHI, SHLP, an d Vi st an ci a p rid e th em se lv es on pro vi di ng th ei r cu st om ers with m or e th anjus t the “br ic ks an d s ti ck s” of aho m e an d e m ph as iz e th e fea tu res an d l ife st y le of the co m

m un ity to po te nt ia l b uyers. Fo r ex am pl e, atth e Reu ni on at Park si de co m

m un ity th ey adve rti se d u si ng th e th em es “ li ve well , workwell , pl ay well ” an d “ th e p ur su itof h ap pi ne ss ”. SHI, SHLP, an d Vi st an ci a p ur ch as edlan d i n v ari ou s s ta ge s fr om co m pl et el y raw t o fi ni sh edlo ts inde ve lo pe d c omm un it ie s. Th ei r bu si ne ss in vo lv edth e an al y si s an d a cqui si ti on of l an d fo r de ve lo pm en t an d the co ns tru ct io n a nd
m ark et in g o f ho m es an d the de si gn an d/ or co ns tru ct io n o f de ve lo pm en ts an d ho m es on th e la ndth ey

acqui red . The co st s i nc urredinth ei r ho m e co ns tru ct io n bu si ne ss in cl ud ed , by pa rti al ex am pl e: (1) acqui si ti on of l an d; (2) fin an ci ng ; (3 )
m un ic ip al an d o th er re gu lato ry ap pr ov al s o f en ti tl em en ts ; (4 ) co ns tru ct io n o f in fras tru ctur e; (5) co ns tru ct io n o f am en it ie s; (6) co ns tru ct io n o f ho m es ; (7 )- 11 -

m ark et in g; (8) bo nd in g; (9) si te supe rv is io n a ndov erh ead ; an d (1 0) tax es . Thei r pr im ary so ur ce o f rev enue fro m th e h om e d ev el op m en t b us in es s was fro m th e sa le of ho us es . W e d is cu ss in fra the ge ne ral pro ces s SHI , SHLP, andVis tanc iaus edinth ei r ho m e d ev el op m en t b us in es s. Mu chof t he tri al was d ed ic at edto th e d et ai ls of t he pr oc es s, an d we b y

no m ean s l is t ev ery si ng le st ep . Our i nt en ti on is no t t o di sc ou ntth os e im

po rta ntst ep s n otm en ti on edbu t t o g iv e a g en eral id ea o f ho w th e de ve lo pm en t p ro ces s wo rk ed
. Lan d Acqui si ti on The in it ia l s te p i n the pro ces s i s t o a cqui re l an d o n wh ic h t o b ui ldth e de ve lo pm en ts . Div is io ns of S HI, SHLP, andVis tanc iaare re sp on si bl e fo r id en ti fy in g p arce ls of l an d a s ca nd id at es forde ve lo pm en t. Aft er i de nt ifi cat io n, the di vi si on s ev al ua te m

ul ti pl e fac to rs to asc ert ai n wh ethe r th atpro pe rty con st itut es a vi ab le de ve lo pm en t o pp ortu ni ty. If a d iv is io n d et erm in es th atth e la ndis vi ab le fo r de ve lo pm en t, i t p rep ares a Lan d C omm it te e Rep ort wh ic h s umm ari zes th e di vi si on ’s eva lu at io n o f th e fac to rs us edto ev al ua te th atparcel . The Lan d Co m m it te e Rep ort i s the n s en t t o the LandCo m m it te e, co m

pr is in g s en io r ex ecu ti ve s, i nc lu di ng own ers , forap pr ov al
.- 12 -

Des ig n o f Dev el op m en ts The de ve lo pm en ts are ty

pi cal ly des ig ne d b y

arch it ect s, en gi ne ers , and
co ns ul tant s en ga ge d b y

SHI, SHLP, an d Vi st an ci a. The fi na l d es ig n fo r th e pl an ne d c on st ru ct io n o f th e d ev el op m en ts is pre se nt edon a m ap or p la t ca ll eda TractMap . The Trac t M ap is subm it te d fo r ap pr ov al to th e co un ty or m un ic ip al ity in whi chth e d ev el op m en t wi ll be lo cat ed . SHI, SHLP, andVis tanc iam ay be requi red , bef

or e o r aft er fo rm al subm is si on , to rev is e th e d es ig n o f th e de ve lo pm en t u si ng inpu t fr om th e co un ty or m

un ic ip al ity . Perf orm an ce Bo nd s SHI, SHLP, an d Vi st an ci a were r equi redby Stat e an d m un ic ip al law t o p os t bo nd s t o s ecu re the ir p erfo rm an ce wi th res pe ctto th e co m pl et io n o f th e co m

m on im pr ov em en ts inth ei r de ve lo pm en ts . The b on ds requi redth em to co m pl et e th e 5 ob li ga ti on s s pe ci fie d the rei n b efo re the bo nd s ar e ex on erat ed . Whe n p erfo rm an ce bo nd s ar e requi red , th ey

are p os te d b efo re o r co nc urren t wi thth e ap pr ov al by and
A su rety bo ndis a pr om is e to pa y a pa rty (th e o bl ig ee) i ts lo ss up to a 5 cert ai n a m ount(th e b on d a m ou nt ) if a se co ndpa rty (th e o bl ig or ) fai ls to m eeton e orm or e o bl ig at io ns . A perfo rm an ce b on d i s a s ur ety bo ndis su edby an in su ran ce co m pa ny or b an k (the su rety ) infav orof a n o bl ig ee t o g ua ran te e sa ti sf act ory co m pl et io n o f a p ro

ject b y anob li go r. In t he real est at e d ev el op m en t co nt ex t, a pe rfo rm an ce b on d i s a s ur ety bo ndis su edby a sur ety

infav orof a n o bl ig ee t o gu aran te e sa ti sf

act ory co m pl et io n o f, am on g o th er thi ng s, co m m on im pr ov em en ts with re sp ectto a de ve lo pm en t co ns tru ct edby an o bl ig or(th e d ev el op er).- 13 -

reco rd in g wi th a go ve rn m en ta l au th or ity of am ap or p la t wi th res pe ctto th e de ve lo pm en t. The am ou ntof ape rfo rm an ce b on d d ep en de d o n the Sta te an d
m un ic ip al law an d the natu re, ex te nt , andan ti ci pa te d c os ts of t he co m m on im pr ov em en ts . The co st s ar e es ti m at edby the ob li ge e wit h the ass is tanc e o f
ex pe rts . The ob li go r m

us t p ur ch as e th e b on d b y pa y in g apre m iu m

to th e su rety . The
su rety pri ces th e p erfo rm an ce b on d p rem iu m acco rd in g t o the ris k a ss oc iate d wi th th e o bl ig or , th e am ou ntof t he pe rfo rm an ce b on d, an d the term of t he pe rfo rm an ce bo nd . If anob li go r fai ls to ful fil l the co nd it io ns of the pe rfo rm an ce b on d, the n the ob li ge e m ay

fil e a cl ai m

with the su rety

by sen di ng th e su rety

a le tt er d et ai li ng th e fai lu re o f th e o bl ig orto pe rfo rm un de r th e co nd it io ns of t he pe rfo rm an ce b on d. Upo n re cei vi ng th e cl ai m fro m anob li ge e, th e su rety

forward s the cla im

to th e ob li go r, who is requi redto m an ag e th e cl ai m pro ces s, i nc lu di ng all ass oc ia te d
co st s. If asu rety

is requi redto pa y

an y of t he bo ndam ou ntto th e o bl ig ee, the
su rety is en ti tl edto reco ve r th e am ou ntpa idfro m th e o bl ig oran d/ oran y

th ird
pa rty gu aran to r pu rs uantto in de m ni fic at io ns th e o bl ig orge ne ral ly m us t en te r in to with re sp ectto each su rety . The ob li ge e m

us t ap pr ov e o f th e co m

pl et io n o f th e subjec t m at te r be fo re the pe rfo rm an ce b on d wi ll be ex on erat ed . Obt ai ni ng th e ap pr ov al of a n o bl ig ee m ay- 14 -

in vo lv e n eg ot ia ti on be twee n the pa rti es as t o wh ethe r th e o bl ig orha s s at is fie d the te rm s o f th e p erfo rm an ce b on d. Fo r ex am pl e, m un ic ip al it ie s m ay

requi re an ob li go r to rep av e ro ad s, fi x c ur bs , in st al l fi re h y dr an ts , or c on st ru ctad di ti on al in fras tru ctur e co m

m onim pr ov em en ts be fo re re le as in g the ob li go r. Hom eo wne rs as so ci at io ns m ay , as e xam pl es , requi re an ob li go r to rep av e n atur e tr ai ls , fix st ep s in co m m on area s, o r im

pr ov e a cl ub ho us e b efo re re le as in g the ob li go r fro m a pe rfo rm an ce b on d. Th e o bl ig ees id en ti fie d i n the pe rfo rm an ce b on ds of S HI, SHLP, an d Vi st an ci a in cl ud edth e h om eo wne rs ass oc iati on s fo rm edwith re sp ect to th ei r de ve lo pm en ts as we ll as t he m un ic ip al it ie s an d S tate s i n wh ic h the de ve lo pm en ts are s itua te d. A per fo rm an ce b on d m ay be acco m

pa ni edby a bo ndgu aran te ei ng pa ym en t of lab oran d m at eri al co st s i nc urredinth e d ev el op m en t. The se bo nd s ar e ref erre d to as “ labo r an d m at eri al bo nd s” or “ pa ym en t b on ds ”. They are su rety bo nd s tha t supp le m en t a p erfo rm an ce b on d fo r labo r an d m at eri al co st s wi th res pe ctto th e co nd it io ns inth e p erfo rm an ce b on d. Th e o bl ig orof alab oran d m at eri al bo ndm ay pa y anad di ti on al pre m iu m

to po stth e b on d, o r th e p rem iu m m ay be in cl ud edin th e p rem iu m

pri ce o f th e as so ci at edpe rfo rm an ce b on d. Th e am ou nt , pre m iu m pr ic e, an d p ro ces s fo r ex on erat io n o f a l ab oran d m at eri al bo ndor p aym en t b on d i s si mil ar t o tha t u se d fo r a p erfo rm an ce b on d.- 15 -

SHI, SHLP, an d Vi st an ci a p os te d p erfo rm an ce b on ds , lab or an d m at eri al bo nd s, an d a dd it io na l s ur ety bo nd s fo r al l ei gh t re pr es en ta ti ve de ve lo pm en ts . For Tril og y at La Qu in ta , SHI po st ed28 bo nd s ra ng in g i n a m ou ntfro m $2 4,6 25 to $3 ,72 6,2 20 with p rem iu m s b etween$1 63 an d $ 12 ,00 0. The o bl ig ees on th es e 6 bo nd s wer e th e ci ty of La Qui nt a, th e Co un ty of Ri ve rs id e, th e Cal ifo rn iaSta te go ve rn m en t, an d the Tril og y at La Qu in taMai nt en an ce As so ci at io n. Th es e b on ds
were ex on erat edbe twee n J anua ry 30 , 20 07 , andDecem

be r 21 , 20 10 , with o ne bo ndfor$2 m il li on st il l o ut st an di ng as o f th e d at e o f th e tr ia l i n the se cas es . 7 Fo r th e Parks id e atReuni on de ve lo pm en t, SHLP p os te d s ix bo nd s ra ng in g in am ou ntfro m

$2 3,5 92 to $3 ,30 0,0 00 with p rem iu m s b etween$4 64 an d $ 13 ,20 0. The ob li ge es were Co m

m erce Cit y

an d the Co un ty of Dou gl as . Two bo nd s ar e 8
The se fig ur es an d the on es di sc us se d b el ow ar e fro m bo ndrep orts pro vi de d 6 by pet it io ne rs an d i n e vi de nc e as st ip ul at io ns an d/ orst ip ul at edex hi bi ts ex cep t i n th e cas e o f Vis tanc ia . The fac tu al an d d oc um en tary reco rdco nc ern in g the bo nd s is sp ot ty. The p art ie s i nc lu de d o rig in al do cu m en ts as t o s om e o f th e b on ds , bu t i n ot he r cas es we rel y

so le ly on the bo ndrep orts . The p art ie s d idno t p ro vi de a bo nd rep ort fo r Vis tanc ia , bu t the y di d p ro vi de a nu m

be r of bo nddo cu m en ts . Lik ewis e, th e b on ds no te d i nf ra as ou ts tand in g wer e o ut st an di ng as o f th e 7 da te of t he tri al
. The bo ndforth e b en efi t o f Dou gl as Co un ty is co nf us in g t o the Co urt as it 8 is pre se nt edas u se d i n c on ne ct io n wi th th e Parks id e atReu ni on de ve lo pm en t, b ut th e Exh ib it18 7- P li st in g re fere nc es Hig hl an ds Ran ch . Park si de is inAdam s Co un ty, whe reas Hig hl an ds Ran chis inDou gl as Co un ty w ith the Co un ty of (co nt in ue d...)- 16 -

st il l o ut st an di ng . The o th er fo urbo nd s wer e ex on erat edbe twee n Oct ob er 5 , 20 06 , an d M arch 19 , 20 09
. Fo r Bre ak ers at P oi nt e Marin , SHLP po st ed23 bo nd s ra ng in g i n a m ou nt s fro m $1 ,67 7 t o $ 1,7 08 ,40 0. Th e b on d re po rt d oe s n otli stth e p rem iu m s p ai d, b ut ot he r ex hi bi ts refl ecta $1 00 pre m iu m pe r bo ndforth e o th er ea rli er Br eak ers at Po in te Mari n s ur ety

bo nd s o f $1 ,67 7, $ 1,8 45 , $2 ,34 8, $ 2,0 12 , $3 ,68 9, an d $ 2,3 48
. The ob li ge e o n the se surety bo nd s was Po in te Mari n As so ci at io n, the de ve lo pm en t’s h om eo wne rs ass oc ia ti on . Exh ib it s al so sh ow p erfo rm an ce b on ds
ran gi ng fro m

$5 8,6 35 to $8 2,1 51 with p rem iu m s ra ng in g fr om $1 50 to $4 10 . The ob li ge e o f th es e b on ds was a ls o the ho m eo wne rs ass oc ia ti on . Obl ig ees forth e rem ai ni ng bo nd s l is te d o n the bo ndrep ort wer e Nov at o S an it ary Dis tri ct , North Mar inW at er Di st ric t, an d the cit y of No va to . As t o C os taAzul , SHLP po st edfiv e b on ds . SHLP po st eda pe rfo rm an ce bo ndinth e am ou ntof $ 50 0,0 00 , with apre m iu m of $ 2,5 00 . The St at e o f Cal ifo rn iawas the ob li ge e o n thi s b on d. SHLP al so po st edbo nd s i n the am ou nt s of $1 0,9 50 , $9 ,81 6, an d $ 7,1 64 with p rem iu m s o f $1 10 , $1 00 , anda pr em iu m am ountno t d is cl os edby the tri al reco rd , res pe ct iv el y . The fi fth bo ndwas fo r (...co nt inue d) 8 Arap ah oe an d/ orth e Ci ty andCo un ty of Den ve r in be twee n. Th e ex pl an at io n m ay in vo lv e u ti li ti es su chas wate r orsewa ge tre atm en t o r anerro r inth e ex hi bi t.- 17 -

$1 72 ,00 0. Th e rec or d a ga in do es no t re fle ctth e p rem iu m , bu t the ob li ge e was th e Co un ty of Oran ge . Thes e b on ds were ex on erat edas e arl y as J anua ry

9, 2 00 9, an d
as lat e as Ju ly 19, 2 01 0. Fo r Azure, SHLP p os te d 2 2 b on ds . Thes e b on ds in cl ud eda $3 00 ,00 0 b on d with a$1 ,05 0 p rem iu m . The o bl ig ee o n thi s b on d was th e St at e o f Cal ifo rn ia . Of th e rem ai ni ng bo nd s, atlea sttwo were s ur ety bo nd s fo r $2 0,8 24 an d $ 1,8 85 is su ed with the de ve lo pm en t’s San El ijo Hil ls Co m m un ity Hom eo wne rs Ass oc ia ti on as th e o bl ig ee. The pre m iu m s fo r th es e b on ds were $ 10 4 a nd$1 00 , res pe ct iv el y . The rem ai ni ng 19 bo nd s ra ng edinam ou ntfro m $1 ,10 5 t o $ 98 ,50 0. Th e ex on erat io n d at es on all bo nd s ra ng edfro m Jan ua ry 19 , 20 05 , to Ju ly 1, 20 08
. W ith re sp ectto Co un try Lane, SHLP p os te d o nl y on e b on d. Th is bo ndwas fo r $3 30 ,65 7, the ob li ge e was th e St at e o f Ariz on a, an d the ex on erat io n d at e was Nov em be r 1, 2 00 4. As fo r So m

m ers etat M or ga n Hi ll , th e b on d re po rt s ho ws tha t SHLP p os te d fiv e b on ds . Accor di ng to th e rep ort, the se bo nd s ra ng edinam ou ntfro m $5 2,7 50 to $5 70 ,80 0. Th e o bl ig ee o n fo urof the se bo nd s was th e Co un ty of Ri ve rs id e, an d th e o bl ig ee o n the fif

th bo ndwas the Co un ty of SanBern ard in o. Th e rep ort refl ect s tha t thr ee o f th es e b on ds were ex on erat edon Decem be r 7, 2 00 7. Th e pa rti es als o i nc lu de d a n u ns ig ne d c op y of asurety

bo ndno t i nc lu de d i n the bo nd- 18 -

rep ort re fle ct in g asi xt h b on d fo r $3 00 ,00 0 wi th a pr em iu m of $ 1,0 50 an d the Sta te of Cal ifo rn iaas t he ob li ge e. Fi na ll y , forVis tanc ia , th e p art ie s i nt ro du cedev id en ce o f th ree p erfo rm an ce bo nd s. Th es e b on ds were fo r $1 34 ,35 8, $ 34 6,9 71 , and$2 35 ,44 1 wi th pre m iu m s of $6 72 , $1 ,73 5, an d $ 1,1 77 , res pe ct iv el y . The o bl ig ee o n the $1 34 ,35 8 b on d was th e ci ty of Peo ria , Mari co paCo un ty, Ariz on a. The o bl ig ee o n the othe r two was th e d ev el op m en t’s h om eo wne rs ass oc ia ti on . Bu dg et in g SHI’s, SHLP’s, andVis tanc ia ’s op erat in g d iv is io ns pre paredbu dg et s fo r th e di rectan d i nd ire ctco st s re la ti ng to th e co ns tru ct io n o f de ve lo pm en ts . They pr ep aredth e b ud ge ts on a de ve lo pm en t-wi de ba si s b y co m pi li ng a bu dg etfil e, refe rredto as aTract -Pro pe rty Inv es tm en t Ev al ua to r fi le (Tract -PIE fi le ). They 9
us edth is to ol to m on it orth e an ti ci pa te d a ndactua l d ev el op m en t co st s an d the pr ojec te d a ndactua l re ve nu e fro m th e sa le of h om es inth e d ev el op m en t. The y al so up da te d the de ve lo pm en t’s Trac t-P ie fil e o n a n a nn ua l, s em iann ua l, o r qu art erl y ba si s d ep en di ng onth e n eed s o f th e p art ic ul ar d ev el op m en t.

Tract -PIE i s a c omm erci al so ftwa re t oo l u se d t o fo reca stan d m on it orth e 9 co st s an d re ve nu e as so ci at edwith c on st ru ct in g ade ve lo pm en t.- 19 -

The Tract -PIE d at a inpu ts in cl ud ed : i nc urredco st s an d re ve nu e rec ei ve d with re sp ectto th e d ev el op m en t (a ctua ls ); jo b c os t re po rts co nt ai ni ng est im at ed
un in cu rredco st s (jo b c os t); sal es an d m ark et in g fo reca st s (s al es an d m ark et in g) ; 1 0
es ti m at edco ns tru ct io n c os ts pe r ho m e m od el (di rectco ns tru ct io n t em pl at e); 1 1
es ti m at edrev enue fro m

th e sa le s o f ho m es (sa le pri ce re ve nu e); an d i nf la ti on an d ap pr eci at io n a ss um

pt io ns (in fla ti on /app reci at io n) . Res po nd en t d oe s n otch al le ng e th e acc ur acy of th e co ns tru ct io n b ud ge ts . Est im at es of r ev enue fro m ho m e sa le s i nv ol ve d p ro

jecti on s o f th e av erag e pr ic e o f so ldho m es , th e sa le s ab so rp ti on rat e, th e co ns tru ct io n c y cl e, an d p ric e ap pr eci at io n, am on g o th er v ari ab le s. SHI, SHLP, an d Vi st an ci a cam e up wi th th ei r an ti ci pa te d re ve nu e st art in g wi th a pr ojec ti on of t he nu m be r of ho us es th ey in te nd edto bu il d i n ade ve lo pm en t an d h ow m an y di ffer en t fl oo r pl an s the y in te nd edto off

er. The di vi si on s es ti m at ed , us in g e xp eri en ce an d s om et im es th e he lp of o ut si de co ns ul tant s, a s al e p ric e fo r eac h fl oo r pl an .

The job co stda tainpu t i s the est im at ed , no n- ho m e-s pe ci fic co ns tru ct io n 1 0 co st s, i nc lu di ng est im at edco st s fo r th e p ur ch as e o f la nd , des ig n o f th e de ve lo pm en t, co ns tru ct io n o f in fras tru ctur e an d am en ity co m m on im pr ov em en ts , labo r, fees , andpro pe rty tax es . The di rectco ns tru ct io n t em pl at e co ns is ts of t he est im at edco st s o n ape r- 1 1 squa re-f oo t b as is to co ns tru cteach ho m e m od el so ldinth atde ve lo pm en t.- 20 -

The pri ces pe r fl oo r pl anwere ex cl us iv e o f any di sc ou ntor p rem iu m

for vi ews , lo t s iz e, orothe r aes th et ic dra ws o r dr awb ack s. Ra th er SHI, SHLP, an d Vis tanc iaest im at edeach pre m iu m an d d is co un t as a de ve lo pm en t-wi de nu m be r; th enth ey di vi de d tha t num

be r by the pro

jecte d n um

be r of un it s t o a rri ve at a n av erag e d is co un t an d p rem iu m pe r un it . SHI, SHLP, andVis tanc iaus edth e av erag e p ric e p er h om e, pl us th e p rem iu m an d l es s the di sc ou nt , to co m e up wi th a gr os s re ve nu e fi gure an d, af te r co ns id eri ng for ecas te d s al es pa ce, ad de d o n ad di ti on al rev enue forexpe ct edfutur e p ric e in crea se s. Si m il arl y , SHI, SHLP, andVis tanc iage ne ral ly esti m at edco st s o n a de ve lo pm en t-wi de ba si s, al th ou gh so m e co st s ar e es ti m at edon a pe r-u ni t b as is an d
ex trapo la te d t o ade ve lo pm en t-wi de ba si s (e .g., the ir i ni ti al pro form a fo r Azure es ti m at eda pe rm it ti ng co stof $ 3,0 00 pe r ho us e). Bu t the y co ul d ro ug hl y

est im at e co st s o n a n a ve rag e p er-u ni t b as is by div id in g the to ta l am ou ntof e st im at edco st s by the est im at ednu m

be r of ho m es to be so ld
. The LandCo m

m it te e Rep ort d is cu ss edsupr a in cl ud edanest im at edbu dg et of th atde ve lo pm en t’s re ve nu e an d e xp en se s. SHI, SHLP, an d Vi st an ci a al so su m m ari zedest im at edco st s an d re ve nu es on a so -cal le d n ap ki n, whi chin cl ud ed 1 2
The napk in is so cal le d b ecau se itis a qu ic k p ro form a es ti m at e, as if o ne 1 2 were qui ck ly eval ua ti ng a pr ojec t o n anapk in
.- 21 -

in fo rm at io n fr om

th e Lan d C omm it te e. On the se rep orts “ di rectex pe ns es ” rep res en te d the actua l “br ic ks an d s ti ck s” co st s o f ho m e co ns tru ct io n i n the de ve lo pm en t. The pa rti es pro vi de d Lan d C ommitte e Rep orts an d n ap ki ns foron ly fo urof t he de ve lo pm en ts . Co ns tru ct io n o f Dev el op m en ts SHI, SHLP, an d Vi st an ci a co ns tru ct edth ei r de ve lo pm en ts ina se qu en ce o f st ag es co ns is ti ng of: gra di ng lan d; in it ia l co ns tru ct io n o f am en ity an d in fras tru ctur e co m

m onim pr ov em en ts ; co ns tru ct io n o f ho m es ; an d c on stru ct io n an d fi na li zat io n o f an y

rem ai ni ng co m

m on im pr ov em en ts . The am ou ntof t im e it to okto gra de th e la ndan d i ni ti al ly con st ru ctth e am en it ie s an d c omm on in fras tru ctur e v ari edwith the si ze, s ur face an d s ub su rfac e co nd it io n, an d n atur e o f th e d ev el op m en t. The gra di ng pro ces s was parti cu larly subjec t t o ri skbe cau se of te n s oi l co nd it io ns un de r th e su rfac e d iff er fro m whatwas o rig in al ly ant ic ip at ed
. Whi le SHI, SHLP, an d Vi st an ci a as si gn eda co stan d ati m e li ne to th e in it ia l
co ns tru ct io n p ha se , th atti m e an d c os t wo ul d v ary with c on di ti on s. Itto ok ap pr ox im at el y

th ree t o fi ve m on th s t o c on st ru cta si ng le -fam il y de ta ch edho m e an d ap pr ox im at el y

si x t o e ig htm on th s t o c on st ru ctm ul ti fam il y att ach edho m es . For larg e d ev el op m en ts , th ey co ul d p erfo rm

th e co ns tru ct io n s ta ge s i n p ha se s.- 22 -

Hom eo wne rs Ass oc ia ti on s Eachde ve lo pm en t h adat l eas t o ne ho m eo wne rs ass oc ia ti on . Thes e as so ci at io ns co ul d i nc lu de ho m eo wne rs ass oc ia ti on s, co nd om in iu m ass oc iati on s, m ai nt en an ce as so ci at io ns , m as te r as so ci at io ns , andco m m un ity ass oc iati on s. Th e st ru ctur e, act iv it ie s, an d o bl ig at io ns of a n a ss oc ia ti on were g ov ern edby, in te r al ia , (i) th e art ic le s o f in co rp or at io n, (i i) b y laws, an d (i ii ) co ve na nt s, co nd it io ns , and
res tri ct io ns do cum en ts with re sp ectto th os e as so ci at io ns . Pri ci ng of Ho m es SHI, SHLP, an d Vi st an ci a ch arg eda si ng le pri ce fo r th ei r ho m es . This is th e “ to ta l p ur ch as e p ric e”. The y di d n otch arg e se pa rat e p ric es forth e h om e, th e lo t, i m pr ov em en ts to th e lo t, i nf ras tru ctur e an d a m en ity

co m m onim pr ov em en ts , fin an ci ng , fees , pro pe rty tax es , lab oran d s up erv is io n, ar ch it ectur al an d
en vi ro nm en ta l d es ig n, b on di ng , or any oth er co st s. Th ey co ul d i nc reas e th e p ric e of a ho m e b y

ch arg in g alo t/ho m es it e o r el ev at io n p rem iu m . Suc h apre miu m was anad di ti on al ch arg e fo r a h om e o n alo t wi thpre ferr edqu al it ie s o r a h om e wit h
aes th et ic , arch it ectur al , or d es ig n upg rad es to th e ex te rio r. SHI, SHLP, and Vis tanc iaco ul d a ls o i nc reas e th e p ric e o f a h om e fo r ad di ti on al op ti on s o r up gr ad es to th e h om e. All of t he se ch arg es were i nc lu de d i n the to ta l p ric e se t fo rth inth e p ur ch as e an d s al e ag reem en t.- 23 -

Marke ti ng SHI, SHLP, an d Vi st an ci a u se d m ul ti pl e fo rm s o f m ark et in g i nc lu di ng : pr in t (m ag azi ne s, n ews pape rs , flyers, an d p am ph le ts ); r ad io ; t el ev is io n; th e In te rn et ; b il lb oa rd s; an d wo rdof m ou th . For apro sp ect iv e b uyer vi si ti ng a de ve lo pm en t, the ir o n- si te m ark et in g e ffo rts in cl ud ed : driv in g t ou rs ; g ui de d walk in g t ou rs of ade ve lo pm en t’s am en it ie s; m od el s o f am en it ie s tha t re m ai n un de r co ns tru ct io n; m ov ie s; an d wal k- th ro ug hs of m od el ho m es pre se nt edina co m m un ity sty le
. SHI, SHLP, an d Vi st an ci a st art edth ei r m ark et in g p ro ces s wel l i n a dv an ce o f th e o pe ni ng of t he co m

m un ity . For e xa m

pl e, th e Act iv e Adu lt s Di vi si on de ve lo pe d apre se ll in g p ro ces s ca ll edts un am i. Thi s p ro ces s i nc lu de d fo cu s gr oups , lea d- ge ne rat in g m ai le rs , andde si gn sh ows . Thes e d es ig n s ho ws, al so kn own as c ha rret te s, an d fo cu s g ro up s i nv it edpo te nt ia l co ns um ers to co nt rib ut e to th e d es ig n o f th e co m

m un ity . The co ns um ers wou ld , bef or e th e fi rs t h om e was so ld , geta se ns e o f own ers hi p i n the co m m un ity . Oftenparti ci pa nt s i n thi s p res al e pr oc es s wo ul d b e th e fi rs t b uyers o nc e th e d ev el op m en t was op en edforsal e. Afte r th e p res al e p ro ces s, the co m m un ity was g en eral ly ope ne d fo r sa le s. At th is po in t SHI, SHLP, an d Vi st an ci a in te nd edto ha ve fin is he d c on st ru ct in g the
co m m un ity cen te r an d the m od el ga ll ery. They the reaf te r co nt inue d t o a dv ert is e- 24 -

us in g the to ol s d is cu ss edab ov e. Fo r ex am pl e, with re sp ectto Park si de at R eu ni on th ey est ab li sh eda W eb si te , reuni on co .co m ; ra n n ews pape r ad s; an d u se d bi ll bo ard s. Gen eral ly, th is m ark et in g p ro ces s was ge aredto ward s s el li ng th e co m m un ity an d l ife sty le , no t ju stth e h om es . At Vi st an ci a, th e “ m ark et in g trai l” be ga n wh enco ns um ers fir stdro ve in to th e co m m un ity . Vist an ci a p ur

po se fu ll y de si gn edth e d ev el op m en t s o tha t the
co ns um er, t o g etto th e to urcen te r an d s al es off ic e, ha d t o driv e p as t al l o f th e m ajoram en it ie s. Th ey

de si gn edth e g rad in g o f th e la ndto m ak e su re the wate r featur e fo r th e 1 8th h ol e o f th e g ol f co ur se was v is ib le forth e en ti re driv e fro m th e ga te ho us e. They als o o rie nt edwate rfal ls an d o th er ae st he ti cs to ward s the
co ns um er t o m ax im iz e v is ib il ity on th e driv e in . Esse nt ia ll y , pro sp ect iv e pu rch as ers ’ vi ews du rin g the ir i ni ti al dri ve in to a co m m un ity was i nt en de d t o b e a si le ntsal es co rri do r. The sal es st aff a t Vi st an ci a g reet edth e co ns um ers by the ir n am es , whi ch ha d b eenrad io edfro m

th e g at eh ou se to th e to urcen te r. At th e to urcen te r, th e st aff s ho wedth e co ns um ers a sh ort v id eo , whi chem ph as iz edth e d ev el op m en t’s fri en ds hi ps , li fes tyle, an d c omm un ity . The p ot en ti al bu y ers th ento ur edth e cl ub ho us e an d the go lf c lub andall of t he va rio us am en it ie s. Th is to urco ul d t ak e be twee n thr ee an d fi ve ho ur s. Cu st om ers th enreturne d t o the to urcen te r, whe re- 25 -

Vis tanc ia ’s sal es st aff e xp la in edth e b en efi ts of l iv in g i n the co m m un ity . They be ga n the ir e xp lana ti on of t he be ne fit s atth e m acro ge og rap hi cal areaan d the pr ox im ity to La Qui nt a an d the n m ov edon to th e m ic ro lev el of t he Vis tanc ia
co m m un ity . Fin al ly, th e p ot en ti al cu st om ers en te redth e m od el ga ll ery, whi ch
co ns is te d o f se ve ral m od el ho m es as we ll as c afes an d a n a m ph ithe at er. Vis tanc ia sh owe d the ho m es on ly at th e en d b ecau se th e m ark et in g app ro achan d p ro du ct en co m pa ss edm uc h m or e th anth e h om e, an d i t trie d t o s ho wcas e fea tu res an d
am en it ie s t o s el l “ th e dream ” to setup th e sa le of t he ho m e. Fi na nc ia l Dat a Track in g SHI, SHLP, an d Vi st an ci a u se d Tra ct -PIE s of twar e to reco rd , acco un t fo r, an d s umm ari ze i nc urredan d b ud ge te d d at a wit h re sp ectto each de ve lo pm en t. The in fo rm at io n Tra ct -PIE k ep t o n fi le foreach de ve lo pm en t i nc lu de d c as hf lo w rece ip ts an d d is burs em en ts , in co m e st at em en t, b al an ce s he et , in te rn al rat e o f return, fi na nc in g d at a, bo okin te res t al lo cat io ns , in fla ti on pro jecti on s, t ot al un it s, un it s cl os ed , andpro

jecte d u ni t cl os in gs forbo th in cu rredan d b ud ge te d d at a du rin g the du rat io n o f th e d ev el op m en t. The Tract -PIE s of twar e tr ack edco st s b y bo th in di rectan d d ire ctco st s. SHI, SHLP, an d Vi st an ci a upd at edth e b ud ge te d
co st s qua rte rly within fo rm at io n p ro vi de d b y th e d iv is io ns .- 26 -

The so ftwa re al lo weda br eak do wn o f di rectco st s i nt o anu m be r of cat eg or ie s. Th e la ndan d a cqui si ti on s ca te go ry rep res en te d c os ts to pu rch as e th e de ve lo pm en t l an d. Th e p ro fitan d p art ic ip at io n a gr eem en ts cat eg ory rep res en te d ag reem en ts inwhi chth e se ll er o f th e d ev el op m en t l an d h adth e o pp ortu ni ty to sh are i n the pro fit s o f th e d ev el op m en t. Th e fo rwardpl an ni ng cat eg ory rep res en te d
co st s as so ci at edwith c iv il en gi ne eri ng , des ig n, an d a rch it ectur e fo r th e de ve lo pm en t. Dir ectco ns tru ct io n c os ts were the co st s i nc urredinth e v ert ic al
co ns tru ct io n o f th e h om es , andop ti on de po si ts an d o pt io n c os ts refl ect edco st s in cu rredwith re sp ectto up gr ad es bu y ers co ul d s el ect . Mod el up gr ad e co st s wer e co st s wi th res pe ctto th e m od el ho m es . Comm it m en t fe es were co st s as so ci at ed with fi na nc in g a ct iv it ie s. Fi na ll y , th e sa le s t ax cat eg ory rep res en te d the Ariz on a sa le s t ax th atjuri sd ic ti on im po se d o n the sal e o f a h om e. The in di rectco stcat eg or ie s i nc lu de d p ro pe rty tax paym en ts , si te de ve lo pm en t/ landde ve lo pm en t/ co m m on areaco st s fo r in fras tru ctur e an d
am en it ie s wi th in a de ve lo pm en t. The cat eg ory foram en it ie s an d g ol f refl ect ed
co st s fo r a d ev el op m en t’s g ol f co ur se (s ). The p erm it s an d fe es cat eg ory reco rd ed pa ym en ts to m

un ic ip al an d S ta te juri sd ic ti on s t o p erm itco ns tru ct in g o f th e de ve lo pm en t. A pr op erty tax pa ym en ts cat eg ory

refl ect edpa ym en ts m ad e fo r ta x- 27 -

on pro pe rty no t yet co nv ey edto th irdpa rti es , eit he r th ro ug h s al e o r th ro ug h tra ns fer t o the ho m eo wne rs ass oc ia ti on s o r m un ic ip al it ie s. The re were als o i nd ire ctco stcat eg or ie s fo r reb at es /c red it s, i nd ire ct co ns tru ct io n c os ts , m an ag em en t fe es , andm is cel lane ou s co st s. Pet it io ne rs rece iv edreb at es an d c red it s fr om th ei r m at eri al s s up pl ie rs if the y m eetcert ai n pu rch as e quo ta s. In di rectco ns tru ct io n c os ts were co st s as so ci at edwith
supe rv is io n, cl ean up , arch it ectur al rev ie w, andothe r si m il ar ac ti vi ti es with re sp ect to co ns tru ct io n. Ma na ge m en t fe es were fe es pa idinde ve lo pm en ts be in g b ui ltas a joi ntve ntur e. Mi sc el lane ou s co st s co ns is te d o f any othe r in di rectco stno t co ve redby the othe r cat eg or ie s. The Tract -PIE fi le s al lo wedSHI, SHLP, an d Vi st an ci a to co m pa re the in di rectco st s t o the di rectco st s. Fo r ex am pl e, ex hi bi ts an d t es ti m on y sh ow tha t fo r th e 2 00 5 t ax y ear, the in di rectco st s o f Park si de at R eu ni onwere ap pr ox im at el y 27 % or m or e o f th e to ta l b ud ge te d c os ts . Sim il ar o r ev enlar ge r pe rcen ta ge s ap pl ie d t o o th er d ev el op m en ts su chas Vi st an ci a an d Tri lo gy at La Qui nt a, whe re SHI, SHLP, orVis tanc iawere re sp on si bl e fo r co nv ert in g ra w lan d i nt o a de ve lo pm en t ra th er than p ur ch as in g a ndde ve lo pi ng jus t a p orti on of a no th er de ve lo pe r’s pr ojec t, wh ere s om e in di rectco st s h adalr eady be enin cu rredan d wer e in cl ud edinlan d c os ts .- 28 -

To m on it or

op erat io na l p erfo rm an ce an d i nc om e ta x c om pl ianc e, SHI, SHLP, an d Vi st an ci a d iv id edth e to ta l i nc urreddi rectan d i nd ire ctco st s b y th e to ta l b ud ge te d d ire ctan d i nd ire ctco st s. Th ei r ta x d ep art m en t m ad e rel ev an t ad jus tm en ts to refl ectwhatitco ns id eredto be th e requi rem en ts of s ect io n 4 60 , su chas c ap it al iz at io n c om pu ta ti on s an d t ax in te res t an al y se s. If the in curredco st s were equa l t o o r gr eat er tha n 9 5% o f th e b ud ge te d c os ts , th enth ey rep orte d in co m e fo r th attax y ear f ro m ho m es th atha d c lo se d i n e sc ro w up to th atda te . If th e in cu rredco st s d idno t ex ceed95 %, th enth ey de ferr edan y

in co m e fro m

ho m es th atclo se d i n e sc ro w th aty ear. Fo r Fed eral in co m e ta x p ur po se s dur in g 2 00 2 a nd20 03 , SHLP compared th e to ta l num

be r of ho m es clo se d i n ade ve lo pm en t t o the nu m be r pr ojec te d t o b e cl os edby the en d o f th e d ev el op m en t. SHI co m pu te d the 95 % tes t b y

co m pa rin g th e d ev el op m en t’s t ot al in cu rreddi rectan d i nd ire ctco st s t o the de ve lo pm en t’s to ta l b ud ge te d d ire ctan d i nd ire ctco st s. Fo r th e 2 00 3 a nd20 04 tax y ears , Vis tanc iadi d n otm athe m at ic al ly det erm in e whe th er ei th er the 95 % tes t o r th e fin al co m pl et io n a ndacce pt an ce t es t h adbe enm et , th e rea so n b ei ng th atVis tanc ia
es ti m at edth ere wer e n o c irc um st an ces un de r whi chth e 9 5% t es t wo ul d b e sa ti sf ie d b ecau se su cha sm al l p orti on of t he ho m es inth e d ev el op m en t h adbe en co m pl et ed
.- 29 -

Fo r al l t ax y ears aft er 2 00 3, ex cep t as jus t n ot ed , SHI, SHLP, andVis tanc ia
us edth e Tract -Pi e so ftwa re an d re late d d oc um en tati on to co m pa re the de ve lo pm en t’s i nc urreddi rectan d i nd ire ctco st s t o the de ve lo pm en t’s t ot al bu dg et eddi rectan d i nd ire ctco st s fo r th e p ur po se s o f de te rm in in g wh ethe r to rep ort i nc om e fo r Fed eral in co m e ta x p ur po se s u nd er the ir i nt erp ret at io n o f th e co m pl et edco nt ractm etho d o f acc ou nt in g. Des cri pt io n o f th e Eig htRep res en ta ti ve Deve lo pm en ts Tril og y at La Qu in ta The Tril og y

at La Qu in tade ve lo pm en t was a ga te d c omm un ity with s ecu rit y an d l an ds cap in g fe atur es lo cat edinRiv ers id e Co un ty, withi n the city li m it s o f La Qui nt a, Cal ifo rn ia . The Tri lo gy dev el op m en t was co ns tru ct edineig htph as es , with 1 ,23 8 t ot al lo ts an d re si de nc es si tu at edon ap pr ox im at el y 53 6 a cres . Co ns tru ct io n b eg aninor abo utJu ly 200 0. Th e Tril og y de ve lo pm en t i nc lu de d a 30 ,00 0- squa re-f

oo t cl ub ho us e wit h aba ll ro om , a cen te r fo r hi gh er l earn in g, a stud io forcrea ti ve art s, a c afe, a k it ch en , a cat eri ng ki tc he n, a g ran d l iv in g ro om , of fic es , m ai l o ffi ces , lo ck er ro om s, s tu di os , an i nd oo r po ol , an o ut do orpo ol , cab an as , an i nd oo r ru nn in g track , a fit ne ss cen te r, a m ed it at io n g ard en , anda sp a. It a ls o h adou td oo r wal ki ng , run ni ng an d b ik e p aths , ten ni s co urts , andou td oo r recr eat io n a reas .- 30 -

Vis tanc ia The Vis tanc iade ve lo pm en t was inPeo ria , Arizo na , andin cl ud edth ree subd iv is io ns : Vi st an ci a Vil la ge , Bla ck st on e, an d Tri lo gy. As o rig in al ly des ig ne d, th e p lan was to in cl ud e 1 8 p ha se s, s itua te d o n app ro xi m at el y 7,1 00 acre s. Co ns tru ct io n o f th e Vis tanc iade ve lo pm en t b eg aninor abo utJanua ry 20 02 . The Vis tanc iade ve lo pm en t i nc lu de d a3.5 -m il e tr ai l s y st em , a res taur an t, a s pa , po ol s, a b as ke tb al l g ym

na si um , a m

ul ti pu rp os e b ui ld in g, a t en ni s co urt, p ark s, o pe n sp aces forwil dl ife , pl ay gr ou nd s, an d aco un try club. Park si de at R eu ni on The Park si de de ve lo pm en t was inCo m m erce Cit y , Col or ad o. Itwas a subd iv is io n o f a l arg er d ev el op m en t n am edReuni on . Con st ru ct io n o f th e Reu ni on de ve lo pm en t b eg aninor abo utMay 200 1 a ndco nt in ue d thr ou gh Decem be r 20 11 in fou r ph as es , with 1 ,87 5 t ot al lo ts an d 1 ,42 5 t ot al res id en ces on ap pr ox im at el y 98 0 a cres . The Re un io n d ev el op m en t i nc lu de d a21 ,00 0- squa re-f oo t re crea ti on cen te r fea tu rin g a n i nd oo r gym na si um , a fit ne ss cen te r, aero bi cs , m eet in g, an d lo ck er ro om s, an ou td oo r po ol with i nt erac ti ve wate r fea tu res , a 52 -acr e cen tra l pa rkth atin cl ud es m

ul ti us e athl et ic fie ld s, trai ls , pl ay gr ou nd s, p ic ni c fac il it ie s, an d
anam ph ithe at er, 1 0 m il es of wa lk in g, ru nn in g a ndbi ki ng tra il s, 8 acre s o f la ke s, 15 0 a cres of p ark s, an d 1 70 acre s o f op ensp ace.- 31 -

Brea ke rs at P oi nt e Marin The Brea ke rs at P oi nt e Marin de ve lo pm en t was inNov at o, Ca li fo rn ia . It
was a subd iv is io n o f a l arg er d ev el op m en t ca ll edPo in te Mari n. Th e h om es inth e Brea ke rs at P oi nt e Marinwere co ns tru ct edin10 ph as es , with 1 06 to ta l l ot s si tu at edonap pr ox im at el y 25 acre s, b eg in ni ng inor abo utMay 200 4. Th e Po in te Mar inde ve lo pm en t i nc lu de d wal ki ng , run ni ng , andbi ke pa th s as well as o pe n sp aces forwil dl ife
. Co st a Azu l The Co st a Azu l d ev el op m en t was a ga te d c omm un ity with s ecu rit y

featur es lo cat edinNewpo rt B each , Cal ifo rn ia . This de ve lo pm en t was a subd iv is io n o f a larg er d ev el op m en t ca ll edPaci fic Rid ge . It co ns is te d o f 42 to ta l l ot s, s itua te d o n ap pr ox im at el y

22 acre s. Th e h om es inCo st a Azu l wer e co ns tru ct edineig ht ph as es be gi nn in g i n o r ab ou t Ap ril 20 04 . The d ev el op m en t i nc lu de d arecr eat io n cen te r, to t l ot s, a s wimm in g p oo l, a s pa , lo ck er ro om s, a p ark , andwalk in g, runn in g, an d b ik in g trai ls an d p aths , in cl ud in g o pe n s pa ces forwil dl ife
. Azure The Azur e d ev el op m en t was inSanMarc os , Cal ifo rn ia . It was a subd iv is io n o f a l arg er d ev el op m en t ca ll edSanEli jo Hil ls . The h om es inth e Azure d ev el op m en t wer e co ns tru ct edinfou r ph as es be gi nn in g i n o r ab ou t- 32 -

Nov em be r 20 03 . It co nt ai ne d 9 2 t ot al lo ts , si tu at edon ap pr ox im at el y 30 acre s. The Azur e d ev el op m en t i nc lu de d apa rk , a pe t ru n a rea, a s ka ti ng area , a swi m m in g p oo l, an d ada y

care faci li ty. Co un try Lane The Co un try Lane d ev el op m en t was inGil be rt, Ari zo na . It was a subd iv is io n o f a d ev el op m en t ca ll edNeel y Co m m on s. Th e h om es inth e Co un try Lan e d ev el op m en t wer e co ns tru ct edina si ng le ph as e, with 1 93 to ta l l ot s, s itua te d
on ap pr ox im at el y

25 acre s, b eg in ni ng inor abo utJu ly 200 2. Th e Co un try Lane de ve lo pm en t i nc lu de d apa rk , lan ds cap edpe de st ria n a reas , a so ccer fie ld , a to t l ot , ram ad as , anda ha lf- co urt b as ke tb al l fa ci li ty. So m m ers etat M or ga n Hi ll The So m m ers etat M or ga n Hi ll de ve lo pm en t was inTem ecu la , Cal ifo rn ia
. It wa s a s ub di vi si on of alar ge r de ve lo pm en t ca ll edMo rg anHil l. The ho m es in th e So m m ers etat M or ga n Hi ll were co ns tru ct edbe gi nn in g i n o r ab ou t M arch 20 04 in sev enph as es with 7 0 t ot al lo ts , si tu at edon ap pr ox im at el y 17 acre s. Th e de ve lo pm en t i nc lu de d aco m m un ity cen te r, a cl ub ho us e, te nn is co urts , swi m m in g po ol s, s pa s, a t otlo t, an d wal ki ng , run ni ng , andbi ki ng path s.- 33 -

Doc um en ta ti on Purch as e an d S al e Agr eem en t SHI, SHLP, an d Vi st an ci a en te redin to sal es co ntract s wi thpro sp ect iv e ho m eb uyers. Th e p ur ch as e an d s al e ag reem en t i de nt ifi edth e b uyer an d the sel le r. It p ro vi de d tha t the bu y er ag reedto pu rch as e th e p ro pe rty andth e se ll er ag reedto se ll th e p ro pe rty. Whe n the bu y er an d the sel le r en te redin to a co ntractforth e pu rch as e o f a h om e, th e b uyer ha d t o re m itanearn es t m on ey de po si t. On ce the
co nt ractha d b eenex ecu te d the pa rti es were o bl ig at edto pe rfo rm . Befo re the bu y er an d s el le r co ul d c lo se esc ro w ona ho m e, SHI, SHLP, an d Vi st an ci a were requi redto eit he r co ns tru ctall co m m on im pr ov em en t ar eas forth e d ev el op m en t (o r ph as e) o r po sta bo ndas d is cu ss edsupr a. Ther efo re, i n s om e in st an ces th e bu y ers were re qu ire d t o p ay th e fu ll co nt ractpri ce b efo re al l o f th e co m m on im pr ov em en ts an d am en it ie s p ro m is edforth atde ve lo pm en t wer e co m pl et ed
. Befo re es cro w cou ldclo se , SHI, SHLP, andVis tanc iaha d t o o bt ai n a cert ifi cat e o f oc cupa nc y

fro m th e lo cal go ve rn m en t h av in g juris di ct io n o ve r th e ho m e. Once th e fu nd s an d the clo si ng do cu m en ts were i n e sc ro w, andinpro pe r or de r an d dul y

ex ecu te d, the de edtra ns ferr in g the pro pe rty to t he bu y er was reco rd ed . An av erag e o f fo urto si x m on th s p as se d b etweenth e ti m e th e b uyer an d th e se ll er en te redin to th e co nt ractforth e p ur ch as e o f a h om e an d the ti m e whe n- 34 -

es cro w clo se d. Atclo si ng , SHI, SHLP, andVis tanc iaha d e xp en de d a ll co st s requi redto co ns tru ctth e dwell in g u ni t an d the im pr ov em en ts to th e lo t o n wh ic h i t sa t. Fo r th e two rep res en ta ti ve de ve lo pm en ts inAriz on a, Co un try Lane an d Vis tanc ia , th e p ur ch as e co nt ract s an d the clo si ng an d e sc ro w in st ru ct io ns in cl ud ed a st at em en t d is cl os in g the pu rch as er’s ri gh t t o re cei ve an d re ada co py of th e de ve lo pm en t’s p ub li c rep ort b efo re s ig ni ng th e p ur ch as e ag reem en t. The do cu m en ts als o i nc lu de d a n i ni ti al edan d s ig ne d a ckno wled gm en t, b y th e pu rch as er(s ), of

th e rec ei ptof aco py of th e d ev el op m en t’s p ub li c rep ort an d o f th e op po rtu ni ty to re adit . The p ur ch as er(s ) al so si gn eda rece ip t d oc um en ti ng th at he /s he ackno wled ge d the publ ic rep ort, i de nt ifi edby a regi st rat io n n um be r an d a da te , andth e in fo rm at io n c on ta in edth erei n, wh ic h c on st itut eda pa rt o f th e pu rch as e co nt ractan d c lo si ng an d e sc ro w in st ru ct io n d oc um en ta ti on . Fo r th e fi ve rep res en ta ti ve de ve lo pm en ts inCal ifo rn ia , Tril og y at La Qu in ta , Brea ke rs at P oi nt e Marin , Cos taAzul , Azur e, an d S omm ers etat M or gan Hi ll , th e pu rch as e co nt ract s an d the clo si ng an d e sc ro w in st ru ct io ns in cl ud edCal ifo rn ia DRE Fo rm

RE61 4E, Re cei ptFo r Publ ic Rep ort Or Ca li fo rn iaPerm it , as e vi de nc e of th e p ur ch as ers ’ rece ip t o f th e p ub li c rep ort. Thi s d oc um en t s ta te d:- 35 -

The Laws an d R eg ul at io ns of t he Real Est at e Co m m is si on er re qu ire th aty ouas apro sp ect iv e p ur ch as er * * * be affo rd edanop po rtu ni ty to readth e p ub li c rep ort * * * forth is subd iv is io n b efo re y oum ak e an y writ te n o fferto purch as e * * * a subd iv is io n i nt eres t o r be fo re an y m on ey or o th er co ns id erat io n t owa rdpu rch as e * * * o f a subd iv is io n i nt eres t i s ac cep te d fr om y ou . The do cu m en t furth er ad m on is he d p ro sp ect iv e p ur ch as ers : “ DO NOT SIGN THIS RECEIPT UNTIL YOU HAVE RECEIVED A COPY OF TH E PUBLIC REPORT * * * AND HAVE READ IT.” The d oc um en t fu rth er re qu ire d the si gn atur e(s ) of th e p ur ch as er(s ) co nf

irming th athe /s he ha d re adth e p ub li c rep ort, i de nt ifi edby reg is tra ti on nu m

be r an d d at e o f is su an ce. Publ ic Rep orts The pu rp os e o f a p ub li c rep ort i s t o d is cl os e to a ho m eb uyer th e ri gh ts an d ob li ga ti on s i m

po se d o n o r gr an te d t o the ho m eb uyer as we ll as t he sel le r with
res pe ctto a cert ai n d ev el op m en t.

Ariz on a InAriz on a th e p ub li c rep ort s ta te d tha t the Depa rtment o f Rea l Es ta te requi res th e d ev el op er t o p ro vi de each pu rch as er wi th a co py of th e p ub li c rep ort an d t o o bt ai n asi gn edrece ip t. Itno te d tha t the pu rch as e co nt ractis res ci nd ab le by th e p ur ch as er i f th e d ev el op er fa il s t o o bt ai n apubl ic rep ort b efo re o ffer in g the
subd iv id edlo ts forsal e o r if th e d ev el op er fa il s t o p ro vi de th e p ur ch as er wi th a- 36 -

co py of th e rep ort. The publ ic rep ort al so no te d the de si gn at io n o f th e p orti on s o f th e d ev el op m en t tha t ar e co m m on area s, s pe ci fic al ly stat in g fo r on e o f th e de ve lo pm en ts th atth e p orti on s tha t ar e co m m onarea s “ ARE TO BE CONVEY ED TO THECOUNTY LA

NE COMMUNITY ASSOCI ATION, IN EA CH CASE FOR THE USE AND ENJOYMENT OF SUCH ASSOCIATION AS MOR E FULLY SET FORTH IN T HE DECLARATION OF COVENANTS, CONDITIONS AND RESTRICTIONS APPLIC ABLE TO SUCH ASSOCIATION”. The publ ic rep orts forth e two Ariz on a d ev el op m en ts als o c it edth e lo cat io ns of th e d ev el op m en t m ap s, wh ic h i de nt ifi edth e d ev el op m en ts ’ co m m onarea s an d im pr ov em en ts . The rep orts in di cat edth e d at es th e d ev el op er an ti ci pa te d
co m pl et io n o f th e co m

m on areaim

pr ov em en ts an d fa ci li ti es as we ll as p ro vi di ng as su ran ces th atth e co m

m on im pr ov em en ts wou ldbe co m pl et ed . Spe ci fic al ly, fo r ex am pl e, th e Co un try Lane d ev el op m en t re po rts st at ed : “ Escr ows wil l n otclo se un ti l the Townof Gi lb ertha s i ss ue d i ts Occupa nc y Cle aran ce an d a ll Subd iv is io n im pr ov em en ts have be enco m pl et ed . A bo ndha s b eensec ur edto ass ur e th e co m pl et io n o f th e la nd sc ap in g i n the co m m on areatra ct s. A bo ndforth e co m pl et io n o f th e ad di ti on al lan ds cap edpe de st ria n a reas ha s b eensec ur edas as su ran ce o f th ei r co m

pl et io n.”- 37 - Cal ifo rn ia The publ ic rep orts forth e fi ve de ve lo pm en ts inCal ifo rn iast at edth ata pu rch as er(s ) m

us t ac kn owl ed ge by sig na tu re tha t h e/ sh e h as rece iv edan d re adth e publ ic rep ort fo r th e d ev el op m en t. The publ ic rep orts st at ed , un de r a s ect io n t it le d

“ INTEREST TO BE CONVE YED”, th ateachpu rch as er wo ul d re cei ve fee t it le to a lo t, m em

be rs hi p i n the ho m eo wne rs ass oc ia ti on , andrig ht s t o u se th e co m m on area s. Th e p ub li c rep orts als o p ro vi de d the de ve lo pe rs ’ es ti m at e o f whe n c omm on area s an d i m

pr ov em en ts wou ldbe co m pl et edan d s tate d tha t es cro ws wo ul d n ot cl os e unt il eit he r th e co m m onarea s an d fa ci li ti es ha d b eenco m pl et edor b on ds ha d b eenpo st ed . Howev er, fo urof t he fiv e rep orts als o s ta te d tha t the re was no as su ran ce the pro

ject wo ul d b e co m

pl et edor d ev el op edas p ro po se d. Th eref or e, whi le th e p ub li c rep orts warn edth e p ur ch as ers th atth ere was no ass ur an ce tha t the pr ojec t wo ul d b e co m

pl et edor d ev el op edas p ro po se d, the ph as e o f th e de ve lo pm en t tha t the publ ic rep ort d is cu ss edwas a ss ur ed . SHI, SHLP, and Vis tanc iaha d t o c om

pl et e o r po stbo nd s en su rin g c om pl et io n o f co m

m on im pr ov em en ts . The publ ic rep orts forth e fi ve Cal ifo rn iade ve lo pm en ts in cl ud eda pr ov is io n th atbe fo re cl os in g e sc ro w, th e d ev el op er was requi redto pro vi de th e p ur ch as er with c op ie s o f th e h om eo wne rs ass oc ia ti on art ic le s o f in co rp or at io n, i nc lu di ng- 38 -

bylaws an d c ov en an ts , con di ti on s, an d re stric ti on s an d tha t tho se do cu m en ts sh ou ldbe readan d i nc lu de d n um ero us pro vi si on s tha t s ub st an ti al ly affect edth e pu rch as ers ’ rig ht s. Co ve na nt s, Co nd it io ns , & Res tri ct io ns The de ve lo pm en ts were g ov ern edby a decl arat io n o f co ve na nt s, co nd it io ns , an d re st ric ti on s (C C&R s) . The CC &Rs were re vi ewedan d app ro ve d b y th e St at e’s de pa rtment o f rea l es tate an d l oc al go ve rn m en t ag en ci es wher e th at de ve lo pm en t was lo cat edan d, i n C al ifo rn iaan d C ol or ad o, wer e rec or de d. 1 3 SHI, SHLP, an d Vi st an ci a p ro vi de d e ach pu rch as er, ator b efo re ex ecu ti on of a pu rch as e ag reem en t, wi th a co py of th e d ecl arat io n o f CC& Rs inco nn ect io n with the sal es of h om es inth atde ve lo pm en ts . Thes e CC& Rs pro vi de d ri gh ts an d
res tri ct io ns with re sp ectto th e u se an d e njo ym en t o f th e p ur ch as edpro pe rty. CC& Rs ap pl ie d t o the pu rch as er o f pr op erty withi n the de ve lo pm en t an d t o a ll fu tu re i nt eres t h ol de rs of p ro pe rty in t he de ve lo pm en t. The CC&R s i nc lu de d a le ga l d es cri pt io n o f th e la ndsubjec t t o the CC&R s, i nc lu di ng bo th res id en ti al lo ts an d c omm on area s, an d a ll of t he pro pe rty with in th e ei gh t re pr es en ta ti ve de ve lo pm en ts was h el d o r co nv ey edsubjec t t o the term s o f th ei r res pe ct iv e
Cal ifo rn iaan d C ol or ad o re qu ire a de ve lo pe r to fil e th e CC& Rs with the 1 3 cl erkan d re co rd er’s o ffi ce o f th e co un try in wh ic h the de ve lo pm en t was lo cat ed
.- 39 -

CC& Rs . The p ur ch as ers of e ach ho m e affi rm edrece ip t o f a co py of th e CC& Rs by sig ni ng ackno wled gm en ts inth e p ur ch as e an d s al e ag reem en t o r ot he r rel at ed do cu m en ts . The CC&R s p ro vi de d the au th or ity for th e h om eo wne rs ass oc ia ti on to adm in is te r th e CC& Rs an d m an ag e th e d ev el op m en t, i nc lu di ng th e au th or ity to as se ss m em

be rs an d t o o wn an d m ai nt ai n c omm on im pr ov em en ts . Und er the CC& Rs each ho m e o wne r in th e d ev el op m en t au to m at ic al ly became a m em be r of th e d ev el op m en t’s h om eo wne rs ass oc ia ti on an d re m ai ne d am em be r un ti l h e/ sh e no lo ng er h el d a n o wne rs hi p i nt eres t. The CC&R s al so auth or iz edth e res pe ct iv e ho m eo wne rs ass oc iati on s t o e nf or ce co ll ect io n a ct io n, i nc lu di ng fil in g ali enan d th e co m m en cem en t o f a fo recl os ur e act io n a ga in stan y m em be r th atfai le d t o sa ti sf y anass es sm en t. Bo th th e h om eo wne rs ass oc ia ti on s an d the ir i nd iv idua l
m em be rs co ul d e nf

or ce the CC&R s. Fo r se ve n o f th e ei gh t re pr es en ta ti ve de ve lo pm en ts , th e CC& Rs requi red SHI, SHLP, an d Vi st an ci a to trans fer t it le to th e co m m onim pr ov em en ts to th e de ve lo pm en ts ’ res pe ct iv e h om eo wne rs ass oc ia ti on s. Fo r Park si de at R eu ni on , th e co m m on im pr ov em en ts were n otco nv ey edto th e h om eo wne rs ass oc ia ti on . Rathe r, th e p ur ch as ers ob ta in eda te na nc y inco m m on in te res t wi th all othe r- 40 -

de ve lo pm en t o wne rs inth es e co m m on im pr ov em en ts . The CC &Rs sp eci fie d thi s own ers hi p i nt eres t. Map s an d P la ts The publ ic rep orts refe rredto th e tr actm ap s o n fi le with the lo cal go ve rn m en t. The se tra ctm ap s re pr es en te d the fin al de si gn forth e p lann ed de ve lo pm en t. Gen eral ly, SHI, SHLP, an d Vi st an ci a p rep aredten ta ti ve ve rs io ns of th es e m ap s fi rs t. The ten ta ti ve m ap di ct at edgra di ng , lo ts , street s, p ark s, eas em en ts , andothe r si m il ar fe atur es . Oftenth e lo cal go ve rn m en t re qu ire d s om e m od ifi cat io ns an d a ls o a tt ach edco nd it io ns an d re qu ire m en ts be fo re i t wo ul d
acce pta tr actm ap . App ro va l o f a fi na l tractm ap oft enres ul te d i n a dd it io na l co nd it io ns , su chas requi rin g the de ve lo pe r to pa y forgra di ng , curbs , gu tt ers , si de walkpa vi ng , street s, an d u ti li ti es , whi chm etth atjuri sd ic ti on ’s st an dard s. Th e lo cal go ve rn m en ts di d
no t ju stres tri ctco nd it io ns to th e are as withi n the de ve lo pm en ts th em se lv es . They
co ul d a ls o c on di ti on th e ap pr ov al up on wid en in g a rte ria l ro ad s atth e b ou nd ari es of th e d ev el op m en ts , th e b ui ld in g o f sc ho ol s, o r in st al li ng off si te tra ffi c li gh ts . SHI, SHLP, an d Vi st an ci a co ul d n eg ot ia te with re sp ectto th e sc op e, st an da rd s, an d n atur e o f th e co nd it io ns to so m e d eg ree, b utth e g ov ern m en ta l au th or ity ret ai ne d the ul ti m at e ap pr ov al co nt ro l o ve r th e m ap s. Durin g the en ti tl em en t- 41 -

pr oc es s, SHI, SHLP, an d Vi st an ci a o fte n e m pl oyed co ns ul tant s. Th e g ov ern m en ts al so so m et im es em

pl oyed co ns ul tant s i n thi s p ro ces s, an d o n o ccas io n, SHI, SHLP, an d Vi st an ci a wou ldco ve r th e co stof t he se go ve rn m en t co ns ul tant s. SHI, SHLP, an d Vi st an ci a wou ldals o e nt er i nt o a gr eem en ts with the lo cal go ve rn m en ta l ag en ci es . SHI, SHLP, andVis tanc iaha d two o pt io ns . They co ul d bu il d e ve ryth in g re qu ire d b y th e m ap , or a lt ern at iv el y , th ey co ul d e nt er i nt o a subd iv is io n i m

pr ov em en t ag reem en t wi th th e g ov ern m en ta l au th or ity . Thes e ag reem en ts requi redth em to po stbo nd s fo r im

pr ov em en ts no t yet bu il t. If al l o f th es e st ep s wer e sa ti sf

act or il y co m pl et ed , th enth e g ov ern m en ta l au th or ity was ob li ga te d t o re co rdth e m ap . OPINION I. Bu rd enof P ro of Gen eral ly, th e Co m

m is si on er’s d et erm in at io n o f a t ax pa y er’s l iabi li ty for an in co m e ta x d efi ci en cy

is pre su m edco rrec t, an d the tax pay er b ears th e b ur de n o f pr ov in g tha t the de te rm in at io n i s i m pr op er. See Ru le 14 2( a); W el chv. Hel ve rin g, 29 0 U.S. 1 11 , 11 5 (1 93 3) . Butif atax pa y er’s m etho d o f acc ou nt in g d oe s n ot cl earl y refl ectin co m e, se ct io n 4 46 (b ) al lo ws the Co m m is si on er t o c ha ng e th e ta xp ay er’s m etho d o f acc ou nt in g t o o ne th atdo es cle arl y refl ectin co m e. The Co m m is si on er i s g ran te d b ro addi sc ret io n i n d et erm in in g wh ethe r anacco un ti ng- 42 -

m etho d c le arl y

refl ect s i nc om e, an d tha t d et erm in at io n i s en ti tl edto m or e th anth e us ua l p res um

pt io n o f co rrec tn es s. Co m mis si on er v . Hans en , 36 0 U.S. 4 46 , 46 7 (1 95 9) ; REC O Indus ., Inc . v. Co m m is si on er, 8 3 T.C. 9 12 , 92 0 (1 98 4) . The qu es ti on of wh ethe r a p art ic ul ar ac co un ti ng m etho d c le arl y refl ect s i nc om e is a factua l que st io n. Sam

W . Em ers on Co . v. Co m m is si on er, 3 7 T.C. 1 06 3, 1 06 7 (1 96 2)
. To p rev ai l, the tax pa y er m us t es tabl is h tha t the Co m m is si on er ab us edhi s di sc ret io n i n c ha ng in g the m etho d o f acc ou nt in g. Prabe l v . Comm is si on er, 9 1 T.C. 11 01 , 11 12 (19 88 ), aff’d, 8 82 F.2d82 0 (3 d C ir. 1 98 9) . Butth e Co m m is si on er m ay no t ch an ge a ta xp ay er’s m etho d o f acc ou nt in g fr om anin co rrec t m etho d t o an ot he r in co rrec t m etho d. Id . Nor m ay th e Co m mis si on er ch an ge a ta xp ay er’s
m etho d o f acc ou nt in g “ [w]here atax pa y er’s m etho d o f acc ou nt in g i s cl earl y an acce pt ab le m etho d” an d c le arl y refl ect s i nc om e. Id
. On b rie f pe ti ti on ers ren ewedpre tri al m ot io ns to sh iftth e b ur de n o f pr oo f to
res po nd en t. Pet it io ne rs co nt en d tha t re sp on de nt ’s det erm in at io ns are ex ces si ve an d a rb itrary andth us jus ti fy th e b ur de n s hi ft. Se e Est at e o f Mi tc he ll v. Co m m is si on er, 2 50 F.3d69 6, 7 02 (9t h C ir. 2 00 1) , aff’g i n p art , vac at in g i n p art an d re m an di ng T.C. Mem o. 1 99 7- 46 1. Sp eci fic al ly, pe ti ti on ers all eg e, ci ti ng Gol de n S ta te Litho v. Co m m is si on er, T.C. Mem o. 1 99 8- 18 4, tha t re sp on de ntha s- 43 -

no t i de nt ifi edth e co rrec t m etho d o f acc ou nt in g o n wh ic h h e se ek s t o p la ce SHI, SHLP, an d Vi st an ci a. W e d is ag ree. Re sp on de ntis see ki ng to pl ace S HI, SHLP,
an d Vi st an ci a o n h is in te rp ret at io n o f th e co m pl et edco nt ractm etho d, d is cu ss edin
m or e d et ai l b el ow. Thu s the bu rd enof p ro of do es no t s hi ft i n the se cas es . II. Leg al Fram ewo rk A. Lon g- Term

Co nt ract s Gen eral ly Sect io n 4 60 go ve rn s h ow t ax pa y ers rep ort i nc om e fro m lo ng -te rm

co nt ract s. It g en eral ly pro vi de s tha t t axpay ers who rece iv e in co m e fro m lo ng -te rm

co nt ract s m us t ac co un t fo r th atin co m e th ro ug h the pe rcen ta ge of c om pl et io n m etho d. Se c. 46 0( a). Thi s m etho d e ss en ti al ly requ ire s a t ax pa y er t o re co gn iz e in co m e an d
ex pe ns es th ro ug ho utth e dur at io n o f a co nt ract . Sec. 4 60 (b ); Tu to r-Sa li baCo rp . v. Co m m is si on er, 1 15 T.C. 1, 4 (20 00 ). Bu t, b y anam en dm en t, the st atut e ex cep ts , in te r al ia , ho m e co ns tru ct io n c on tra ct s. Sec . 46 0( e)(1 )(A), (6 )(A) (a s amend edby th e Tech ni cal an d M is cel lane ou s R ev enue Act o f 19 88 , Pub . L. No. 10 0- 64 7, s ec. 50 41 (b )(1 ), 10 2 S ta t. at36 73 ). Sect io n 4 60 (f)(1 ) de fin es a lo ng -te rm co nt ractas “ any

co nt ractforth e m anuf actur e, bu il di ng , in st al lati on , or c on st ru ct io n o f pr op erty if s uc h c on ta ctis
no t co m pl et edwithi n the tax ab le y ear i n wh ic h s uc h c on tra ctis en te redin to .” The st atut e d oe s n otde fin e co m pl et io n, wh ic h i s t o b e d et erm in edon a co nt ract -- 44 -

by-con tra ctba si s, s ec. 1 .46 0- 1( f), In co m e Tax Reg s., b utth e reg ul at io ns pro vi de th ata co nt ractis co m

pl et edwhen itfir stm eet s o ne of two t es ts , sec . 1.4 60
- 1( c)(3 )(i ), In co m e Tax Reg s. Th es e te st s ar e co m m on ly kno wn as th e u se an d 95 % co m pl et io n t es t, an d the fin al co m pl et io n a ndacce pt an ce t es t. Und er the fir sttes t, the co nt ractis co m pl et edup on “ [u ]se of

th e subjec t
m at te r of th e co nt ractby the cu st om er fo r it s i nt en de d p ur po se (ot he r th anfor te st in g) an d a t l eas t 9 5 p erce ntof t he to ta l al lo cab le co nt ractco st s at tri bu tabl e to th e subjec t m at te r ha ve be enin cu rredby the tax pa y er”. Se c. 1.4 60 -1 (c)( 3) (i) (A), In co m e Tax Reg s. Un de r th e se co ndtes t, the co nt ractis co m pl et edup on “ [f]in al
co m pl et io n a ndacce pt an ce o f th e subjec t m at te r of th e co nt ract .” Sec. 1 .46 0- 1( c)(3 )(i )(B) , Inc om e Tax Reg s. As for th is lat te r te st , “ to de te rm in e whe th er fi na l
co m pl et io n a ndacce pt an ce o f th e subjec t m at te r of a co nt ractha ve oc cu rred , a ta xp ay er m

us t co ns id er al l re le va ntfact s an d c irc um st an ces .” Sec. 1 .46 0- 1( c)(3 )(i v) , Inc om e Tax Reg s. A furth er wri nk le to de te rm in in g wh ena ta xp ay er co m pl et es a co nt ractis th e ro le of s eco nd ary it em s. Tax pa y ers are t o app ly the tes ts to de te rm in e whe n a co nt ractis co m

pl et edun de r th e co m

pl et edco nt ractm etho d “ witho utreg ardto whe th er o ne or m or e se co nd ary it em s h av e b eenus edor f in al ly com

pl et edan d
acce pt ed .” Sec. 1 .46 0- 1( c)(3 )(i i), In co m e Tax Reg s. Inap pl y in g the 95 %- 45 -

co m pl et io n t es t, t ax pa y ers “ m us t s ep arat e th e p orti on of the gro ss co nt ractpri ce an d the all oc ab le co nt ractco st s at tri bu tabl e to th e in co m pl et e se co nd ary it em (s ) fro m th e co m pl et edco nt ract ”. Id
. B. Hom e Co ns tru ct io n C on tra ct s A tax pa y er m ay

acco un t fo r in co m e fro m ho m e co ns tru ct io n c on tra ct s u nd er th e co m pl et edco nt ractm etho d. Se c. 46 0( e). Tha t i s b ecau se sec ti on 46 0( e) pr ov id es th atth e p erce nt ag e o f co m pl et io n m etho d wi ll no t ap pl y to “ any ho m e co ns tru ct io n c on tra ct ”. A “ho m e co ns tru ct io n c on tra ct ” is 1 4
an y co ns tru ct io n c on tra ctif 8 0 p erce ntof t he est im at edto ta l co ntract co st s (a s o f th e cl os e o f th e ta xabl e y ear i n wh ic h the co nt ractwas en te redin to ) are reas on ab ly exp ect edto be att rib ut ab le to act iv it ie s refe rredto inpa rag rap h (4 ) with re sp ectto -- (i ) dwe ll in g u ni ts * * * co nt ai ne d i n b ui ld in gs co nt ai ni ng 4 o r fewerdwel li ng un it s * * * , and (ii ) im pr ov em en ts to real pro pe rty dir ect ly relat edto su chdwel li ng un it s an d l oc at edon th e si te of s uc h dwell in g u ni ts . Sec. 4 60 (e)( 6) (A). The “ act iv it ie s re ferr edto inpa rag rap h (4 )” ar e “bu il di ng , co ns tru ct io n, re co ns tru ct io n, o r reh ab il it at io n o f, orth e in st al la ti on of a ny int eg ral
co m po ne ntto , or i m

pr ov em en ts of, re al pro pe rty.” Sec. 46 0( e)(4 ).
Sec. 4 60 (e) a ls o c on ta in s an ex cep ti onforcert ai n o th er co ns tru ct io n 1 4 co nt ract s p ro vi de d tha t the tax pa y er m eet s a g ro ss rece ip ts tes t an d a nt ic ip at es th e co nt ractwil l b e co m

pl et edwithi n two years o f co nt ractco m m en cem en t. Sec
. 46 0( e)(1 )(B) . This sec ti on als o g iv es a m or e g en ero us pe rcen ta ge of c om pl et io n m etho d o f acc ou nt in g fo r res id en ti al co ns tru ct io n c on tra ct s wh ic h a re n otho m e co ns tru ct io n c on tra ct s. Sec . 46 0( e)(5 ).- 46 -

As the st atut e is writ te n andde pe nd in g o n the m ean in g o f th e wor d “ si te ”, ta xp ay ers su chas S HI, SHLP, andVis tanc iacanha ve tro ub le m eet in g the 80 % requi rem en t o f se ct io n 4 60 (e)( 6) (A). Thi s o ccu rs be cau se a si gn ifi can t p orti on of th e co nt ractco st s m ay

be attrib ut ab le to it em s n ot“ lo cat edon th e si te of s uc h dwe ll in g u ni ts ”, su chas d ev el op m en t i nf ras tru ctur e. The re gu la ti on s, h owe ve r, in st ru cta ta xp ay er t o “ in cl ud e[] inth e co stof t he dwel li ng un it s the ir a ll oc ab le sh are o f th e co stth atth e ta xp ay er re as on ab ly exp ect s t o i nc ur for an y co m m on im pr ov em en ts (e.g ., sewer s, ro ad s, cl ub ho us es ) th atbe ne fitth e dwell in g u ni ts an d th atth e ta xp ay er i s co nt ractua ll y ob li ga te d, o r requi redby law, to co ns tru ctwithi n th e tr actor t ract s o f la ndth atco nt ai n the dwel li ng un it s.” Se c. 1.4 60 -3 (b )(2 )(i ii ), In co m e Tax Reg s. Thu s, atlea stforth e p ur

po se of d et erm in in g wh ethe r th e co nt ractqu al ifi es as a ho m e co ns tru ct io n c on tra ctun de r se ct io n 4 60 (e), the tax pa y er i nc lu de s, fo r th e 8 0% t es t, co st s at tri bu tabl e to co m m onim pr ov em en ts inth e m an ne r di ct at ed by the reg ul at io ns . Peti ti on ers an d re sp on de ntdi sa gr ee, h owe ve r, as to whet he r th is reg ul at io n a ffec ts th e te st s i n s ect io n 1 .46 0- 1( c)(3 )(A) an d (B ), In co m e Tax Reg s., tha t d et erm in e whe n the tax pa y er co m pl et es th e co nt ractforth e p ur po se s o f de ci di ng whet he r itis a lo ng -te rm co nt ract .- 47 -

III. Ana lysis W e m us t d eci de whethe r SHI, SHLP, an d Vi st an ci a p ro pe rly repo rte d the ir in co m e fro m

th e sa le s o f ho m es inth ei r de ve lo pm en ts us in g the co m pl et ed
co nt ractm etho d. Re sp on de ntco nt en ds th aton ly the co nt ract s tha t cl os edintax y ears di ffer en t fr om

th e ta xabl e y ears th ey

were en te redin to qu al ify as l on g- te rm co nt ract s. Un de r res po nd en t’s i nt erp ret at io n o f th e co m pl et edco nt ractm etho d, SHI, SHLP, an d Vi st an ci a m us t re po rt i nc om e fro m

th es e lo ng -te rm

co nt ract s fo r th e y ears inwhi chth e co nt ract s cl os edinesc ro w. Resp on de nttak es th is po si ti on be cau se , inhi s v ie w, th e subjec t m at te r of th e co nt ractis th e h om e an d the lo t up on whi chitsi ts . Con se qu en tl y , each co ntractis co m pl et ed , withi n the m ean in g of sec ti on 46 0, i n the y ear i n wh ic h e sc ro w clo se s. Th aty ear i s wh enres po nd en t co nt en ds fin al co m

pl et io n a ndacce pt an ce o ccu rs . Forth e o th er co nt ract s, 1 5
res po nd en t wo ul d re qu ire SHI, SHLP, an d Vi st an ci a to acco un t fo r th e in co m e un de r th ei r no rm al m etho d o f acc ou nt in g. It h as be en25 y ears si nc e se c. 46 0( e)(1 )(A) an d (6 )(A) was en act edby the 1 5 Tech ni cal an d M is cel lane ou s R ev enue Act o f 19 88 , Pub . L. No.10 0- 64 7, s ec. 50 41 , 10 2 S tat. at36 73 , andap pa ren tl y de ve lo pm en t b ui ld ers , su chas S HI, SHLP, an d Vi st an ci a, m ay

ha ve us edth is m etho d s in ce 1 98 8. Th e ear li es t t ax y ear a t is su e in th es e cas es is 20 03 . Thatde lay inen fo rcem en t i s i m

m at eri al to ou r co ns id erat io n a s the Co m m is si on er i s n otbo un d b y hi s fa il ur e to en fo rce t he law i n anearl ie r y ear. Un it edSta te s v . W oo ds , 57 1 U.S. _ _, _ _, 1 34 S. Ct. 5 57 , 56 7 n .5 (2 01 3) ; Co or s v . Comm is si on er, 6 0 T.C. 3 68 , 39 5 (1 97 3) , aff’d, 5 19 F.2d12 80 (1 0t h C ir. 9 75 ).- 48 -

Pet it io ne rs are o f th e o pi ni on th atth e subjec t m at te r of th e co nt ract s i s br oa de r an d e nc om

pa ss es th e en ti re d ev el op m en t o r, inso m e in st an ces of l arg er de ve lo pm en ts , th e d ev el op m en t p ha se of wh ic h the ho m e is a pa rt. In supp ort, pe ti ti on ers co nt en d tha t a c on tra ctco m pr is es all do cu m en ts pro vi de d t o the bu y er, an y do cu m en ts ex pr es sl y

refe ren cedth erei n o r in co rp or at edth erei n b y law, an d
eas em en ts , res tri ct io ns , andothe r do cu m en ts reco rd edas e nc um br an ces on a ho m e pu rch as er’s t it le . Peti ti on ers ass ertth atth es e d oc um en ts co ll ect iv el y setforth th e rig ht s an d o bl ig at io ns of t he bu y er an d s el le r. Ther efo re, the y co nt en d tha t, o th er th ansec on da ry

it em s i f any , th e fi na l co m pl et io n a ndacce pt an ce d oe s n otoc cu r un ti l, as to th e p ha se or the de ve lo pm en t, the fin al roa d i s p av edan d the fin al bo nd is rel eas ed . Und er the ir i nt erp ret at io n, the us e an d 9 5% c om pl et io n t es t i s m etfir st whe n S HI, SHLP, andVis tanc iain cu r 95 % of t he ph as e’s orde ve lo pm en t’s co st s. Pet it io ne rs co nt en d tha t b ecau se th e 8 0% t es t fo r a h om e co ns tru ct io n c on tra ct in cl ud es th e al lo cab le sh are o f th e co st s o f co m m on im pr ov em en ts , th e 9 5% t es t al so m us t i nc lu de th es e co st s. Res po nd en t al so urg es analt ern at iv e th eo ry . Accor di ng to th is th eo ry , if we ho ldth atth e subjec t m at te r of th e co ntract s i s b ro ad er tha n the ho us e an d the lo t, we m us t ap pl y th e 9 5% c om

pl et io n t es t wi th ou t re ga rdto th e co st s at tri bu tabl e to co m m on im pr ov em en ts be cau se th ey are s eco nd ary it em s. Pet it io ne rs , ho wev er,- 49 -

co nt en d tha t the se co m

m on im pr ov em en ts are p artof the pri m ary subjec t m at te r of th e co nt ractno t s eco nd ary it em s an d tha t the y m ay in cl ud e su chall oc ab le co st s i n ap pl y in g the 95 % tes t. The in it ia l que st io n i s wh atdo cu m en ts are p artof t he co nt ract s. Un de r res po nd en t’s i nt erp ret at io n, the subjec t m at te r of th e co nt ract s i s the lo t an d the ho us e whi chth e b uyer(s ) pu rch as e. To s up po rt t hi s co nt en ti on , res po nd en t p oi nt s to th e p ur ch as e an d s al e ag reem en t as be in g the so le co ntractdo cu m en t. He u rg es us to fin d tha t St at e la w andth e wor di ng of t he co nt ractne ces sa ril y res tri ctth e co nt ractto on ly thi s d oc um en t. Pet it io ne rs , ho wev er, co nt en d tha t the sco pe of t he
co nt ract s ex ceed s the m ere “ br ic ks an d s ti ck s” an d e nc om pa ss es th e d ev el op m en t as a who le . In thi s v ei n, p et it io ne rs ass ertth at , forth e p ur po se s o f se ct io n 4 60 , th e co nt ractco ns is ts of t he pu rch as e an d s al e ag reem en ts as we ll as a ll do cu m en ts refe ren cedor i nc or

po rat edth erei n. Th is wou lden co m pa ss publ ic rep orts , CC& Rs , publ ic ly recor de d p la ts an d m ap s, p ub li c res ol ut io ns or c on di ti on s o f ap pr ov al , andho m eo wne rs ass oc ia ti on do cu m en ts . A. Wha t Co ns ti tu te s the Co nt ract 1. In te gr at io n C laus es Res po nd en t cl ai m s tha t b ecau se each of the res pe ct iv e p ur ch as e an d s al e ag reem en ts co nt ai ns anin te gr at io n c laus e, th e p ur ch as e an d s al e ag reem en ts- 50 -

co ns ti tu te th e en ti re co nt ract . Each p ur ch as e an d s al e ag reem en t s ta te s tha t the ag reem en t i s the so le an d e nt ire ag reem en t b etweenth e b uyer an d the sel le r. Co urts ha ve gi ve n i nt eg rat io n c laus es si gn ifi can t wei gh t wh enin te rp ret in g co nt ract s. See , e.g., Be ta co , Inc . v. Ces sn a Air craf t Co ., 10 3 F .3d12 81 , 12 83 (7t h Ci r. 19 96 ). Cal ifo rn iacas el aw ex pl ai ns th at“ ‘[t]he cru ci al is su e in de te rm in in g whe th er the re h as be enanin te gr at io n i s wh ethe r th e p art ie s i nt en de d the ir wri ti ng to serve as t he ex cl us iv e em bo di m en t o f th ei r ag reem en t.’” Grey v. Am . Mg m

t. Serv s., 1 39 Cal . Rpt r. 3d21 0, 2 13 (Ct . App . 20 12 ) (quo ti ng Mas te rs onv. Si ne , 65 Cal . Rpt r. 54 5, 5 47 (19 68 )). An Ari zo naco urt ex pl ai ne d: “ A com pl et el y in te gr at edco nt ractis a co ntractad op te d b y th e p art ie s as a co m

pl et e an d e xc lu si ve st at em en t o f th e te rm s o f th e co nt ract .” And ers on v. Pre ferr edSto ckFo odMkts ., In c., 85 4 P .2d11 94 , 11 97 (Ariz . Ct. Ap p. 1 99 3)
. Whi le we ag ree wi th res po nd en t tha t the pu rch as e an d s al e ag reem en ts do
co nt ai n i nt eg rat io n c laus es , we do no t co nc lu de th atth e p ur ch as e an d s al e ag reem en t al on e se rv es as t he ex cl us iv e em bo di m en t o f th e en ti re ag reem en t be twee n the pa rti es . Buyers o f ho m es fro m SHI, SHLP, an d Vi st an ci a are co ns ci ou sl y

pu rch as in g m or e th anth e “br ic ks an d s ti ck s” of t he ho m e. The pu rch as e an d s al e ag reem en t s pe ci fic al ly inc lu de s a c he ck li sten surin g tha t the pu rch as er re cei ve s the rel at eddo cu m en ts .- 51 -

Fo r th e two rep res en ta ti ve de ve lo pm en ts inAriz on a, Co un try Lane an d Vis tanc ia , th e p ur ch as e co nt ract s an d the clo si ng an d e sc ro w in st ru ct io ns in cl ud e a st at em en t d is cl os in g the pu rch as er’s ri gh t t o re cei ve an d re ada co py of th e de ve lo pm en t’s p ub li c rep ort b efo re s ig ni ng th e p ur ch as e ag reem en t. In cl ud edis
anatt ach edackno wled gm en t, s ig ni fie d b y th e p ur ch as er’s i ni ti al s an d s ig na tu re, o f th e rec ei ptan d o pp ortu ni ty to re ada co py of th e d ev el op m en t’s p ub li c rep ort. Fo r th e fi ve rep res en ta ti ve de ve lo pm en ts inCal ifo rn ia , th e p ur ch as e co nt ract s an d the clo si ng an d e sc ro w in st ru ct io ns in cl ud e Cal ifo rn iaDRE Form RE6 14 E as ev id en ce o f th e p ur ch as er’s rec ei ptof t he publ ic rep ort. The do cu m en t al so co nt ai ns th e si gn atur e o f th e p ur ch as er co nf irming th athe /s he ha s re adth e publ ic rep ort, i de nt ifi edby regi st rat io n n um be r an d d at e o f is su an ce. At tria l p et it io ne rs em

ph as iz edth atitis no t ju stth e h ou se bu t the li fes tyle th atSHI, SHLP, an d Vi st an ci a adve rti se an d s el l t o the ir p ur ch as ers . For t he rep res en ta ti ve de ve lo pm en ts SHI, SHLP, an d Vi st an ci a b ud ge te d a ndin cu rred si gn ifi can t i nd ire ctco st s wh enco m pa redto th e d ire ctco st s o f bu il di ng th e h om es . Purch as ers of h om es inth ei r de ve lo pm en ts were co ns ci ou s o f th e el ab or at e am en it ie s an d wo ul d h av e und ers to odth atth e p ric e th ey pa idfor a ho m e in cl ud ed th e am en it ie s o f th e d ev el op m en t. If a p ur ch as er d idno t wan t t o l iv e in on e o f th e pl an ne d d ev el op m en ts with i ts acco m pa nyin g a m en it ie s, i t i s l ik el y he or s he co ul d- 52 -

ha ve pa idm

uc h l es s fo r anothe rwis e co m pa rab le dwel li ng ou ts id e o f a de ve lo pm en t an d wi th no sel le r-p ro vi de d a m en it ie s. 1 6 Furth er ev id en ce tha t SHI, SHLP, an d Vi st an ci a were o bl ig at edto th ei r lo t pu rch as ers for

m uc h m or e th anth e p ur ch as e an d s al e ag reem en t s an s amenit ie s i s th e h efty pe rfo rm an ce b on ds th atwere re qu ire d b y Sta te an d m

un ic ip al law i n or de r to sec ur e th ei r pe rfo rm an ce wi th res pe ctto th e co m pl et io n o f th e co m

m on im pr ov em en ts ineachde ve lo pm en t. Inord er fo r th e p erfo rm an ce b on ds to be
ex on erat edth e o bl ig ees ha d t o app ro ve th e co m pl et io n o f th e am en ity

subjec t
m at te r. Hom eo wne rs ass oc ia ti on s fo r eac h o f th e rep res en ta ti ve de ve lo pm en ts as well as t he m

un ic ip al it ie s an d S ta te s i n wh ic h the de ve lo pm en ts were s itua te d were i de nt ifi edas o bl ig ees inth e p erfo rm an ce b on ds . Purc ha se rs au to m at ic al ly be cam e m em

be rs inth e h om eo wne rs ass oc ia ti on s, an d thu s ea chpurch as er h ad cert ai n ri gh ts as t o e nf

or cem en t o f th e b on ds vi s- a-v is th e h om eo wne rs as so ci at io n. SHI, SHLP, an d Vi st an ci a were a ls o re qu ire d b y Sta te law i n C al ifo rn iaan d Ariz on a to pro vi de a pu rch as er wi th a co py of th e p ub li c rep ort wh ic h d is cl os es to In di rectco st s i n, fo r ex am pl e, Park si de at R eu ni on , cou ldam ou ntto ov er 1 6 on e-fo urth of t he to ta l d ev el op m en t co st s. Oth er raw lan d d ev el op m en ts , su chas Tril og y at La Qu in taan d Vi st an ci a, ha d s im il arl y lar ge in di rectco st s. To be li ev e th atth e co ns um er h om eb uyer di d n otvi ew th e fru it s o f th es e ex pe nd itur es as a n in te gr al asp ectof the ir h om e p ur ch as e d eci si on strai ns cred ib il ity .- 53 -

th e h om eb uyer th e o bl ig at io ns im po se d o n the ho m eb uyer as we ll as S HI, SHLP,
an d Vi st an ci a wit h re sp ectto th e d ev el op m en t. SHI, SHLP, an d Vi st an ci a were requi redto ob ta in a si gn edackno wled gm en t fr om th e p ur ch as er tha t h e o r sh e h ad
rece iv edth e p ub li c rep ort, an d i n Ari zo nath e p ub li c rep ort s ta te s tha t the purch as e co nt ractis res ci nd ab le if the de ve lo pe r fai ls to pro vi de th e p ur ch as er wi th a co py of th e rep ort. The publ ic rep orts forth e two Ariz on a d ev el op m en ts als o c it e th e lo cat io ns of t he de ve lo pm en t m ap s, wh ic h i de nt ify the de ve lo pm en ts ’ co m m on area s an d i m

pr ov em en ts . The rep orts in di cat e th e d at es th e d ev el op er an ti ci pa te s co m pl et io n o f th e co m

m on areaim

pr ov em en ts an d fa ci li ti es as we ll as p ro vi di ng as su ran ces th atth e co m

m on im pr ov em en ts wil l b e co m

pl et ed
. The publ ic rep orts forth e fi ve de ve lo pm en ts inCal ifo rn iast at e th ateach pu rch as er wi ll rece iv e fee ti tl e to a lo t, m em be rs hi p i n the ho m eo wne rs as so ci at io n, an d ri gh t t o u se of t he co m m on area s. Each rep ort al so pro vi de s the de ve lo pe r’s es ti m at e o f whe n c omm on area s an d i m pr ov em en ts wil l b e co m

pl et e an d s tate s tha t ei th er es cro ws wi ll no t cl os e unt il co m pl et io n o f th e co m

m onarea s an d fa ci li ti es or b on ds ha ve be enpo st ed
. Evi de nc e o f th e h om e p ur ch as ers ’ ex tra -p ur ch as e an d s al e ag reem en t ob li ga ti on s ar e fo un d i n the CC&R s. SHI, SHLP, an d Vi st an ci a p ro vi de d a ll pu rch as ers with c op ie s o f th e d ecl arat io n o f CC& Rs forth e d ev el op m en ts in- 54 -

co nn ect io n wi th th e sa le s o f ho m es inth ei r de ve lo pm en ts , whi chpro vi de d the rig ht s an d re st ric ti on s wi th res pe ctto th e p ro pe rty purch as ed . They pr ov id edth e pu rch as ers with c op ie s o f th e CC& Rs at o r be fo re the ti m e o f ex ecu ti on of t he pu rch as e an d s al e ag reem en ts , andth e p ur ch as ers affi rm edrece ip t o f th e CC& Rs by sig ni ng ackno wled gm en ts inth e p ur ch as e an d s al e ag reem en ts or o th er re la te d do cu m en ts . W e d is ag ree wi th res po nd en t’s co nc lu si on th atth e in te gr at io n c laus e o f th e pu rch as e an d s al e ag reem en ts ne ces saril y ex cl ud es th es e d oc um en ts . Rath er, we ag ree wi th pe ti ti on ers th atinco ns tru in g the co nt ract s u nd er s ect io n 4 60 , th es e do cu m en ts sh ou ldbe an d i n fa ctare i nc or po rat edin to th e co ns tru ct io n p ur ch as e an d s al e co nt ract s. No t o nl y are the se do cu m en ts ex ch an ge d o r ackno wled ge d du rin g the si gn in g b y

th e p art ie s, b utth e p ur ch as e an d s al e ag reem en ts refe ren ce th es e d oc um en ts . W e co nc urwith re sp on de ntth atm ere r efer en ce t o a no th er d oc um en t d oe s no t m an da te in co rp or at io n o f th atdo cu m en t i nt o the co nt ract . See, e.g ., Uni te d Cal . Ban k v . Pru de nt ia l In s. Co . of Am ., 68 1 P .2d39 0, 4 11 (Ariz . Ct. Ap p. 1 98 3)
. Yet, the Ariz on a co urt o f ap pe al s s ub se qu en tl y st at edth at“ subs tant ia ll y co nt em po ran eo us in st ru m en ts wil l b e rea d t og ethe r to de te rm in e th e n atur e o f th e tra ns act io n b etweenth e p art ie s.” Pe arl l v . W il li am s, 7 04 P.2d13 48 , 13 51 (Ariz
.- 55 -

Ct . App . 19 85 ). Whi le no sp eci fic word in g i s re qu ire d t o i nc or po rat e an ot he r do cu m en t, the in co rp or at in g re fere nc e m us t b e cl ear andun equi vo cal an d “ m us t b e cal le d t o the att en ti on of t he othe r pa rty, he m us t co ns en t the ret o, an d the term s o f th e in co rp or at eddo cum en t m us t b e kno wn o r eas il y

av ai labl e to th e co nt ract in g pa rti es ”. Uni te d C al . Ban k, 6 81 P.2dat 4 20 . Here, th e h om eb uyers ac kn owl ed ge th atth ey have rece iv edan d re adth e p ub li c rep orts as we ll as t he CC&R s. No t on ly is the refe ren ce ca ll edto th e p ur ch as ers ’ at te nt io n, b utth ey co ns en t, an d the do cu m en t i s p ro vi de d t o the m by SHI, SHLP, or Vis tanc ia . W e b el ie ve , th eref or e, th atth e p ur ch as e an d s al e ag reem en ts in co rp or at e th e o th er re fere nc eddo cu m en ts , su chas the publ ic rep orts , th e CC& Rs , th e h om eo wne rs ass oc ia ti on do cu m en ts , an d e ve n the publ ic ly recor de d m ap s an d c on di ti on s o f ap pr ov al
. Cal ifo rn iaco urts ha ve rul es si m il ar t o Ari zo na ’s reg ard in g i nc or po rat io n b y refe ren ce. See Avery

v. In te gr at edHeal th care Hol di ng s, In c., 15 9 C al . Rpt r. 3d 44 4, 4 57 (Ct . App . 20 13 ) (“ ‘For the term s o f an ot he r do cu m en t t o b e in co rp or at ed in to th e d oc um en t ex ecu te d b y th e p art ie s the refe ren ce m us t b e cl ear and
un equi vo cal , th e ref

eren ce m us t b e cal le d t o the att en ti on of t he othe r party andhe
m us t co ns en t the ret o, an d the term s o f th e in co rp or at eddo cu m en t m us t b e kno wn oreas il y av ai labl e to th e co nt ract in g p art ie s.’” (qu ot in g Wol sc hl ag er v . Fid . Nat’l Tit . Ins . Co., 4 Cal . Rpt r. 17 9, 1 84 (Ct . App . 20 03 )). Thu s, we b el ie ve si m il arl y- 56 -

th atth e co ntract s fo r sa le of h om es inCal ifo rn iain co rp or at edth e ref eren ced do cu m en ts . InCo lo rad o, a p ub li c rep ort i s n otrequi red . Butho m eb uyers s ti ll ackno wled ge d re cei ptof h om eo wne rs ass oc ia ti on do cu m en ts , whi chin cl ud ed
m ap s an d l eg al de sc rip ti on s o f th e d ev el op m en t, co nt ig uo us arearep orts , whi ch in cl ud edm ap s, an d ali stof e as em en ts . AndCo lo rad o c ou rts tak e a v ie w si m il ar to th os e o f Cal ifo rn iaan d Ari zo naon in co rp or at io n b y refe ren ce. See Taub m an Ch erry CreekSh op pi ng Ctr ., LLC v. Neim an -Ma rcu s Grp ., Inc ., 25 1 P .3d10 91 , 10 95 (Co lo . App . 20 10 ) (“ Purs ua ntto ge ne ral co nt ractlaw, fo r anin co rp or at io n by referen ce t o b e eff

ect iv e, ‘it m

us t b e cl ear t ha t the pa rti es to th e ag reem en t h ad kn owl ed ge of a ndass en te d t o the in co rp or at edterm s.’” (qu ot in g 1 1 S am ue l W il li st on& Ri ch ardA. Lord , Con tra ct s, s ec. 3 0.2 5, at23 4 (4 th ed . 19 99 )). W e th in k i t cl ear t ha t the pu rch as e an d s al e ag reem en ts inCo lo rad o a ls o i nc or po rat ed th e ref eren ceddo cu m en ts . Res po nd en t, h owe ve r, al so cit es Treo @ Ket tn er Ho m eo wne rs Ass ’n v. Supe rio r Co urt, 8 3 C al . Rpt r. 3d31 8 (C t. Ap p. 2 00 8) , as s tand in g fo r th e pr op os it io n tha t CC &Rs can no t b e co ns id eredco nt ract s. Bu t Treo he ldon ly tha t th e “ de ve lo pe r-wri tt enrequi rem en t i n a n a ss oc ia ti on ’s CC&R ’s th atall di sp ut es be twee n o wne rs an d the de ve lo pe r an d d is pu te s b etweenth e as so ci at io n a ndth e- 57 -

de ve lo pe r be de ci de d b y

a ge ne ral jud ic ia l re fere nc e is no t a wri tt enco nt ract ” be cau se itvi ol at eda co ns ti tu ti on al rig htto a jury tria l. Id . at 3 26 . Furt he r, res po nd en t fa il edto ful ly con si de r th e im pa ctof P in na cl e Mu se um Tower As s’n v
. Pi nn acl e Mkt. Dev . (US), LLC, 28 2 P .3d12 17 (Cal . 20 12 ). The Cal ifo rn iaSupr em e Co urt i n P in na cl e d et erm in edth atCC&R s refe ren cedinpu rch as e an d s al e ag reem en ts were b in di ng on th e in di vi du al pu rch as ers as we ll as t he ho m eo wne rs ass oc ia ti on . Id. at12 35 . The co urt di st in gu is he d Tre o a s v oi di ng th e jury tria l wai ve r in th os e CC& Rs as un co ns ti tu ti on al , wher eas Pin na cl e in vo lv edanag reem en t t o a rb itrat e, whi chis fav or edby pub li c p ol ic y . Id. at12 31
. Res po nd en t al so ig no res th e m ul ti tu de of c as es inwhi chCal ifo rn iaco urts ha ve ch arac te riz edCC&R s as co nt ract s, i nc lu di ng th os e b etweenth e d ev el op er an d the ho m eo wne rs ass oc ia ti on . See, e.g ., Vill a Mi lano Hom eo wne rs Ass ’n v. Il Dav or ge , 10 2 C al . Rpt r. 2d1, 4 -5 (Ct . App . 20 00 ) (co ns tru in g C C&R s, t o the
ex te ntth atth e p ur ch as ers ha d c on st ru ct iv e n ot ic e, as a co nt ractbe twee n the pa rti es an d c it in g c as es wher e CC& Rs ha ve be enco ns tru edas c on tra ct s)
. 1 7 Ariz on a co urts have he ldth atCC&R s ar e co nt ract s “ ‘betweenth e 1 7 subd iv is io n’s p ro pe rty owne rs as awho le an d the in di vi du al lo t o wne rs .’ ” Horto n v. M it ch el l, 2 9 P .3d87 0, 8 72 (Ariz . Ct. Ap p. 2 00 1) (qu ot in g Ari z. Bi lt m or e Est at es Ass ’n v. Teza k, 8 68 P.2d10 30 , 10 31 (Ariz . Ct. Ap p. 1 99 3) ). Res po nd en t (co nt in ue d...)- 58 -

SHI, SHLP, an d Vi st an ci a an d the buy ers of t he ir h om es un de rs to odan d be li ev edth atth e p art ie s h adco nt ract edfor th e en ti re l ife st y le of t he de ve lo pm en t an d i ts am en it ie s. Th e p ur ch as e an d s al e ag reem en t i s n otth e ex cl us iv e em bo di m en t o f th atun de rs tand in g. Co ns eque nt ly, th e in te gr at io n c laus es do no t li mitth e en ti re co nt ractto th e n ak edpu rch as e an d s al e ag reem en t.

2. St at e Laws Go ve rn in g R eal Pro pe rty Sales Res po nd en t fu rth er co nt en ds th atSta te laws reg ard in g re al pro pe rty sal es supp ort h is po si ti on th atth e co nt ractsubjec t m at te r co ns is ts on ly of th e h ou se , th e lo t, an d i m

pr ov em en ts to th atlo t. Fo r in st an ce, the Cal ifo rn iaCiv il Co de pr ov id es : “ A real pro pe rty sal es co nt ractm ay no t b e tr an sf

erre d b y th e fee own er of th e rea l p ro pe rty un le ss acco m pa ni edby a tran sf

er o f th e rea l p ro pe rty whic h i s th e subjec t o f th e co nt ract , andreal pro pe rty m ay no t b e tr an sf

erre d b y th e fee
own er the reo f un le ss acco m pa ni edby an as si gn m en t o f th e co nt ract ”, Cal . Civ
. (...co nt in ue d) 1 7 ci te s Ho rto n fo r th e p ro po si ti on th ata CC& R is no t a c on tra ctbe twee n a ho m eb ui ld er an d abu y er. Bu t we ar e n otaware o f an y cas el aw inAriz on a o r Co lo rad o tha t wo ul d p rev en t an own er o r a h om eo wne rs ass oc iati onfro m bri ng in g su itag ai ns t a d ev el op er fo r vi ol at in g C C&R s. InCo lo rad o thi s m ay be be cau se Co lo rad o s ta tu te s s pe ci fic al ly gran t h om eo wne rs ass oc ia ti on s s tand in g t o b rin g co ns tru ct io n d efec t cl ai m s o n b eh al f of in di vi du al own ers for

un it s an d c omm on area s ev enif the CC&R s d o n otau th or iz e su cha su it . See Heri ta ge Vil la ge Owner s As s’n, In c. v. Go ld enHeri ta ge Inv es to rs , Ltd ., 89 P.3d51 3, 5 14 -5 15 (Co lo . App . 20 04 ) (ci ti ng th e Co lo rad o C omm on Int eres t Own ers hi p Act , Col o. Rev . Stat. s ecs . 38 -3 3.3 -1 01 , et s eq .).- 59 -

Co de sec . 29 85 .1 (West20 12 ), an d “ [a] real pro pe rty sal es co nt ractis an ag reem en t i n wh ic h o ne pa rty agre es to co nv ey ti tl e to real pro pe rty to a no th er pa rty up on th e sa ti sf

act io n o f sp eci fie d c on di ti on s s etforth inth e co nt ract ”, id
. se c. 29 85 (a) (West20 12 & Supp . 20 14 ). Co lo rad o c ourts ha ve cal le d the real est at e th e subjec t m at te r of real est at e co nt ract s an d h av e n ot edth atwhen th e co nt ractis si gn ed , equ it ab le ti tl e imm ed ia te ly tran sf

ers to th e p ur ch as er al th ou gh nake d l eg al ti tl e rem ai ns with the
se ll er. Dwy er v . Dis t. Co urt, Si xt h J ud ic ia l Di st ., 53 2 P .2d72 5, 7 27 (Co lo . 19 75 ). AndAriz on a st atut es de fin e a rea l es ta te sal es co nt ractas “ anag reem en t i n wh ic h
on e p arty ag rees to co nv ey

ti tl e to real est at e to an ot he r party up on th e sa ti sf act io n of sp eci fie d c on di ti on s s etforth inth e co nt ract .” Ariz . Rev . Sta t. s ec. 3 2- 21 01 (4 9) (2 01 2) (W es t). Th us , acco rd in g t o re sp on de nt , inAriz on a, Co lo rad o, an d Cal ifo rn iath e subjec t o f a rea l es ta te co nt ractis th e rea l es tate be in g tran sf erre d. Bu t i n C al ifo rn ia , th e le gi sl atur e h as als o d efi ne d re al pro pe rty to i nc lu de

“ [t]ha t wh ic h i s i nc id en ta l o r ap pu rte na ntto lan d” . Cal. C iv . Cod e se c. 65 8( 3) (West 2 00 7) . The Co lo rad o l eg is la tu re d efi ne s re al est at e to in cl ud e “ ot he r im pr ov em en ts an d i nt eres ts th at , by cu st om , us ag e, orlaw, p as s wi th a co nv ey an ce of lan d tho ug h n otde sc rib edinth e co nt ractof s al e o r in st ru m en t o f co nv ey an ce.” Co lo . Rev . Sta t. 3 8- 33 .3-1 03 (2 5) (20 13 ). Andth e Ari zo naleg is la tu re al so- 60 -

in cl ud es withi n the de fin it io n o f rea l es tate “ in te res ts whi chby cus to m , us ag e o r law pas s wi th a co nv ey an ce o f landth ou gh no t d es cri be d i n the co nt ractof s al e o r in st ru m en t o f co nv ey an ce.” Ari z. Rev . Stat. Ann. 3 3- 12 02 (1 9) (20 07 ) (West ). W e th eref or e fi rm ly reject re sp on de nt ’s con te nt io n tha t St at e la w def in it io ns of r eal
es ta te co nt ract s fo recl os e u s fr om in cl ud in g the ab ov e-re fere nc eddo cu m en ts as a n in te gr al pa rt o f th e h om e p ur ch as e co nt ract s. Res po nd en t al so advanc es th e st atut es of r ep os e fro m th e th ree S ta te s as supp orti ng hi s p os it io n tha t the co nt ract s wer e co m pl et edat the clo se of e sc ro w. The se Sta te st atut es ess en ti al ly pla ce a t im e li m iton a ho m eb uyer’s rig htto rai se cl ai m s ag ai ns t b ui ld ers or d ev el op ers . In Ari zo na , th e st atut e o f rep os e b eg in s up on “ subs tant ia l co m

pl et io n o f th e im

pr ov em en t t o re al pro pe rty”. Id. s ec. 1 2- 55 2( A) (2 00 3) (W es t). Co lo rad o a ndCal ifo rn iast atut es co nt ai n s im il ar l an gu ag e. Cal . Civ . Pro c. Co de sec . 33 7.1 5( a), (g ) (West20 06 ); C ol o. Re v. St at . sec . 13 -8 0- 10 4( 1) (a) (2 01 3) . The Ca li fo rn iast atut e d efi ne s “ subs tant ia l co m pl et io n” to m eanth e fi rs t oc cu rren ce o f: “ (1 ) The da te of f in al in sp ect io n b y

th e ap pl ic ab le publ ic ag en cy . (2 ) The da te of r eco rd at io n o f a v al idno ti ce o f co m pl et io n. (3 ) The da te of u se or oc cupa ti on of t he im

pr ov em en t. (4 ) One y ear a fte r te rm in at io n o r ces sa ti on of
work o n the im

pr ov em en t.” Ca l. Ci v. Pr oc . Cod e se c. 33 7.1 5( g) . The Ari zo na- 61 -

st atut e d efi ne s the term

“ subs tant ia l co m

pl et io n” as t he da te th e o wne r oroc cupa nt fir stus es th e im

pr ov em en t, the im

pr ov em en t i s fi rs t av ai labl e fo r us e aft er co m pl et io n, o r up on fin al in sp ect io n i f requi red . Ariz. Re v. St at . Ann . sec . 12
- 55 2( E) (2 00 3) (W es t). Th e Co lo rad o s ta tu te is si le ntas t o the m ean in g o f
subs tant ia l co m

pl et io n, b utCo lo rad o c ou rts have in di cat editm ean s atlea stth e is su an ce o f a certi fic at e o f oc cupa nc y . Shaw Con st r., LLC v. Uni te d B ui ld er Serv s., In c., 29 6 P .3d14 5, 1 55 -1 56 (Co lo . App . 20 12 ). W e co nc lu de th atres po nd en t’s em ph as is on th e st atut es of r ep os e is
m is pl aced . Thes e st atut es de te rm in e th e ti m e fro m th e d at e o f co m

pl et io n o f an im pr ov em en t wh ic h i s af

fo rd edto th e p ur ch as er t o b rin g s ui t fo r co ns tru ct io n de fect s. Ineffe ct , th ey

op erat e li ke a st atut e o f li m it at io n. So , inth e cas e o f ho m es , th e st atut es wou ldne ces sa ril y run , forex am

pl e, fro m th e is su an ce o f a cert ifi cat e o f habi tabi li ty if th atis th e ear li es t trig ge rin g e ve nt . Buta cert ifi cat e o f
oc cupanc y

fora pa rti cu lar ho m e wou ldhave at m os t a l im it edim pa cton a ho m eo wne rs ass oc iati on ’s hypot he ti cal cau se of a ct io n a ga in stSHI, SHLP, or Vis tanc iafora de fectinanam en ity th ey ha d c on st ru ct ed
. Res po nd en t al so co nt en ds th atSHI, SHLP, an d Vi st an ci a sh ou ldno t b e al lo wedto ho ldth ei r ho m es ou t as co m pl et e fo r th e p ur

po se s o f ob ta in in g cert ifi cat es of o ccupanc y un de r St at e la w whi le si m ul tane ou sl y

rep res en ti ng to th e- 62 -

Fed eral Gov ern m en t tha t the sal es are n otco m pl et e. Res po nd en t’s co nt en ti on la ck s m eri t. The subjec t m at te r of th e co nt ractis no t l im it edto th e h ou se an d the lo t, an d re sp on de ntis co m pa rin g two d iff

eren t thi ng s. W e co nc urwith p et it io ne rs th atres po nd en t’s i nt erp ret at io ns of t he rel ev an t St at e le ga l d efi ni ti on s o f rea l es ta te an d the st atut es of r ep os e are to o n arro w. Whe n v ie wedinpro pe r co nt ex t, the Sta te laws do no t n eces sa ril y res tri ctth e subjec t m at te r of

a real est at e co nt ractto jus t a h ou se an d the lo t upo n wh ic h i t si ts . Res po nd en t’s an al y si s i s s im pl is ti c an d s ho rt s ig ht ed ; i t d oe s n ot ackno wled ge th e co m

pl ex rel at io ns hi ps crea te d b y th e p ur ch as e an d s al es ag reem en t, es pe ci al ly SHI’ s, SHLP’s, an d Vi st an ci a’s ob li ga ti on s tha t co nt in ue lo ng aft er the fir stho m e is bu il t. B. Subjec t M at te r of

th e Co nt ract s Bec au se we de te rm in e th at , forth e p ur po se s o f as cert ai ni ng th e p ro pe r us e of th e co m pl et edco nt ractm etho d o f acc ou nt in g a s ap pl ie d t o re si de nt ia l h om e co ns tru ct io n, s up ra, the co nt ractco ns is te d o f m or e th anth e p ur ch as e an d s al e ag reem en t, we m

us t n ow ad dr es s the subjec t m at te r of th e co ntract . See s ec. 1.4 60 -1 (c)( 3) (i) , Inc om e Tax Reg s. Inres po nd en t’s v ie w, th e subjec t m at te r of th e co nt ractco ns is ts so le ly of th e h ou se , th e lo t, an d i m pr ov em en ts to th e lo t. Un de r th is vi ew, SHI, SHLP, an d Vi st an ci a co m pl et e th ei r co nt ract s wh enesc ro w clo se s- 63 -

be cau se at tha t p oi ntth e fi na l co m pl et io n andacce pt an ce t es t i s m et . See s ec. 1.4 60 -1 (c)( 3) (B), In co m e Tax Reg s. Inco nt ras t, p et it io ne rs ass ertth atth e subjec t
m at te r of th e co nt racten co m

pa ss es th e d ev el op m en t i n i ts en ti rety . Und er thi s vi ew, SHI, SHLP, an d Vi st an ci a co m pl et e th ei r co nt ract s fo r th e p ur po se s o f
se ct io n 4 60 when th ey

in cu r 95 % of t he all oc ab le co st s at tri bu tabl e to th e subjec t
m at te r of th e co nt ract , whi chis th e d ev el op m en t as a who le , andth e h om eb uyers us e th e subjec t m at te r. See s ec. 1 .46 0- 1( c)(3 )(A), In co m e Tax Reg s. Pet it io ne rs co nt en d tha t the fin al co m pl et io n a ndacce pt an ce t es t i s m eton ly whe n the las t ro adis pa ve d a ndth e fi na l b on d i s re le as ed
. The reg ul at io ns acco m

pa nyin g s ect io n 4 60 ex pl ic it ly ackn owl ed ge th atth e subjec t m at te r of

a ho m e co ns tru ct io n c on tra ctex te nd s b ey on d the co ns tru ct io n o f a h om e. See s ec. 1 .46 0- 3( b) (2 )(i ii ), In co m e Tax Reg s. Whende te rm in in g wh ethe r a co nt ractqu al ifi es as aho m e co ns tru ct io n c on tra ct , th e ta xp ay er t ak es in to acco un t the to ta l co st s o f dwe ll in g u ni ts , im pr ov em en ts to th e rel at edreal pro pe rty atth e si te of t he dwel li ng un it , andth e “ al lo cab le sh are o f th e co stth atth e ta xp ay er re as on ab ly exp ect s t o i nc urforany co m m on im pr ov em en ts ”. Id
. Res po nd en t co nt en ds th atth is in cl us io n i s s ol el y for th e p ur po se s o f de te rm in in g wh ethe r th e ta xp ay er m eet s the 80 % tes t, wh ic h d et erm in es whet he r th e co nt ractinqu es ti on is a ho m e co ns tru ct io n c on tra ct . Und er thi s the ory , a- 64 -

ta xp ay er co m

pu te s the 95 % co m

pl et io n t es t, fo r whi chth e ta xp ay er u se s as a pa rt of th e d en om in at oron ly “ to ta l al lo cab le co ntractco st s at tri bu tabl e to th e subjec t
m at te r”, s ec. 1 .46 0- 1( c)(3 )(i )(A), In co m e Tax Reg s., wit ho utreg ardto co st s al lo cab le to co m

m on im pr ov em en ts . But , as p et it io ne rs po in t o ut , th e reg ul at io ns al so st at e th at , inde te rm in in g wh ena co ntractis be gu n a ndco m pl et ed , “ a ta xp ay er m us t co ns id er al l re le va ntall oc ab le co nt ractco st s i nc urredan d a ct iv it ie s pe rfo rm edby its el f, by relat edpa rti es on it s b eh al f, an d b y th e cu st om er, tha t ar e in ci de ntto or n eces sa ry

forth e lo ng -te rm

co nt ract .” Sec. 1 .46 0- 1( c)(1 ), In co m e Tax Reg s. Acco rd in g t o thi s i nt erp ret at io n, b ecau se th e sa le pri ce o n aho m e co ns tru ct io n c on tra ctin cl ud es anall oc ab le sh are o f th e co stof c omm on im pr ov em en ts , sec . 1.4 60 -3 (b )(2 )(i ii ), In co m e Tax Reg s., the n the to ta l al lo cab le
co nt ractco st s m

us t al so in cl ud e th e al lo cab le sh are o f co m m on im pr ov em en t co st s. Giv enth e d iv erg en t p os it io ns , th e p art ie s as k the Co urt t o i nt erp retth is
as pe ctof t he reg ul at io ns . 1 8 Im pl ic itinth e p art ie s’ po si ti on s i s tha t the reg ul at io n i s v al idan d e nt it le d 1 8 to de fere nc e und er Ch ev ro n U.S.A. In c. v. Natur al Res . Def. Co un ci l, In c., 46 7 U.S. 83 7 (1 98 4) . Thes e p os it io ns are u nd ers tand ab le inth e li gh t o f adm in is tra ti ve law go ve rn in g d efer en ce t o re gu la ti on s, M ay o F ou nd . forMed . Edu c. & Res earc h v. Un it edSta te s, 5 62 U.S. __ _, 1 31 S. Ct. 7 04 (20 11 ), an d the co ng res si on al di rect iv e to th e Sec ret ary to pro m ul ga te reg ul at io ns co nc ern in g a cco un ti ng for lo ng -te rm co nt ract s, s ec. 4 60 (h ); s ee Advo , Inc . & Subs . v. Co m m is si on er, 1 41 T.C. __ _, _

__(sl ip op . at 3 9 n .18 ) (Oct . 24 , 20 13 ). Bu t cf . Uni te d S tate s v . Hom e

(co nt in ue d...)- 65 -

As an in it ia l m at te r, we m us t as k wh atde fere nc e, if an y , we sh ou ldgi ve to res po nd en t’s i nt erp ret at io n o f th e reg ul at io ns . Neithe r party app ears to ad dr es s th is is su e. Res po nd en t ap pe ars to be li ev e th atno su chin qu iry is n eces sa ry be cau se th e reg ul at io n i s cl ear o n i ts face . Whi le he co nc ed es th at“ [t]he reg ul at io ns do no t d efi ne th e p hr as e ‘sub ject m at te r of

th e co nt ract ’”, he al so co nt en ds th atwe sh ou ldgi ve th os e wor ds th ei r “ or di na ry , con te m po rary m ean in g” , im

pl y in g tha t n o a m

bi gu ity inth e reg ul at io n e xi st s. Pet it io ne rs als o d o n otad dr es s o r rai se th e is su e o f whe th er an d t o wh at ex te ntwe sh ou ldde fer t o re sp on de nt ’s in te rp ret at io n o f th e reg ul at io ns . But , pe ti ti on ers ’ br ie fs are re pl et e wit h re fere nc es to res po nd en t’s “ li ti ga ti ng po si ti on ”, pr es um ab ly a referen ce t o p rece de ntinwhi chwe ha ve de cl in edto gi ve de fere nc e to li ti ga ti ng po si ti on s. See , e.g., Garn et t v . Comm is si on er, 1 32 T.C. 36 8, 3 81 (2 00 9) (ci ti ng Gen. Dynam ic s C or p. & Subs . v. Co m

mis si on er, 1 08 T.C. 10 7, 1 20
- 12 1 (1 99 7) ); s ee al so Str omm e v . Comm is si on er, 1 38 T.C. 21 3, 2 23 n.2 (20 12 ) (Ho lm es , J., co nc urrin g) ; Pi erre v. Co m m is si on er, 1 33 T.C. 24 , 40 -4 1 (2 00 9) (Co he n, J ., con cu rri ng ), supp le m en te d b y T.C. Mem o. 2 01 0- 10 6. (...co nt in ue d) 1 8 Co nc ret e & Supp ly, LLC, 56 6 U.S. _

__ , 13 2 S . Ct. 1 83 6 (2 01 2) . Like wis e, as to Adm in is tra ti ve Pro cedur es Act re qu ire m en ts , see Dom in io n R es ., Inc . v. Un it ed St at es , 68 1 F .3d13 13 (Fed . Cir . 20 12 ), Co he n v . Uni te d S ta te s, 6 50 F.3d71 7 (D.C. Ci r. 20 11 ), an d B urks v. Un it edSta te s, 6 33 F.3d34 7 (5 th Cir . 20 11 ).- 66 -

Pet it io ne rs us e th e te rm

“ li ti ga ti ng po si ti on ” p res um ab ly in an att em ptto di st in gu is h the curren t s etof f act s fr om th atof Au er v . Rob bi ns , 51 9 U.S. 4 52 , 46 1 (1 99 7) , inwhi chth e Supr em e Co urt d eferredto anag en cy ’s in te rp ret at io n o f it s own reg ul at io ns ex pr es se d i n a n a m ic us bri ef re qu es te d b y th e Co urt. Gen eral ly,
co urts do no t h av e to de fer t o s uc h l it ig at in g p os it io ns th atare u ns up po rte d b y reg ul at io ns , rul in gs , or a dm in is tra ti ve pra ct ic e. Bo wenv. Geo rg et own Uni v. Hos p., 4 88 U.S. 20 4, 2 12 (19 88 ). Res po nd en t d oe s n otcla im th athi s p os it io n i n th es e cas es co ns ti tu te s “ fai r an d c on si de redjud gm en t o n the is su e” ra th er tha n “ a po stho c rat io na li zat io n fo r pa stag en cy act io n” . Mas sa ch us et ts v. Se be li us , 63 8 F.3 d 2 4, 3 4 (1 stCir . 20 11 ) (ci ti ng Ch as e Ban k USA, N.A. v. Mc Co y , 56 2 U.S.

__ _, _

__ , 13 1 S . Ct. 8 71 , 88 1 (2 01 1) ). Thu s, re sp on de ntdo es no t ar gu e h is po si ti onis en ti tl edto an y sp eci al de fere nc e, an d we a cco rditno ne . Inm at te rs of r eg ul at ory

co ns tru ct io n, the rul es of s ta tu to ry co ns tru ct io n ap pl y . Calt ex Oil Ventur e v . Comm is si on er, 1 38 T.C. 18 , 34 (20 12 ). The s tarti ng po in t fo r in te rp ret in g ast atut e o r a reg ul at io n i s i ts pl ai n a ndord in ary m ean in g un le ss su chanin te rp ret at io n “ wou ldpro du ce ab su rdor u nr eas on ab le res ul ts .” Uni onCarb id e Co rp . v. Co m m is si on er, 1 10 T.C. 37 5, 3 84 (19 98 ). Und efi ne d
wor ds tak e th ei r “ or di na ry , con te m po rary, com

m on m ean in g.” Hewlet t-P ack ard Co . & Co ns ol . Sub s. v . Comm is si on er, 1 39 T.C. 25 5, 2 64 (20 12 ). “ Subjec t- 67 -

m at te r” i s n otde fin edby the reg ul at io ns or the st atut e. Acco rd in g t o re sp on de nt th e p la in m ean in g o f “ subjec t m at te r of th e co nt ract ” m ean s o nl y th e h ou se , th e lo t, an d i m pr ov em en ts on th atlo t. Pet it io ne rs , ho wev er, co nt en d tha t the term “ subjec t
m at te r of th e co nt ract ” m

us t b e v ie wedinth e li gh t o f th e reg ul at ory de fin it io n o f a ho m e co ns tru ct io n c on tra ct . W e d is ag ree wi th th e b as ic pre m is e o f res po nd en t’s co nt en ti on . “ Subjec t
m at te r of th e co nt ract ” d oe s n otinour vi ew ha ve th e p la in m ean in g h e co nt en ds
. As we co nc lu de d abo ve , SHI’s, SHLP’ s, an d Vi st an ci a’s co nt ract s ea ch
en co m pa ss m or e th anjus t the ho us e, th e lo t, an d the im pr ov em en ts to th e lo t. If we were t o a sc rib e a p la in m ean in g t o the term , th enth e subjec t m at te r of th e co nt ract s wo ul d i nc lu de th e co m m on im pr ov em en ts . Furth er s up po rti ng th e v ie w th atth e reg ul at io n i s n otas n arro w as res po nd en t co nt en ds is th e co nt ex t o f th e reg ul at ory sch em e g en eral ly. In
co ns tru in g the reg ul at io n, we d o n otjus t l oo k at the word s o r ph ras es inis ol at io n, bu t ra th er we re adth es e wor ds an d p hr as es inth ei r co nt ex t an d wi tha vi ew to th ei r pl ace i n the ov eral l s ta tu to ry sch em e. FDA v. Bro wn & W il li am so n To ba cco Co rp ., 52 9 U.S. 1 20 , 13 3 (2 00 0) . Thu s, we l oo k a t the co nt ractco m pl et io n t es ts in
se ct io n 1 .46 0- 1( c)(3 ), In co m e Tax Reg s., i n the co nt ex t o f th e en ti re s ect io n 4 60- 68 -

reg ul at ory

sch em e, in cl ud in g s ect io n 1 .46 0- 3, In co m e Tax Reg s., co nc ern in g l on gte rm co ns tru ct io n c on tra ct s, an d, o f co ur se , th e st atut e it se lf. 1 9 The li tt le leg is la ti ve hi st ory th atex is ts supp orts ou r co nc lu si on s. Be fo re 1 9 19 86 tax pa y ers co ul d a cco un t fo r lo ng -te rm co nt ract s u nd er wh atis kn own as t he co m pl et edco nt ractm etho d o r th e p erce nt ag e o f co m pl et io n m etho d. Se e se c. 44 6( c) unt il 19 65 , th ensec . 45 1 (1 95 4 a s amend ed ), an d s ec. 1 .45 1- 3( a), In co m e Tax Reg s. (1 98 6)
. In19 86 , Con gr es s b eg anto cu t b ackon th e co m pl et edco nt ractm etho d, al lo win g o nl y

60 % of r ev enue to be de ferr edun de r th is m etho d. Tax Refo rm Act of 19 86 , Pub . L. No. 99 -5 14 , sec . 80 4( a), 1 00 Sta t. at23 58 . In 1 98 7 thi s pe rcen ta ge was re du cedto 30 %. Om ni bu s B ud ge t Re co nc il iati on Act o f 19 87 , Pub. L. No. 1 00 -2 03 , sec . 10 20 3, 1 01 Sta t. at13 30 -3 94 . In 1 98 8 C on gr es s fu rth er sc al edba ckth e am ou ntof i nc om e th atco ul d b e d eferredun de r th e co m pl et ed co nt ractm etho d. TAMRA s ec. 5 04 1. By 198 9 l on g- te rm co nt ract s h adto be rep orte d u nd er the pe rcen ta ge of c om pl et io n m etho d. Om

ni bu s B ud ge t Rec on ci li at io n Actof 1 98 9, Pub. L. No. 1 01 -2 39 , sec . 76 21 (a), 1 03 Sta t. at23 75 . Co ng res s ad de d the ex cep ti on forho m e co ns tru ct io n c on tra ct s fr om th e pe rcen ta ge of c om

pl et io n m etho d o f acc ou nt in g a s anin te nd edrel ie f m eas ur e in 19 88 as p artof TAM RA. Sen at orDenn is DeCo nc in i an d R ep res en ta ti ve Ric ha rd T. Schu lz e eac h p ro po se d i de nt ic al am en dm en ts to th e res pe ct iv e Sen at e an d Hou se ve rs io ns of t he bi ll . S. 26 94 , 10 0t h C on g. (1 98 8) (te xtat 1 34 Co ng . Rec. 20 86 2 (Au g. 8 , 19 88 )); H.R. 51 51 , 10 0t h C on g. (1 98 8) . Bot h l eg is lato rs were co nc ern edwith the po te nt ia l re co gn it io n o f in co m e n oty etrece iv edby the ho m eb ui ld ers an d m at ch in g c os ts with re ve nu es . 13 4 C on g. Re c. 20 72 2- 20 72 3 (Au g. 5 , 19 88 ) (Sen . DeCo nc in i); 29 96 2- 29 96 3 (Oc t. 1 2, 1 98 8) (Sen . DeCo nc in i); 13 4 C on g. Re c. 20 20 2 (Au g. 3 , 19 88 ) (Re p. Sc hu lz e). The y were al so reac ti ng to anadvanc e rel eas e o f anIRS p ro no un cem en t tha t wo ul d app ly the pe rcen ta ge of co m pl et io n m etho d o f acc ou nt in g t o c on tra ct s fo r th e co ns tru ct io n a ndsal e o f a ho m e. See al so Not ic e 8 8- 66 , 19 88 -1 C.B. 5 22 , 55 4. The ir p ro po se d a m en dm en ts were n arro wer tha n wh atul ti m at el y em erg ed fro m co nf eren ce. The y

cal le d fo r anex em

pt io n fo r res id en ti al real pro pe rty (co nt in ue d...)- 69 -

Sect io n 1 .46 0- 1( c)(3 )(i )(A), In co m e Tax Reg s., s ta te s tha t the co nt ractis
co m pl et edup on “ [u ]se of

th e subjec t m at te r of

th e co nt ractby the cu st om er fo r it s in te nd edpu rp os e (o th er tha n fo r te st in g) an d a t l eas t 9 5 p erce ntof t he to ta l al lo cab le co ntractco st s at tri bu tabl e to th e subjec t m at te r ha ve be enin cu rredby the ta xp ay er”. Th e fi na l co m pl et io n a ndacce pt an ce t es t s ta te s s im pl y : “ Fi na l
co m pl et io n a ndacce pt an ce o f th e subjec t m at te r of th e co nt ract .” Sec. 1 .46 0- 1( c)(3 )(i )(B) , Inc om e Tax Reg s. Bu t “ to de te rm in e whe th er fi na l co m pl et io n a nd
acce pt an ce o f th e subjec t m at te r of a co nt ractha ve oc cu rred , a tax pa y er m us t co ns id er al l re le vantfact s an d c irc um st an ces .” Sec. 1 .46 0- 1( c)(3 )(i v) (A), In co m e Tax Reg s. Inon e te st , th e ta xp ay er l oo ks to all oc ab le co st s at tri bu tabl e to th e subjec t m at te r of

th e co nt ract ; i n the othe r te st , all rel ev an t fa ct s an d c irc um st an ces in fo rm th e subjec t m atte r of

th e co nt ract . It i s cl ear t ha t, i n the co nt ex t o f th e lang ua ge su rro un di ng th e p hr as e “ subjec t m at te r of th e co nt ract ”, th e d efi ni ti on is
ne ces sa ril y

bro ad er than tha t ad vo cat edby resp on de nt . (...co nt in ue d) 1 9 co nt ract s tha t wer e es ti m at edto be co m pl et edwithi n 1 2 m on th s o f be in g e nt ered in to . S. 26 94 ; H.R. 5 15 1. Se na to r DeCo nc in i b el ie ve d thi s 1 2- m on th rul e wou ld pr oh ib itde ferr al forbu il de rs of c us to m ho m es . 13 4 C on g. Re c. 20 72 3. Th e co nf eren ce re po rt i s s il en t as to th e rat io na le forth e h om e co ns tru ct io n c on tra ct ex cep ti on as i t ex is ts no w, bu t wh atul ti m at el y em erg edwas b ro ad er tha n the earl ie r pr op os ed12 -m on th rul e. Wha t m at te rs is th e la w as wri tt en . Sha dy Grov e Orth op ed ic Ass oc s., P.A. v. Al ls ta te Ins . Co., 5 59 U.S. 39 3, 4 03 (20 10 ).- 70 -

The co nt ex t o f th e p hr as e in rel at io n t o the res t o f th e reg ul at ory sch em e al so in di cat es a br oa de r in te rp ret at io n. As st at edearl ie r, se ct io n 4 60 de fin es

“ ho m e co ns tru ct io n c on tra ct ” fo r th e p ur po se s o f a s pe ci fic subs ect io n. Se c. 46 0( e)(6 )(A). And , as m en ti on ed , th e reg ul at io ns expa ndth is de fin it io n t o a ll ow ta xp ay ers to in cl ud e th e “ al lo cab le sh are o f th e co stth atth e ta xp ay er re as on ab ly
ex pe ct s t o i nc urforan y

co m m onim pr ov em en t” . Sec. 1 .46 0- 3( b) (2 )(i ii ), In co m e Tax Reg s. Whil e th e d efi ni ti on of “ ho m e co ns tru ct io n c on tra ct ” in th e st atut e an d th e reg ul at io ns do es no t n eces sa ril y m eanth atth is de fin it io n c arri es ov er t o the
us e o f th e te rm

“ co ntract ” in th e res t o f th e st atut e an d the reg ul at io ns , itis at a
m in im um in st ru ct iv e. Inad di ti on , th e reg ul at io ns in st ru cttax pa y ers to “ co ns id er al l re le vant al lo cab le co ntractco st s * * * th atare i nc id en t t o o r ne ces sa ry forth e lo ng -te rm co nt ract ”, se c. 1.4 60 -1 (c)( 1) , Inc om e Tax Reg s., i n d et erm in in g the co nt ract co m m en cem en t an d c om

pl et io n d at es . And“ al lo cab le co nt ractco st s” is a de fin ed te rm . Sec. 1 .46 0- 1( b) (3 ), In co m e Tax Reg s. Fo r th e p ur po se s o f ho m e co ns tru ct io n c on tra ct s, s uc h c os ts in cl ud e “ th e co stof a ny acti vi ty tha t i s i nc id en t to or n eces sary

forth e ta xp ay er’s p erfo rm an ce u nd er a l on g- te rm co nt ract .” Sec. 1.4 60 -5 (d )(1 ), In co m e Tax Reg s. Th e reg ul at io ns ex pr es sl y in cl ud e withi n the de fin it io n o f “ al lo cab le co nt ractco st s” in di rectco st s s uc h a s tho se rel at edto- 71 -

equi pm en t an d fa ci li ti es , lab or , in di rectm at eri al s an d s up pl ie s, qua li ty con tro l an d in sp ect io n, an d c ert ai n t ax es . Sec. 1 .46 0- 5( d) (2 )(i ), In co m e Tax Reg s. Thu s, atth e v ery m in im

um , th e 9 5% c om

pl et io n t es t, as ap pl ie d h ere, l oo ks to co st s b ey on d ju stth os e as so ci at edwith the ho us e, th e lo t, an d i m pr ov em en ts to th e lo t. The fact s an d c irc um st an ces gl os s o n the fin al co m pl et io n a ndacce pt an ce te stals o i nd ic at es th atth e subjec t m at te r of th e co nt ractinth es e cas es is m or e th an jus t the ho us e, th e lo t, an d i m pr ov em en ts to th e lo t. Ult im at el y , th is ou tc om e is
supp orte d b y

ou r co nc lu si on , supr a, th atSHI’s, SHLP’s, andVis tanc ia ’s con tra ct s co ns is t o f m or e th anth e p ur ch as e an d s al e ag reem en t al on e. Whe n the co nt ract do cu m en ts are re adto ge th er, the subjec t m at te r of th e co nt ractis qu it e cl earl y m or e th anjus t the ho us e, th e lo t, an d i m pr ov em en ts to th e lo t. Res po nd en t fu rth er co nt en ds th at , un de r th es e co nt ract s, the 95 %
co m pl et io n t es t ca n n ev er o ccu r be fo re fi na l co m pl et io n b ecau se th e 9 5%
co m pl et io n t es t co nt ai ns a us e requi rem en t. See sec . 1.4 60 -1 (c)( 3) (A), In co m e Tax Reg s. Un de r th is th eo ry , th e subjec t m at te r is th e h ou se an d the lo t, an d the
subjec t m at te r is us edon th e sa m e d ay th e co nt ractis co m

pl et edan d a ccep te d. Res po nd en t b as es hi s co nt en ti on on th e erro ne ou s as su m pt io n tha t the subjec t
m at te r of th e co nt ractis on ly the ho us e an d l ot . W hi le th e h ou se m ay

be co m pl et e- 72 -

as of t he clo se of e sc ro w andth e p ur ch as er m ay be us in g the ho us e atth atti m e, th e en ti re s ub

ject m at te r of

th e co nt ractm ay

no t yet be co m

pl et edor u se d. The subjec t m at te r of

th e co nt ractin cl ud es th e h ou se , th e lo t, an d im pr ov em en ts to th e lo t as well as t he co m m on im pr ov em en ts inth e d ev el op m en t. Thu s, fo r th e p ur

po se of t he 95 % co m

pl et io n t es t, SHI, SHLP, an d Vi st an ci a co rrec tl y tes te d the to ta l al lo cab le co st s as so ci at edwith the de ve lo pm en t ag ai ns t th e co st s i nc urredto da te . For p ur po se s o f th e fi na l co m

pl et io n andacce pt an ce te st , SHI, SHLP, andVis tanc iaap pr op ria te ly deci de d tha t, o n the ba si s o f th e fac ts an d c irc um st an ces , fin al co m pl et io n d idno t o ccu r un ti l the fin al bo nd s wer e rel eas edan d the fin al roa d p av ed
. 2 0 Inad di ti on , res po nd en t co nt en ds th atineffe ctwhatSHI, SHLP, an d Vis tanc iaha ve do ne is th e sam e as ag gr eg at in g the di ffer en t h om e p ur ch as e co nt ract s. As res po nd en t co rrec tl y po in ts ou t, t ax pa y ers are t o app ly the
co m pl et io n t es ts of t he reg ul at io ns on a co nt ract -b y -co nt ractba si s. See sec . 1.4 60
- 1( c)(3 )(i ), In co m e Tax Reg s. Th e st atut e an d the reg ul at io ns do all ow t ax pa y ers to Sec. 1 .46 0- 1( c)(3 )(i v) (A), In co m e Tax Reg s., co nt ai ns a cav eatas t o the 2 0 fact s an d c irc um st an ces co m po ne ntof t he co m

pl et io n a ndacce pt an ce t es t: “Nev erthe le ss , a tax pay er m ay no t d el ay th e co m pl et io n o f a co nt ractforth e pr in ci pa l p ur

po se of d eferrin g fe de ral in co m e ta x.” Res po nd en t d oe s n otsu gg es t th atSHI, SHLP, or Vi st an ci a in te nt io na ll y de lay edth e co m

pl et io n o f th ei r co nt ract s, ei th er thr ou gh no t p av in g the fin al roa d o r no t s ecu rin g the rel eas e o f th e fin al bo nd . W e m en ti on th is cav eaton ly for the sak e o f co m pl et en es s.- 73 -

ag gr eg at e co nt ract s, b uton ly in ce rta in si tu at io ns , forth e p ur po se s o f se ct io n 4 60
. Sec. 4 60 (f)(3 ); s ec. 1 .46 0- 1( e), In co m e Tax Reg s. Acco rd in g t o re sp on de nt , no t on ly do the ag gr eg at io n ru le s n otap pl y inth es e cas es bu t SHI, SHLP, an d Vis tanc iadi d n otfil e th e requi si te st at em en t wi th th ei r Fed eral in co m e ta x re tu rn s as requi redby the reg ul at io ns . See s ec. 1 .46 0- 1( e)(4 ), In co m e Tax Reg s. Bu t SHI, SHLP, an d Vi st an ci a d idno t ag gr eg at e co nt ract s. Ra th er, the y tes te d c om

pl et io n da te s o f in di vi du al co nt ract s u si ng th ei r co nc ep ti onof t he subjec t m at te r of th os e co nt ract s. To s umm ari ze, we ag ree wi th pe ti ti on ers th atth e co nt ract s co ns is t o f m or e th anjus t the pu rch as e an d s al e ag reem en ts an d tha t the subjec t m atte r of th e co nt ract s i nc lu de s the co st s o f co m m onim pr ov em en ts forth e p ur

po se of t es ti ng th ei r co m pl et io n d at e. Ther efo re, the co nt ract s wi ll ge ne ral ly m eetth e 9 5%
co m pl et io n t es t b efo re the y

m eetth e fi na l co m

pl et io n a ndacce pt an ce t es t. Un de r th e co m pl et edco nt ractm etho d o f acc ou nt in g, SHI, SHLP, an d Vi st an ci a are en ti tl edto de fer i nc om e fro m th ei r co nt ract s u nt il 95 % of t he to ta l co ntractco st s, al lo cab le to th e subjec t m at te r of th e co nt ract , is in cu rredor t he de ve lo pm en t o r ph as e o f th e d ev el op m en t, as th e cas e m ay be , is co m

pl et edan d a ccep te d.- 74 -

C. Seco nd ary Ite m s Res po nd en t as ks th atif we a gr ee wi thpe ti ti on ers ’ read in g o f “ subjec t m atte r of th e co nt ract ” th enwe fin d tha t the co st s n otdi rect ly ass oc iate d wi thth e h ou se s, th e lo ts , andim

pr ov em en ts to th e lo ts co ns ti tu te sec on da ry it em s und er s ect io n 1.4 60 -1 (c)( 3) (ii ), In co m e Tax Reg s. Re sp on de ntco nt en ds th atbe cau se SHI, SHLP, an d Vi st an ci a an d the ho m eb uyers treat edth e co m m on im pr ov em en ts co nt em pl at edinth e co nt ractas s eco nd ary it em s “ subo rd in at e in im po rta nc e to th e ho us e”, the reg ul at io ns forbi d the m fro m tak in g tho se it em s i nt o a cco un t i n de te rm in in g the co nt ractco m pl et io n d at e. Pet it io ne rs , onth e o th er h an d, m ai nt ai n th atth es e co m

m on im pr ov em en ts are n otsec on da ry it em s an d tha t the pa rti es to each co nt ractdi d n ottre ator c on si de r th e it em s as sec on dary it em s i n the co nt ract s bu t ra th er i nt eg ral asp ect s o f th e h om es ’ pu rch as e an d s al e. Sect io n 1 .46 0- 1( c)(3 )(i i), In co m e Tax Reg s., p ro vi de s: (ii ) Sec on da ry

it em s. Th e d at e a co nt ractacco un te d fo r us in g th e CCM [co m

pl et edco nt ractm etho d] is co m pl et edis de te rm in ed witho utreg ardto whet he r on e o r m or e se co nd ary it em s h av e b een us edor f in al ly com

pl et edan d a ccep te d. If

an y sec on da ry

it em s ar e in co m pl et e atth e en d o f th e ta xabl e y ear i n wh ic h the pri m ary subjec t m at te r of a co nt ractis co m

pl et ed , th e ta xp ay er m

us t s ep arat e th e po rti on of t he gro ss co nt ractpri ce an d the all oc ab le co nt ractco st s at tri bu tabl e to th e in co m

pl et e se co nd ary it em (s ) fro m th e co m pl et ed co nt ractan d a cco un t fo r th em us in g ape rm is si bl e m etho d o f acco un ti ng . A perm is si bl e m etho d o f acc ou nt in g i nc lu de s a l on g- te rm co nt ractm etho d o f acc ou nt in g o nl y if asep arat e co ntractforth e- 75 -

se co nd ary it em (s ) wou ldbe a lo ng -te rm co nt ract , as d efi ne d i n pa rag rap h (b )(1 ) of

th is sec ti on . The reg ul at io ns do no t d efi ne “ se co nd ary it em s” , andord in ari ly w e wou ldres ort t o th e to ol s o f reg ul at ory

an al y si s d is cu ss edab ov e. Bu t re sp on de ntan d p et it io ne rs are e ss en ti al ly in ag reem en t as to th e m ean in g o f th is ph ras e. Inth ei r br ie fs , th ey bo th urg e u s t o re adsec on da ry it em s as it em s tha t the co nt ract in g p art ie s i nt en d t o be sec on da ry . W e co nc ur th atth e que st io ns of wh atis a se co nd ary it em ina co nt ractan d wh atis th e p rimary subjec t m atte r of

a co nt ractare que st io ns to be
an swe redby referen ce t o the fact s an d i nt en t o f th e co nt ract in g p art ie s. Here ag ai n, the pa rti es ’ di sa gr eem en t o ve r th e n atur e o f th e co nt ract s be co m es pa ram ou nt . Res po nd en t’s i nt erp ret at io n o f th e co nt ract s as be in g m erel y ab ou t the ho us e, th e lo t, an d the im pr ov em en ts to th e lo t n eces sa ril y in fo rm s h is be li ef tha t the co m

m on im pr ov em en ts m

us t b e se co nd ary it em s. Si m il arl y , pe ti ti on ers ’ vi ew of

th e co nt ract s as be in g abo utth e li fes tyle in cl ud in g a cces s t o th e p lann edco m

m un ity , th e am en it ie s, an d the in fras tru ctur e, ne ces sa ril y in fo rm s th ei r be li ef tha t the co m

m on im pr ov em en ts are p artof t he pri m ary subjec t m at te r of th e co nt ract . W e ag ree wi th pe ti ti on ers . As di sc us se d a t l en gt h, the co nt ractua l do cu m en ts co ns is t o f m or e th anjus t the pu rch as e an d s al e ag reem en t. Whenth e- 76 -

co nt ractdo cu m en ts are ex am in edto ge th er, i t b eco m es read il y ap paren t tha t the pr im ary subjec t m at te r of th e co nt ract s i nc lu de s the ho us e, th e lo t, i m pr ov em en ts to th e lo t, an d c omm on im pr ov em en ts to th e d ev el op m en t. As afactua l m at te r, we fin d the am en it ie s t o b e o f gr eatim po rta nc e to an d acru ci al asp ectof S HI’s, SHLP’s, andVis tanc ia ’s sal es effo rt, o bt ai ni ng of g ov ern m en ta l ap pr ov al of t he de ve lo pm en t, an d the bu y ers ’ pu rch as e d eci si on , andth us th e am en it ie s ar e an es se nt ia l el em en t o f th e h om e p ur ch as e an d s al e co nt ract . D. Co nc lu si on W e h av e fo un d tha t the co nt ractdo cu m en ts co ns is t o f m uc h m or e th anjus t th e p ur ch as e an d s al e ag reem en t. Thi s co nc lu si on lea ds us to ho ldth atSHI, SHLP, an d Vi st an ci a ap pr op ria te ly inc lu de d the co st s o f co m m on im pr ov em en ts in de te rm in in g the co nt ractco m pl et io n d at e. Furth erm or e, th e n atur e o f th e b us in es s an d the co nt ractdo cu m en ts als o l eadus to co nc lu de th atth e co m m on im pr ov em en ts are n otsec on da ry it em s an d d o n otha ve to be acco un te d fo r se pa rat el y . IV. Cl ear R efl ect io n o f In co m e W e h av e d et erm in edth atSHI, SHLP, an d Vi st an ci a p ro pe rly us eda pe rm is si bl e m etho d o f acc ou nt in g. Yetth e que st io n re m ai ns whet he r th atm etho d of acco un ti ng cle arl y

refl ect s i nc om e. See s ec. 4 46 (b ). The C omm is si on er h as- 77 -

wid e d is cret io n i n d et erm in in g wh ethe r a m etho d o f acc ou nt in g c le arl y refl ect s in co m e. Tho r Po wer Too l Co . v. Co m mis si on er, 4 39 U.S. 52 2, 5 32 (19 79 ). If, ho wev er, SHI’s, SHLP’s, an d Vi st an ci a’s m etho d o f acc ou nt in g c le arl y refl ect s in co m e, th enres po nd en t ca nn otbe pe rm it te d t o c ha ng e th ei r m etho d o f acc ou nt in g ev ento a m etho d tha t m or e cl earl y refl ect s i nc om e. Ph ot o- So ni cs , Inc . v. Co m m is si on er, 3 57 F.2d65 6, 6 58 n.1 (9t h C ir. 1 96 6) , aff’g 4 2 T.C. 9 26 (19 64 ); Keit h v . Comm is si on er, 1 15 T.C. 60 5, 6 17 (20 00 ). Whe th er a m etho d o f
acco un ti ng cle arl y

refl ect s i nc om e is a qu es ti on of f act . Pen in su laSte el Pro ds . v. Co m m is si on er, 7 8 T.C. 1 02 9, 1 04 5 (1 98 2)
. SHI, SHLP, an d Vi st an ci a ex pe nd eda gr eatde al of c ap it al earl y on inth e co ns tru ct io n o f th ei r de ve lo pm en ts . The l an d a cqui si ti onco st s al on e were alar ge pe rcen ta ge of the to ta l d ev el op m en t co st . On to p o f th at , th ey in cu rredup fro nt co st s s uc h a s g rad in g the lan d, i ns ta ll in g s ewer, wat er, g as , ele ctric , andothe r ut il it ie s, an d c on st ru ct in g ro ad s, n otto m en ti on th e en ti tl em en t co st s an d b on d
co st s. Ma ny of th es e co st s wer e in cu rredbe fo re the fir stho m e was co ns tru ct ed , le t al on e so ld . Once t he y be gan s el li ng ho m es , itwas s om e ti m e b efo re re ve nu e fro m th os e sa le s ex ceed edth e al read y in cu rredpro

ject c os ts . They were co nt ractua ll y

or l eg al ly requ ire d t o c om pl et e th e it em s as so ci at edwith the se co st s. Bec au se th ei r pr ojec ts were l on ge r pr ojec ts , andgi ve n the nature o f th e h om e- 78 -

co ns tru ct io n i ndus try, cos ts are d iff ic ul t t o p red ic t, an d the y

co ul d n otaccurat el y de te rm in e th ei r pr of

itun ti l the de ve lo pm en t was ne arl y co m pl et ed
. The co m pl et edco nt ractm etho d o f acc ou nt in g i s a n arro w exc ep ti on to th e le gi sl at edrul e th atm os t l on g- te rm co nt ract s m

us t n ow b e acc ou nt edforun de r th e pe rcen ta ge of c om

pl et io n m etho d o f acc ou nt in g. Bu t the cle arl y art ic ul at ed
ex cep ti on forho m eb ui ld ers is , as t o the m , gen ero us ly bro adan d re fle ct s a de li be rat e ch oi ce b y

Co ng res s tha t h om e co ns tru ct io n c on tra ct s s ho ul d b e tr eat ed di ffer en tl y

an d a cco rd edth e m or e g en ero us de ferr al of t he co m pl et edco nt ract
m etho d. SHI’s, SHLP’s, an d Vi st an ci a’s us e o f th e co m pl et edco nt ractm etho d
was sp eci fic al ly con te m

pl at edby Con gr es s an d i s a p erm is si bl e, co ng res si on al ly
sa nc ti on edcle ar re fle ct io n o f in co m e. W e n ot e th atSHLP admit te dl y ap pl ie d the 95 % co m

pl et io n t es t i n 2 00 2 a nd 20 03 by com

pa rin g the nu m

be r of ho m es clo se d i n e sc ro w inth e d ev el op m en t t o th e num be r of ho m es pro

jecte d t o b e b ui ltinth e d ev el op m en t. Thi s ca lc ul at io n was anin co rrec t ap pl ic at io n o f th e co m pl et edco ntractm etho d o f acc ou nt in g. Bu t th e 2 00 2 t ax y ear i s n otinis su e, an d the pa rti es in tro du cedev id en ce s ho win g tha t fo r SHLP’s lo ng -te rm

co nt ract s i n 2 00 3, the 95 % co m pl et io n t es t h adno t yet be en m et . Thu s, the co m

pl et edco nt ractm etho d o f acc ou nt in g a s p ro pe rly app li ed- 79 -

ren de rs th e sa m e res ul t as th e res ul t wh ic h was rep orte d fo r th e 2 00 3 t ax y ear, an d itcle arl y refl ect s the in co m e o f SHLP fo r th at20 03 tax y ear. Res po nd en t p oi nt s o utth atTril og y at La Qu in taan d Vi st an ci a were d iv id ed in to ph as es forpu rp os es of t es ti ng co nt ractco m pl et io n, b utothe r de ve lo pm en ts were n otsi m il arl y

di vi de d. Re sp on de ntap pe ars to be im pl y in g tha t s uc h a di sc rep an cy

inth e ap pl ic at io n o f th e 9 5% c om pl et io n t es t d em on st rat es th atSHI’s, SHLP’s, andVis tanc ia ’s us e o f th e co m pl et edco nt ractm etho d d oe s n otcle arl y refl ectin co m e. Fo r in st an ce, the en ti re Co st a Azu l d ev el op m en t, as in di cat edby th e p ub li c rep ort, was to co ns is t o f 17 ph as es , whi chat f irs t g lanc e se em s l ik e a lo t. Bu t a c lo se r lo okat t he publ ic rep ort re ve al s tha t the pro jecte d t ot al nu m

be r of ho m es inCo st a Azu l was 83 , andeach ph as e was to be rathe r sm al l. Fo r in st an ce, ph as e 1 0 c on si st edof f

ou r res id en ti al lo ts . Tril og y , onth e o th er h an d, was to co ns is t o f 23 ph as es with apro jecte d 1 ,36 5 re si de nc es on 1,2 03 res id en ti al lo ts . The ni nt h p ha se was t o c on si stof 4 8 re si de nt ia l l ot s. Inad di ti on , for

th e p ur po se s o f th es e cas es , th e p art ie s s ti pu la te d tha t the Co st a Azu l d ev el op m en t as co nt em pl at edby SHLP was on ly a sm al l, re lati ve ly sh ort-t erm

bu il do utasp ectof t ha t o ve ral l d ev el op m en t. Ineffe ct , itwas e qu iv al en t to a ph as e o f th e o ve ral l d ev el op m en t. The Co st a Azu l d ev el op m en t, as in it ia ll y pr op os edto th e Lan d C omm it te e, was a sh ort-t erm , 37 -h om e d ev el op m en t, an d, as- 80 -

st ip ul at edby the pa rti es , Cos taAzul was d ev el op edineig htph as es with 4 2 t ot al lo ts . W hi le Co st a Azu l as pre se nt edinth is cas e d iff ers fro m Co st a Azu l as 2 1 pr es en te d i n the publ ic rep ort, SHLP’s u se of t he co m pl et edco nt ractm etho d o f
acco un ti ng cle arl y

refl ect edin co m e. Ther e is no m at eri al ev id en ce i n the reco rd , an d we d is cernno ne , th atSHLP att em pt edto m an ip ul at e o r to de lay it s C os ta Azu l p ro ject o r co nt ract s t o o bt ai n alo ng er d eferral pe rio d. 2 2 Res po nd en t al so co nt en ds th atpe ti ti on ers ’ in te rp ret at io n o f th e subjec t
m at te r of th e co nt ract“ crea te s the no ns en si cal si tu at io n o f th e subjec t m at te r of each in di vi du al co nt ractforth e sa le of aho us e b ei ng th e en ti re d ev el op m en t an d, th us , in cl ud in g the subjec t m at te r of ev ery ot he r pa st , pre se nt , andfutur e h ou se .” He go es on to st at e th ata pu rch as er o f on e h om e h as no cla im to an y un so ldor pr ev io us ly sol d l ot s an d h om es . Cert ai nl y th is lat te r st at em en t i s co rrec t. The

The reco rdis un cl ear wh y th e num be r of lo ts as s ti pu la te d d iff

ers fro m th e 2 1 nu m be r of ho m es pro

jecte d i n the LandCo m

m it te e rep ort. Perhaps so m e h ou se s were co ns tru ct edon m

ul ti pl e lo ts , or s om e lo ts were u se d a s co m m on area s. What is cle ar i s tha t the pro

ject a s o rig in al ly con te m

pl at edinth e p ub li c rep ort d idno t fu ll y m at eri al iz e whe n the real est at e m ark ettu rn edan d S HLP di d n otpu rch as e th e rem ai ni ng lo ts . The ap pr op ria te sco pe of e ach co nt ractas i t i nv ol ve s co m m on or e xc lu si ve 2 2 of f-l otam en it ie s i s a f

actua l que st io n. Re sp on de ntha s n otsh ownth atSHI’s, SHLP’s, or Vi st an ci a’s ch oi ces of d ev el op m en t o r ph as e as th e sc op e fo r pu rp os es of th e 9 5% t es t as itin vo lv es off -lo t am en it ie s wer e im

pr op er o r un reas on ab le as to an y of t he eig htrep res en ta ti ve de ve lo pm en ts .- 81 -

co nt ractdo es no t i nc lu de th e h ou se s an d l ot s o th er tha n tha t wh ic h i s p ur ch as ed ; bu t the subjec t m at te r of

eachin di vi du al pu rch as edho us e st il l i nc lu de s the de ve lo pm en t o r ph as e o f th e d ev el op m en t an d i ts co m m on im pr ov em en ts an d
am en it ie s. Thus , whi le th ere a re co m m on al it ie s i n the subjec t m at te rs of t he
co nt ract s, s uc h a s the am en it ie s an d o th er co m m on im pr ov em en ts , th e subjec t
m at te rs as t o the in di vi du al ho us e an d l otare n otid en ti cal
. 2 3 Fo r th es e rea so ns , we con cl ud e th atres po nd en t m ay no t ch an ge SHI’s, SHLP’s, andVis tanc ia ’s m etho d o f acc ou nt in g e ve n i f hi s p ro po se d m etho d m or e cl earl y refl ect s i nc om e. See Pr ab el v. Co m m is si on er, 9 1 T.C. at11 12
.

Furth erm or e, we rejectth e ch arac te riz at io n tha t wh atSHI, SHLP, an d 2 3 Vis tanc iaha ve do ne , andwhatwe ap pr ov e o f, is insubs tanc e anag gr eg at io n o f co nt ract s. Co nt ract in g p art ie s h av e a ri gh t t o the ir o wn co nt ractforth e p ur po se s of Sta te law, an d i t i s thi s co nt ractth atwe tes t i n d et erm in in g the subjec t m at te r of th e co nt ract . In the cas e o f m uc h l arg er, d ecad es -lo ng de ve lo pm en ts , th e m eet in g of th e m in ds be twee n the pu rch as er an d the sel le r wou ldbe m uc h l es s l ik el y

to in cl ud e anam en ity

or c omm on im

pr ov em en t wi tha co m

pl et io n d at e unr eas on ab ly far i n the futur e. Here, the subjec t m atte r of SHI’s, SHLP’s, andVis tanc ia ’s co nt ract s i nc lu de s the de ve lo pm en t. Ina di ffer en t ca se , un de r di ffer en t fa ct s, si mil ar treat m en t o f anun reas on ab ly lon g- te rm de ve lo pm en t m ay

iness en ce b e an ag gr eg at io n.- 82 -

V. Co nc lu si on SHI, SHLP, an d Vi st an ci a are pe rm it te d t o re po rt i nc om e an d l os s fr om th e sa le s o f ho m es inth ei r pl anne d d ev el op m en ts us in g the co m pl et edco ntract
m etho d o f acc ou nt in g a s co ns is te ntwith thi s Op in io n. 2 4 The Co urt h as co ns id eredall of t he pa rti es ’ co nt en ti on s, ar gu m en ts , reque st s, an d s ta te m en ts . To th e ex te ntno t d is cu ss edhe rei n, the Co urt co nc lu de s th atth ey are m eri tl es s, m oo t, o r irrel ev an t. Deci si on s wi ll be en te red fo r pe ti ti on ers .

W e are co gn iz an t tha t o urOpi ni on to da y co ul d l eadtax pa y ers to be li ev e 2 4 th atlar ge de ve lo pm en ts m ay qu al ify for ex tre m el y

lo ng , alm os t u nl im it edde ferr al pe rio ds . W e wou ldcau ti on th os e ta xp ay ers a de te rm in at io n o f th e subjec t m at te r of th e co nt ractis ba se d o n a ll th e fac ts an d c irc um st an ces . If Vis tanc ia , for ex am pl e, at te m pt edto ap pl y

th e co nt ractco m

pl et io n t es ts by loo ki ng at a ll co nt em pl at edph as es , itis un li ke ly tha t the subjec t m atte r as co nt em pl at edby the co nt ract in g p art ie s co ul d b e stret ch edth atfar. Fu rth er, s ec. 1 .46 0- 1( c)(3 )(i v) (A), In co m e Tax Reg s., m ay

pro hi bi t t ax pa y ers fro m

in se rti ng lan gu ag e in th ei r co nt ract s tha t wo ul d u nr eas on ab ly del ay co m pl et io n u nt il su cha supe r de ve lo pm en t i s co m

pl et ed
.