Court Opinion

ID: 4027978
Source: CourtListenerOpinion
Date Created: 2016-08-24 17:01:06.421552+00
Date Added: 2024-06-11T14:08:48.332136
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

SHEA HOMES, INC. AND                   No. 14-72161
SUBSIDIARIES,
              Petitioner-Appellee,     Tax Ct. No.
                                        29271-09
                 v.

COMMISSIONER OF INTERNAL
REVENUE,
           Respondent-Appellant.

SHEA HOMES, LP; JF SHEA, LP, FKA       No. 14-72162
JF Shea LLC, Tax Matters Partner,
              Petitioners-Appellees,   Tax Ct. No.
                                        1400-10
                 v.

COMMISSIONER OF INTERNAL
REVENUE,
           Respondent-Appellant.
2                   SHEA HOMES V. CIR

VISTANCIA, LLC; SHEA HOMES                 No. 14-72163
SOUTHWEST, INC., Tax Matters
Partner,                                    Tax Ct. No.
             Petitioners-Appellees,          1401-10

                   v.
                                               OPINION
COMMISSIONER OF INTERNAL
REVENUE,
           Respondent-Appellant.

               Appeals from Decisions of the
                         Tax Court

             Argued and Submitted June 7, 2016
                   Pasadena, California

                   Filed August 24, 2016

    Before: Ferdinand F. Fernandez, Johnnie B. Rawlinson,
              and Carlos T. Bea, Circuit Judges.

               Opinion by Judge Fernandez;
              Concurrence by Judge Rawlinson
                       SHEA HOMES V. CIR                              3

                           SUMMARY*

                                 Tax

    The panel affirmed the Tax Court’s decisions that
taxpayers Shea Homes, Inc. and Subsidiaries did not have any
deficiencies and that taxpayers Shea Homes, LP and
Vistancia, LLC had no adjustments to partnership items for
certain tax years, based on a challenge to the completed-
contract accounting method for home construction contracts.

    Taxpayers are planned community builders and
developers in Colorado, California, and Arizona. Because
their projects tended to involve long-term home construction
contracts extending across more than one tax year, they
applied the completed-contract accounting method to report
income, where the completion year is the taxable year in
which a taxpayer completes a contract. See 26 U.S.C.
§ 460(e)(1)(a); 26 C.F.R. §§ 1.460-1–1.460-4. The
Commissioner contended that the subject matter of the
contracts was limited to the house and lot; the Tax Court
determined that, as a matter of fact, the subject matter
included the house, lot, development, and its common
improvements and amenities. The panel held that the Tax
Court did not clearly err in its determination, noting that until
taxpayers’ work was complete, they had an obligation to
fulfill their promises regarding the development that they had
induced the buyers to become a part of. The panel affirmed
the Tax Court’s decision that taxpayers had used a

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4                   SHEA HOMES V. CIR

permissible method of accounting that clearly reflected their
income.

    Judge Rawlinson concurred in the judgment, solely on the
basis that the Commissioner is bound by the arguments and
theories relied upon during the trial before the Tax Court,
because “our precedent is replete with cases precluding a
party from endeavoring to assert a theory on appeal that was
not presented to the trial court.” Judge Rawlinson would
affirm the Tax Court’s decision solely on the basis that the
Commissioner failed to raise the issue raised in this appeal —
whether the subject of each construction contract is the entire
development — sufficiently for the Tax Court to rule on it.

                         COUNSEL

Andrew M. Weiner (argued) and Richard Farber, Attorneys,
Tax Division; Caroline D. Ciraolo, Assistant Attorney
General; Department of Justice, Washington, D.C., for
Respondent-Appellant.

Gregory G. Garre (argued), Gerald A. Kafka, Sean M. Akins,
and Benjamin W. Snyder, Latham & Watkins LLP,
Washington, D.C.; Robert A. Long, Jr. and Kevin King,
Covington & Burling LLP, Washington, D.C.; for Petitioners-
Appellees.
                         SHEA HOMES V. CIR                                5

                               OPINION

FERNANDEZ, Circuit Judge:

    The Commissioner of Internal Revenue
(“Commissioner”) appeals the decisions of the United States
Tax Court in these consolidated cases that Shea Homes, Inc.
and Subsidiaries (“SHI”) did not have any deficiencies for the
tax years under consideration and that Shea Homes, LP
(“SHLP”) and Vistancia, LLC (“Vistancia”) had no
adjustments to partnership items for their tax years which
were under consideration.1 Hereafter, SHI, SHLP and
Vistancia are collectively referred to as “the Taxpayers.”2
The decisions flowed from the Tax Court’s determination3
that the Taxpayers had used an accounting method4 that
clearly reflected their income during the tax years under
consideration. We affirm.

                           BACKGROUND

   The Tax Court found that the Taxpayers are builders and
developers of planned communities “ranging in size from 100

  1
    For SHI those were tax years 2004 and 2005. For SHLP those were
tax years 2003, 2004, 2005, and 2006. For Vistancia, those were tax years
2004 and 2005.
 2
  We recognize that, technically, SHLP and Vistancia do not themselves
pay taxes. We use “the Taxpayers” for convenience of reference only.
 3
    Shea Homes, Inc. v. Comm’r, 142 T.C. 60 (2014). We note that many
of the background facts were stipulated to by the parties and incorporated
into the Tax Court’s decision.
 4
     See 26 C.F.R. § 1.460-1(c)(3)(i)(A); see also id. § 1.446-1(a)(1).
6                  SHEA HOMES V. CIR

homes to more than 1,000 homes in Colorado, California, and
Arizona.” Shea Homes, 142 T.C. 64. It further determined
that:

           [The Taxpayers] pride themselves on
       providing their customers with more than just
       the “bricks and sticks” of a home and
       emphasize the features and lifestyle of the
       community to potential buyers. For example,
       at the Reunion at Parkside community they
       advertised using the themes “live well, work
       well, play well” and “the pursuit of
       happiness”.

           [The Taxpayers] purchased land in various
       stages from completely raw to finished lots in
       developed communities. Their business
       involved the analysis and acquisition of land
       for development and the construction and
       marketing of homes and the design and/or
       construction of developments and homes on
       the land they acquired. The costs incurred in
       their home construction business included, by
       partial example: (1) acquisition of land;
       (2) financing; (3) municipal and other
       regulatory approvals of entitlements;
       (4) construction of infrastructure;
       (5) construction of amenities; (6) construction
       of homes; (7) marketing; (8) bonding; (9) site
       supervision and overhead; and (10) taxes.
       Their primary source of revenue from the
       home development business was from the sale
       of houses.
                        SHEA HOMES V. CIR                                 7

Id. at 65. Because of the magnitude of those undertakings,
the process tends to extend across more than one tax year.
See 26 U.S.C. § 460(f)(1); 26 C.F.R. §§ 1.460-1(b)(5)–(6),
1.460-3(a).

     Although the Internal Revenue Code generally requires
that a taxpayer report income in “the taxable year in which [it
was] received,” 26 U.S.C. § 451(a), it also provides special
rules for reporting taxable income from long-term contracts,
id. § 460. “A long-term contract generally is any contract for
the . . . construction of property if the contract is not
completed within the contracting year. . . .” 26 C.F.R.
§ 1.460-1(b)(1); see also 26 U.S.C. § 460(f)(1). Typically,
taxable income from long-term contracts must “be
determined under the percentage of completion method” of
accounting. 26 U.S.C. § 460(a). But home construction
contracts are exempt from that requirement.                Id.
§ 460(e)(1)(A); 26 C.F.R. § 1.460-3(b)(1). Instead, the
regulations prescribe several acceptable methods of
accounting for home construction contracts (and other
contracts exempt from the percentage-of-completion method
of accounting), one of which is the completed-contract
method (“CCM”) of accounting. 26 C.F.R. § 1.460-4(c)(1);
see also id. (a).5

 5
   Under the percentage-of-completion method of accounting, a taxpayer
must generally recognize as income a portion of the contract price in each
taxable year covered by the long-term contract. See 26 C.F.R. § 1.460-
4(b)(1). By contrast, under the CCM, a taxpayer generally does not
recognize any income from a long-term contract until the contract is
complete. See id. § 1.460-4(d)(1). The CCM is thus more favorable to
taxpayers because it generally defers the taxation of income relative to the
percentage-of-completion method.
8                       SHEA HOMES V. CIR

    The parties agree that the contracts at issue here are long-
term home construction contracts.             See 26 U.S.C.
§ 460(e)(1)(A), (6)(A). The Taxpayers applied the CCM to
report income from their home construction projects. “[A]
taxpayer using the CCM to account for a long-term contract
must take into account in the contract’s completion year, as
defined in § 1.460-1(b)(6), the gross contract price and all
allocable contract costs incurred by the completion year.”
26 C.F.R. § 1.460-4(d)(1). “The completion year is the
taxable year in which a taxpayer completes a contract as
described” by the applicable regulation. Id. § 1.460-1(b)(6).
That regulation, in turn, provides that:

         A taxpayer’s contract is completed upon the
         earlier of—

          (A) Use of the subject matter of the contract
         by the customer for its intended purpose
         (other than for testing) and at least 95 percent
         of the total allocable contract costs
         attributable to the subject matter have been
         incurred by the taxpayer; or

         (B) Final completion and acceptance of the
         subject matter of the contract.

Id. § 1.460-1(c)(3)(i).6 The date of contract completion
should be “determined without regard to whether one or more
secondary items have been used or finally completed and
accepted.” Id. § 1.460-1(c)(3)(ii).

  6
    We refer to these alternative methods as the “95 percent test” and the
“final completion test,” respectively.
                       SHEA HOMES V. CIR                              9

    During the tax years at issue here, the Taxpayers reported
their income using the CCM. They applied the 95 percent
test to determine the year of contract completion and, hence,
the year in which they recognized income from their long-
term home construction contracts. The Taxpayers took the
position that the subject matter of their home construction
contracts included the development in which the home was
situated. For each tax year, the Taxpayers would calculate,
on a development-by-development basis, whether they had
incurred at least 95 percent of the budgeted costs of the
development, including the costs of the houses and the
common improvements and amenities.

         If the incurred costs were equal to or greater
         than 95% of the budgeted costs, then [the
         Taxpayers] reported income for that tax year
         from homes that had closed in escrow up to
         that date. If the incurred costs did not exceed
         95%, then [the Taxpayers] deferred any
         income from homes that closed in escrow that
         year.

Shea Homes, 142 T.C. 76.7

 7
   Two matters bear mentioning. First, SHLP incorrectly applied the 95
percent test in tax years 2002 and 2003: It calculated a development’s
completion ratio by comparing the number of homes built to the number
of homes projected to be built, when it should have compared the costs
incurred to the projected costs. However, this error was immaterial. See
Shea Homes, 142 T.C. 107. Second, with respect to certain large
developments, the Taxpayers applied the 95 percent test on a phase-by-
phase basis, rather than a development-wide basis. See id. at 107–08. In
other words, for purposes of applying the 95 percent test, the Taxpayers
treated certain large developments as if they comprised several smaller
developments, and applied the 95 percent test to each sub-development.
10                      SHEA HOMES V. CIR

    In 2009, the Commissioner issued a notice of deficiency
to SHI for the tax years 2004–2005, and notices of final
partnership administrative adjustments to SHLP for
2003–2006 and to Vistancia for 2004–2005. Each notice
provided the same explanation for the Commissioner’s
action: that is, the “amounts can not be deferred under the
completed contract method of accounting until the
completion of a future common improvement” because “the
primary subject matter of the contract” was the home, and
“[t]he cost of common improvements and any future
obligations are secondary items and do not impact when a
contract is completed on the subject matter.” In effect, the
Commissioner took the position that for purposes of applying
the CCM, the subject matter of a contract for sale of a house
in a planned community development was limited to the
house and lot alone and that anything else—for example, the
common improvements—constituted “secondary items” to be
ignored in determining when the contract was completed. See
26 C.F.R. § 1.460-1(c)(3)(ii). Thus, in the Commissioner’s
view, the Taxpayers’ home construction contracts were
complete, under the final completion test, once a home
purchase closed in escrow. That meant that contracts entered
into and closed in escrow in a single tax year were not long-
term contracts at all, and that income from home construction
contracts entered into in one tax year but closed in another tax
year had to be recognized for tax purposes once the home
purchase closed in escrow, even if the Taxpayers had not yet
finished the development or the common improvements and
amenities to which the buyer was entitled pursuant to his sale
contract with the Taxpayers.

This reduced the deferral of taxable income that would have resulted if the
Taxpayers had applied the 95 percent test on a development-wide basis.
                    SHEA HOMES V. CIR                       11

    The Taxpayers disagreed and pointed out that the subject
matter of their contracts with their buyers went beyond a
mere house and lot sale, but included much more; the subject
matter included the common improvements and the other
requirements needed to create a house within the particularly
oriented planned community development that the buyer had
bargained for. Therefore, they said, they had properly applied
the 95 percent test to determine the date of contract
completion, and their method of accounting reflected the
subject matter of their home construction contracts and
clearly reflected income. The Taxpayers contended that the
Commissioner’s proposed method—that is, recognizing
income upon closing of a home purchase in escrow—did not
clearly reflect income.

    The Tax Court essentially agreed with the Taxpayers. In
a careful and detailed opinion, the Tax Court concluded that
on the evidence before it all aspects of the planned
community development were understood by the Taxpayers
and their buyers to be what was bargained for, and that the
documents reflected that understanding. As the Tax Court
put it: “[The Taxpayers] and the buyers of their homes
understood and believed that the parties had contracted for
the entire lifestyle of the development and its amenities.”
Shea Homes, 142 T.C. 95. Ultimately, it concluded that
“[t]he contract does not include the houses and lots other than
that which is purchased; but the subject matter of each
individual purchased house still includes the development or
phase of development and its common improvements and
amenities.” Id. at 109. Thus, the decisions in favor of the
Taxpayers were entered, and these consolidated appeals by
the Commissioner followed.
12                   SHEA HOMES V. CIR

     On appeal, the Commissioner has taken a different
approach from the one he took at the Tax Court. The
Commissioner concedes that the Tax Court correctly held that
the subject matter of the Taxpayers’ home construction
contracts includes more than just the house and lot purchased.
He accepts the notion that the subject matter of the contract
also includes the common improvements of the planned
community development in which the house is situated,
which improvements the Taxpayers are contractually
obligated to build. But the Commissioner now takes issue
with how the Taxpayers applied the 95 percent test. During
the relevant tax years, the Taxpayers deemed their home
construction contracts complete for purposes of the CCM
when they had incurred 95 percent of the budgeted costs for
building the entire community, including the costs of building
all of the houses in the community. See 26 C.F.R. § 1.460-
1(c)(3)(i)(A). In the Commissioner’s current view, the
subject matter of the contract includes the house, lot and
common amenities, but does not include the other houses in
the community. Accordingly, he argues that the 95 percent
test should be met when the Taxpayers incur 95 percent of the
budgeted costs of the contracted-for house, lot and common
amenities, but not the costs of the other houses. See id. We
discuss this late-blooming argument further below.

     JURISDICTION AND STANDARDS OF REVIEW

   The Tax Court had jurisdiction pursuant to 26 U.S.C.
§§ 6213(a), 6214(a), 6226, 7442. We have jurisdiction
pursuant to 26 U.S.C. § 7482(a) and 28 U.S.C. § 1291.

    We review decisions of the Tax Court “‘on the same basis
as decisions in civil bench trials in district court.’” Estate of
Ashman v. Comm’r, 231 F.3d 541, 542 (9th Cir. 2000). We
                           SHEA HOMES V. CIR                   13

review conclusions of law and mixed questions of law and
fact de novo; we review findings of fact for clear error.
Meruelo v. Comm’r, 691 F.3d 1108, 1114 (9th Cir. 2012);
Ball, Ball & Brosamer, Inc. v. Comm’r, 964 F.2d 890, 891
(9th Cir. 1992). A mixed question of law and fact is one in
which the “primary facts are undisputed and ultimate
inferences and legal consequences are in dispute.” Suzy’s
Zoo v. Comm’r, 273 F.3d 875, 878 (9th Cir. 2001).

                             DISCUSSION

    The United States Internal Revenue Code allows a
taxpayer some discretion in selecting an accounting method
by which to report his income,8 but that method must “clearly
reflect income.”9 If the Commissioner determines that the
taxpayer’s method does not clearly reflect income, the
Commissioner “has wide discretion in choosing an income-
reconstruction method” for the taxpayer. Palmer v. IRS,
116 F.3d 1309, 1312 (9th Cir. 1997). The Commissioner’s
determinations are entitled to a presumption of correctness,
although the taxpayer may prove them wrong. Id.; see also
26 U.S.C. § 446(b). In the event that the Commissioner
issues a deficiency notice (or a final partnership
administrative adjustment), as he did here, a taxpayer may
petition the Tax Court for a redetermination,10 as the
Taxpayers did here. There are two somewhat separate
questions involved in accounting cases: Did a taxpayer’s
method of accounting clearly reflect income, and, if not, did

 8
     See 26 U.S.C. § 446(a), (c); 26 C.F.R. § 1.446-1(a)(2).
 9
     26 U.S.C. § 446(b).
 10
      26 U.S.C. §§ 6213(a), 6226(a).
14                       SHEA HOMES V. CIR

the Commissioner choose a method that did? The Taxpayers
assert—and the Commissioner does not argue
otherwise—that a taxpayer can prevail in the Tax Court by
“show[ing] either that its accounting method resulted in a
clear reflection of income or that the Commissioner’s method
does not.” Dayton Hudson Corp. & Subsidiaries v. Comm’r,
153 F.3d 660, 664 (8th Cir. 1998); see also 26 U.S.C.
§ 446(b); Lucas v. Ox Fibre Brush Co., 281 U.S. 115, 120,
50 S. Ct. 273, 274–75, 74 L. Ed. 733 (1930); Harden v.
Comm’r, 223 F.2d 418, 421 (10th Cir. 1955); Prabel v.
Comm’r, 91 T.C. 1101, 1112–13 (1988).

    Here the Commissioner continues to claim that the
Taxpayers’ method does not clearly reflect income, and
asserts that we should review that as a mixed question of fact
and law. We do not agree. No doubt there are times when
the issue is one where the facts are undisputed and only what
amount to legal consequences are involved. See Suzy’s Zoo,
273 F.3d at 878. Before the Tax Court, the Commissioner
argued that the issue presented was “a question of fact to be
determined on a case-by-case basis.” He agreed that the Tax
Court principally had to decide what the subject matter of the
Taxpayers’ home construction contracts was as a matter of
fact—that is, what were the Taxpayers obligated to provide
to the buyers. See Sparkman v. Comm’r, 509 F.3d 1149,
1157 (9th Cir. 2007); see also Smith v. Comm’r, 300 F.3d
1023, 1028 (9th Cir. 2002). Thus, his argument amounted to
a dispute about the subject matter content of the contracts, but
the Commissioner took the very crabbed view that the subject
matter was limited to the house and the lot.11 However, the
Tax Court determined that, as a matter of fact, the subject
matter included the house, the lot, “the development . . . and

 11
      He now concedes that his limited view was in error.
                           SHEA HOMES V. CIR                15

its common improvements and amenities.” Shea Homes,
142 T.C. 109; see also Pullman-Standard v. Swint,
456 U.S. 273, 287–88, 102 S. Ct. 1781, 1789–90, 72 L. Ed.
2d 66 (1982). We review those underlying factual
determinations for clear error, which means that “we may
reverse the Tax Court only if we have a ‘definite and firm
conviction’ that the tax court’s factual finding was wrong.”
Meruelo, 691 F.3d at 1114. And, “[t]o have a definite and
firm conviction that the Tax Court erred, we must find that
the Tax Court’s conclusion was ‘(1) illogical, (2) implausible,
or (3) without support in inferences that may be drawn from
the facts in the record.’” Id.; see also DJB Holding Corp. v.
Comm’r, 803 F.3d 1014, 1022 (9th Cir. 2015). In this case,
we cannot make those determinations. On the contrary, the
evidence is sufficient to support the Tax Court’s factual
determinations.

    The Tax Court found that the subject matter of the
contracts between the buyers and the Taxpayers encompassed
more than the mere “‘bricks and sticks’”12 of the homes; the
buyers were purchasing “the entire lifestyle of the
development”13 fostered by the carrying out of the promises
regarding what the development would be, and the Taxpayers
incurred costs and obligations accordingly.14 Those are
reflected in, among other things, common improvements,
bonding requirements, the creation of homeowners’
associations in which each buyer had rights, and in the
covenants, conditions and restrictions (“CC&R’s”) that ran

 12
      Shea Homes, 142 T.C. 90.
 13
      Id. at 95; see also id. at 90–91.
 14
      Id. at 91–92.
16                  SHEA HOMES V. CIR

with the land and affected not only the buyer but also other
prospective buyers and the properties they were purchasing.
This was not a simple case of buyers purchasing homes and
having no substantial interest in whether the development
would be and remain the kind of development that they
wished to live in for some time in the future. It was not like
a situation where a person bought a product but had no
interest in other products sold by the same seller to other
purchasers. Nor could the Taxpayers assume that they could
sell other houses in the development without considering the
promises made to the initial buyers regarding what the overall
development would be like. The Taxpayers’ promises gave
buyers justifiable expectations regarding what would be
promised to those who came later. In other words: “If a
purchaser did not want to live in one of the planned
developments with its accompanying amenities, it is likely he
or she could have paid much less for an otherwise comparable
dwelling outside of a development and with no seller-
provided amenities.” Shea Homes, 142 T.C. 91 (footnote
omitted). The Tax Court’s determinations were not clearly
erroneous.

    The Commissioner complains that the Tax Court focused
on the house, lot and common amenities in its opinion. The
Commissioner then suggests that when the Tax Court
mentioned the development as a whole, it was, somehow,
being inconsistent. The Commissioner overlooks the fact that
his focus was on those specific aspects, and those are what he
specifically pointed to when he was stating his position for
purposes of the trial of this case at the Tax Court. We suspect
that the Commissioner was satisfied that his position on those
points would win the day and, therefore, that he need not
concentrate his firepower on the overall planned community
                    SHEA HOMES V. CIR                       17

development aspect of the contracts. The resulting outcome
was due to his misperception rather than a Tax Court mistake.

    The Commissioner also argues that a buyer of a house
cannot himself use other homes and, therefore, the
development as a whole could not be part of the subject
matter of the buyer’s contract. That not only begs the
question but also is a non sequitur. Each person in the
planned community would, indeed, have an interest in the use
of other property in the development, and that would include
not only the common amenities but also the use that others in
the development made of their own properties. That is at
least one reason for the CC&R’s and the mandated
homeowners’ associations. It is not a question of living in
another’s home; it is a question of assuring that the planned
lifestyle is followed to some degree. And until the
Taxpayers’ work was complete, they had an obligation to
fulfill their promises regarding the development that they had
induced the buyers to become a part of.

    To the extent that the Commissioner asserts that the Tax
Court has approved of an aggregation of contracts by the
Taxpayers, he does not elaborate or precisely illuminate what
he means. We assume he means that the question of whether
a contract with a buyer is complete refers to that contract
alone, and cannot be combined with other contracts in
deciding the question of individual contract completion. Cf.
26 U.S.C. § 460(f)(3); 26 C.F.R. § 1.460-1(e). If so, as
applied to the facts of this case, that argument is simply
another allotrope of the Commissioner’s argument to the Tax
Court that a buyer’s contract cannot encompass more than the
house and lot or, as a fall-back position, more than the house,
the lot, and the common improvements. It likewise fails.
“[The Taxpayers] did not aggregate contracts. Rather, they
18                      SHEA HOMES V. CIR

tested completion dates of individual contracts using . . . the
subject matter of those contracts.” Shea Homes, 142 T.C.
104. As the Tax Court further noted, in answer to the
Commissioner’s jeremiad about that outcome: “Here, the
subject matter of [the Taxpayers’] contracts includes the
development. In a different case, under different facts,
similar treatment of an unreasonably long-term development
may in essence be an aggregation.”15 Id. at 109 n.23; see also
id. n.24.

    In other words, the Tax Court did not clearly err when it
determined the subject matter of the Taxpayers’ home
construction contracts; the Taxpayers’ application of the 95
percent test and the CCM logically flows from that
determination. That being so, we need not and do not
consider whether the Commissioner’s methods could clearly
reflect income, although we note that the Commissioner
himself has abandoned those specific methods on appeal.16

  15
     The Commissioner argues that Congress did not intend that the 95
percent test would apply as it was applied here. He cites no authority for
that proposition. Indeed, he points to a lack of legislative history on the
point. At root, the Commissioner’s congressional intent point is yet
another variant of his argument at the Tax Court that only an individual
house and lot could be considered, despite the fact that the contract with
the buyer encompassed much more. The Tax Court noted that to the
extent legislative history existed, it pointed to Congress’ special concerns
about homebuilders. See Shea Homes, 142 T.C. 101 n.19. As the Tax
Court pointed out, Congress’ concern stemmed from builders’ need to
better match income to expenses. Id. That is, Congress wanted to help
them clearly reflect their income. In fine, the Commissioner’s allusion to
congressional intent does not buttress his argument.
  16
    The Commissioner now asks that we remand the case so that he can
offer an approach that would undermine the Tax Court’s ultimate decision
and demonstrate that there are deficiencies and required adjustments after
                        SHEA HOMES V. CIR                             19

                           CONCLUSION

    The Commissioner assessed deficiencies or adjustments
against the Taxpayers. They sought relief in the Tax Court,
which ruled in their favor. We affirm the Tax Court’s
decision that on the record before it, the Taxpayers “used a
permissible method of accounting” and “that method of
accounting clearly reflect[ed] [their] income.” Shea Homes,
42 T.C. 106; see also id. at 106–09. In short, they were
“permitted to report income and loss from the sales of homes
in their planned developments using the completed contract
method of accounting” in the manner “consistent with [its]
Opinion.” Id. at 109. Perhaps the Commissioner wishes that
he had approached the proceeding before the Tax Court in a
different way. In any event, he asks for relief. We have none
to offer; he must thole the result. Nevertheless, we would be
remiss if we did not close this opinion with the Tax Court’s
admonition: “We are cognizant that our Opinion today could
lead taxpayers to believe that large developments may qualify
for extremely long, almost unlimited deferral periods. We
would caution those taxpayers a determination of the subject

all. We decline to do so because we do not find exceptional circumstances
that would justify allowing the case to proceed on the basis of a new
factual theory not actually properly presented to the Tax Court. See
Armstrong v. Brown, 768 F.3d 975, 982 (9th Cir. 2014); cf. Hormel v.
Helvering, 312 U.S. 552, 556–57, 61 S. Ct. 719, 721, 85 L. Ed. 1037
(1941); El Paso v. Am. W. Airlines, Inc. (In re Am. W. Airlines, Inc.),
217 F.3d 1161, 1165 (9th Cir. 2000). We see no reason to accede to the
Commissioner’s desire to attempt to prevail by retrying this case based on
a new methodological approach. See Riggs v. Prober & Raphael,
681 F.3d 1097, 1104 (9th Cir. 2012).
20                  SHEA HOMES V. CIR

matter of the contract is based on all the facts and
circumstances.” Id. at 109 n.24.

     AFFIRMED.

RAWLINSON, Circuit Judge, concurring in the judgment:

    I concur in the judgment affirming the decision of the Tax
Court. However, I do so solely on the basis that the
Commissioner of the Internal Revenue Service
(Commissioner) is bound by the arguments and theories
relied upon during the trial before the Tax Court. As noted
by the majority, the Commissioner advocated before the Tax
Court that, for purposes of determining the taxable income
from the home construction contracts at issue, the subject
matter of the construction contract was only the purchased
house and the lot upon which the house was sited.
Specifically, the Commissioner argued that none of the
amenities included in the housing development were part of
the contract, and that any amenities were secondary items
unrelated to completion of the contract.

    The Tax Court rejected the Commissioner’s argument on
both fronts, ruling that each construction contract included
the amenities within the development, and that those
amenities were not secondary items. On appeal, the
Commissioner does not challenge these rulings by the Tax
Court. Rather, the Commissioner now seeks to argue that the
Tax Court erroneously permitted the Taxpayers to include the
entire development when performing the calculation under
the 95 percent completion test.
                    SHEA HOMES V. CIR                       21

     Our precedent is replete with cases precluding a party
from endeavoring to assert a theory on appeal that was not
presented to the trial court. See, e.g., Stewart v. Comm’r of
Internal Revenue, 714 F.2d 977, 986 (9th Cir. 1983)
(“Without question, the most appropriate times for the
Commissioner to inform a taxpayer of the legal theories on
which he intends to rely are first in the notice of deficiency
and then in the Commissioner’s answer in the Tax
Court. . . .”) ( citation omitted); Ecological Rights Found. v.
Pac. Gas & Elec. Co., 713 F.3d 502, 511 (9th Cir. 2013)
(“The Court will not allow a party to raise an issue for the
first time on appeal merely because a party believes that he
might prevail if given the opportunity to try a case again on
a different theory.”) (citation and alteration omitted); Tibble
v. Edison Int’l., 820 F.3d 1041, 1046 (9th Cir. 2016) (“We
recognize a general rule against entertaining arguments on
appeal that were not presented or developed before the
district court. . . . [A]n issue will generally be deemed
waived on appeal if the argument was not raised sufficiently
for the trial court to rule on it.”) (citations and internal
quotation marks omitted).

     We need go no further than consulting this precedent to
resolve the instant appeal. I would not, and do not, go so far
as to adopt the Taxpayers’ contention that the subject of each
construction contract is the entire development. For starters,
the concept of the contract encompassing all of the homes in
the development ignores the singular language of the
governing regulation, which references “the subject matter of
the contract.” 26 C.F.R. §1.460-4(d)(1) (emphasis added).
It is undisputed that each home purchaser signs an individual
contract and becomes obligated for the purchase price of the
home at the time the individual contract is signed. Yet, the
Taxpayers argued that until the cost of 95 percent of the
22                  SHEA HOMES V. CIR

entire development has been incurred, no reportable income
has been realized. The Tax Court appeared to recognize the
fallacy in this contention as a general premise, noting that it
would be improper to apply the 95 percent completion test
“by comparing the number of homes closed in escrow in the
development to the number of homes projected to be built in
the development.” Nevertheless, the fact remains that a
Taxpayer could readily manipulate the 95 percent completion
test by deliberately incurring development costs of less than
95 percent and deferring the balance of the costs indefinitely,
correspondingly deferring taxes indefinitely. I am not
persuaded that this interpretation of the regulation is
consistent with its plain language. For that reason, I would
affirm the Tax Court’s decision solely on the basis that the
Commissioner failed to raise this issue sufficiently for the
Tax Court to rule on it. I would reserve resolution of this
important issue for a case where it was fairly joined.