Court Opinion

ID: 3151190
Source: CourtListenerOpinion
Date Created: 2015-10-31 00:00:49.165065+00
Date Added: 2024-06-11T11:55:33.811502
License: Public Domain

Case: 14-60915     Document: 00513254290      Page: 1       Date Filed: 10/30/2015

                       REVISED October 30, 2015

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT      United States Court of Appeals
                                                     Fifth Circuit

                                                                                  FILED
                                                                             October 27, 2015
                                   No. 14-60915
                                                                               Lyle W. Cayce
                                                                                    Clerk

HOWARD HUGHES COMPANY, L.L.C., formerly known as Howard Hughes
Corporation and Subsidiaries,

             Petitioner - Appellant

v.

COMMISSIONER OF INTERNAL REVENUE,

                  Respondent - Appellee
--------------------------------------------------------------
                Cons/w Case No. 14-60921
HOWARD HUGHES PROPERTIES, INCORPORATED,

             Petitioner - Appellant

v.

COMMISSIONER OF INTERNAL REVENUE,

             Respondent - Appellee

                          Appeals from a Decision of the
                            United States Tax Court

Before KING, DENNIS, and OWEN, Circuit Judges.
KING, Circuit Judge:
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                        No. 14-60915 cons/w No. 14-60921
      Petitioners–Appellants      used    the   completed     contract    method    of
accounting in computing their gains from sales of property under long-term
construction contracts. The Internal Revenue Service challenged the method
of accounting, arguing that the contracts at issue do not qualify as home
construction contracts and that Petitioners–Appellants should therefore have
used the percentage of completion method in computing their gains. The Tax
Court sided with the Internal Revenue Service. We AFFIRM.
               I. FACTUAL AND PROCEDURAL BACKGROUND
      Petitioners The Howard Hughes Company, LLC (THHC) and Howard
Hughes Properties, Inc. (HHPI) are subsidiaries of the Howard Hughes Corp.,
an entity involved in selling and developing commercial and residential real
estate. Among the real estate holdings originally owned by Howard Hughes
Corp. is a 22,500-acre plot of land west of downtown Las Vegas, Nevada, known
as Summerlin. In the 1980s this land was selected for development and was
divided into three geographic regions: Summerlin North, Summerlin South,
and Summerlin West. 1       Each of the Summerlin geographical regions was
further divided into villages, which were then divided into parcels or
neighborhoods containing individual lots.         Petitioners intended to develop
Summerlin as a large master-planned residential community. To secure the
rights to develop Summerlin, Petitioners reached master development
agreements (MDAs) with the City of Las Vegas and Clark County, which
required Petitioners to submit village development plans for municipal
approval.

      1 As of today, THHC owns Summerlin West and HHPI owns Summerlin North and
Summerlin South, excluding any tracts of land within each region that have been sold to
third parties. Since its development, Summerlin has grown into a residential community
with approximately 100,000 residents living in 40,000 homes as of 2010.
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      Petitioners generated revenue from their holdings in Summerlin by
selling property within the community to commercial builders or individual
buyers who would then construct homes on the property. The first land sales
in Summerlin North took place approximately in 1986, in Summerlin South in
1998, and in Summerlin West in 2000. 2 Petitioners’ sales generally fell into
one of four categories: pad sales, finished lot sales, custom lot sales, or bulk
sales. In a pad sale, Petitioners would construct all the infrastructure in a
village up to a parcel boundary and then sell a parcel to a homebuilder who
would be responsible for any subdivision of the parcel, infrastructure in the
parcel, and any construction therein. In a finished lot sale, Petitioners divided
the parcels into lots, constructed the village and parcel infrastructure up to the
individual lot lines, and then sold neighborhoods to buyers. For both pad sales
and finished lots sales, Petitioners reached building development agreements
(BDAs) that required the buyers–builders to do further development work on
the property. In custom lot sales, Petitioners sold individual lots to buyers who
were contractually bound to build residential dwelling units. And in bulk
sales, Petitioners sold entire villages to buyers who would then subdivide the
villages into parcels and be responsible for all of the infrastructure
improvements within the villages.
      Under the land sale contracts and MDAs, Petitioners were obligated to
construct infrastructure and other common improvements in Summerlin. The
MDAs Petitioners signed with municipal authorities required the construction
of parks, roadways, fire stations, flooding facilities, and other infrastructure.
And the BDAs required Petitioners to construct roads and utility
infrastructure such as water and sewer systems up to the line of the lots sold

      2The tax deficiencies at issue here, however, only relate to contracts involving
Summerlin South and Summerlin West.
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to homebuilders, who would then assume responsibility for completing the
infrastructure on their lots. 3 Important to this case, Petitioners did not build
homes, perform any home construction work, or make improvements within
the boundaries of any lots in Summerlin.
       For the tax years at issue (2007 and 2008), Petitioners used the
“completed contract method” of accounting in computing gain for tax purposes
from their long-term contracts for the sale of residential property in Summerlin
West and South. By using this method, Petitioners deferred reporting income
on a contract for the sale of land until the contract was “complete,” i.e., until
the year in which Petitioners’ incurred costs reached 95% of their estimated
contract costs. 4 See Treas. Reg. § 1.4601-(c)(3)(A). This is in contrast to the
general method of reporting income for tax purposes under long-term
contracts, the “percentage of completion” method.                       The percentage of
completion method requires a taxpayer to recognize gain or loss annually in
proportion to the progress the taxpayer has made during the year toward
completing the contract, determined by comparing costs allocated and incurred
before the end of the year to the estimated contract costs. 5 Petitioners claimed

       3 The costs attributable to these common improvement activities that were incurred
by Petitioners exceeded 10% of the various total contract prices. Under an operative Treasury
Regulation, a contract cannot be a construction contact “if the contract includes the provision
of land by the taxpayer and the estimated total allocable contract costs, as defined in
paragraph (b)(3) of this section, attributable to the taxpayer's construction activities are less
than 10 percent of the contract's total contract price.” Treas. Reg. § 1.4601-(b)(2)(ii).
       4 As noted by one treatise:

       Under the completed contract method, the taxpayer does not report income
       until the tax year in which the contract is completed and accepted . . . .
       Expenses allocable to the contract are deductible in the year in which the
       contract is completed. Expenses not allocated to the contract (i.e., period costs)
       are deductible in the year in which they are paid or incurred, depending on the
       method of accounting employed.

U.S. Master Tax Guide ¶ 1552 (96th ed. 2013).
      5 More specifically:

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that they were entitled to use the completed contract method because their
contracts were “home construction contracts” under I.R.C. § 460(e)(1).
       Respondent, the Commissioner of Internal Revenue (the Commissioner),
disagreed with Petitioners’ method of accounting and issued notices of
deficiency for the 2007 and 2008 tax years, changing the method of accounting
as the Commissioner is authorized to do under I.R.C. § 446(b).                          The
Commissioner asserted that Petitioners were required to use the percentage of
completion method to report gains or losses under their contracts. As a result
of this change in the method of accounting, the Commissioner increased
Petitioners’ taxable income for 2007 and 2008 as follows:
       Petitioner           2007                 2008                   Total
         THHC          $209,875,725          $19,399,420            $229,275,145
         HHPI          $156,303,168          $37,192,046            $193,495,214
Petitioners challenged the deficiencies 6 in the United States Tax Court. The
Tax Court held that Petitioners’ contracts were long-term contracts within

      Under the percentage-of-completion method, gross income is reported annually
      according to the percentage of the contract completed in that year. The
      completion percentage must be determined by comparing costs allocated and
      incurred before the end of the tax year with the estimated total contract costs
      (cost-to-cost method or simplified cost-to-cost method). Thus, for a particular
      tax year, the taxpayer includes a portion of the total contract price in gross
      income as the taxpayer incurs allocable contract costs for the year. Any
      contract income that has not been included in the taxpayer’s gross income by
      the end of the tax year in which the contract is completed is included in gross
      income for the following tax year.

U.S. Master Tax Guide ¶ 1552.
       6 Other adjustments by the Commissioner, when added to the increases in Petitioners’

taxable income, resulted in the Commissioner assessing the following total deficiencies
against Petitioners:

              Petitioner          2007                  2008
               THHC           $73,456,504            $6,789,797
               HHPI           $50,633,554           $13,228,620
                                            5
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I.R.C. § 460 but were not “home construction contracts” under I.R.C.
§ 460(e)(6)(A) that would permit the use of the completed contract method.
Howard Hughes Co., LLC v. Comm’r, 2014 WL 10077466, at *14–25 (T.C. June
2, 2014).
      Interpreting    the      “home   construction    contracts”     exception   in
I.R.C. § 460(e)(6)(A) and its accompanying regulations, the Tax Court based its
reasoning on three points. First, provisions of the Internal Revenue Code
permitting the deferral of income (such as § 460(e)(6)(A)) are to be “strictly
construed.”    Id. at *18.      Second, Petitioners’ costs do not come within
subsection (i) of § 460(e)(6)(A), which requires that costs be incurred “with
respect to” dwelling units. According to the Tax Court, Petitioners did not
engage in any activities “attributable to the construction of the dwelling units”
because they did not intend to build dwelling units and their costs did not have
a sufficient causal nexus to the construction of dwelling units. Id. at *21. The
lack of any home construction activity on the part of Petitioners was
particularly important to the Tax Court.        Apart from the statutory text, the
court pointed to the legislative history of the Technical and Miscellaneous
Revenue Act of 1988 (TAMRA), which gave birth to § 460(e)(6)(A) and which
suggested that the home construction contract exception to the use of the
percentage of completion method was specifically directed toward taxpayers
involved in building homes. Id. at *21–22.
      Third, Petitioners’ costs did not come within subsection (ii) of
§ 460(e)(6)(A) as the costs were not incurred for improvements “on the site of
such dwelling units,” a phrase which the court interpreted to mean “the
individual lot.” Id. The Tax Court also rejected Petitioners’ arguments that
their common improvement costs came within subsection (ii) because of a
regulation    that   counted    common       improvement     costs   towards   home

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constructions costs. 7        According to the court, the regulation required the
taxpayer to “at some point incur some construction cost with respect to the
dwelling unit to include these costs in the dwelling unit cost,” but “[Petitioners]
ha[d] no dwelling unit costs in which to include the common improvement
costs.” Id. at *23. 8 The court concluded its opinion by “draw[ing] a bright line,”
under which a “contract [could] qualify as a home construction contract only if
the taxpayer builds, constructs, reconstructs, rehabilitates, or installs integral
components to dwelling units or real property improvements directly related
to and located on the site of such dwelling units.” Id. at *25. It held that this

       7   The regulation states:

       (2) Home construction contract—(i) In general. A long-term construction
       contract is a home construction contract if a taxpayer (including a
       subcontractor working for a general contractor) reasonably expects to attribute
       80 percent or more of the estimated total allocable contract costs (including the
       cost of land, materials, and services), determined as of the close of the
       contracting year, to the construction of—
               (A) Dwelling units, as defined in section 168(e)(2)(A)(ii)(I), contained in
               buildings containing 4 or fewer dwelling units (including buildings with
               4 or fewer dwelling units that also have commercial units); and
               (B) Improvements to real property directly related to, and located at the
               site of, the dwelling units.
       (ii) Townhouses and rowhouses. Each townhouse or rowhouse is a separate
       building.
       (iii) Common improvements. A taxpayer includes in the cost of the dwelling
       units their allocable share of the cost that the taxpayer reasonably expects to
       incur for any common improvements (e.g., sewers, roads, clubhouses) that
       benefit the dwelling units and that the taxpayer is contractually obligated, or
       required by law, to construct within the tract or tracts of land that contain the
       dwelling units.

Treas. Reg. § 1.460-3(b)(2).
       8 The Tax Court noted that regulations proposed in 2008, but not yet adopted by the

Treasury Department, would have allowed for common improvement costs to come within
“home construction costs” even if a contract did not provide for the construction of a dwelling
unit. Id. at *24 n.19. However, the court declined to attach any importance to the regulations
and added that they supported the view that common improvement costs were not covered
by the statute and existing regulations. Id.
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rule was necessary to keep costs that were attenuated to home construction
from being the basis for the completed contract method of accounting. Id.
      The Tax Court issued its consolidated decision on June 2, 2014, and
entered decisions finally disposing of Petitioners’ claims on September 15,
2014. Petitioners then timely appealed the decision of the Tax Court. We have
jurisdiction under I.R.C. § 7482(a)(1).
                        II. STANDARD OF REVIEW
       “In reviewing Tax Court decisions, we apply the same standard as
applied to district court determinations.” Rodriguez v. Comm’r, 722 F.3d 306,
308 (5th Cir. 2013).     Because this case presents a question of statutory
interpretation, an issue of law, “the proper standard of review is de novo.”
BMC Software, Inc. v. Comm’r, 780 F.3d 669, 674 (5th Cir. 2015).
     III. THE HOME CONSTRUCTION CONTRACTS EXCEPTION
      The case before us concerns a matter of statutory interpretation of the
Internal Revenue Code. In particular, the issue is whether or not Petitioners’
contracts were “home construction contracts” within the meaning of I.R.C.
§ 460(e)(6)(A), thereby making Petitioners eligible to use the completed
contract method of accounting. Our statutory analysis here is guided by two
principles. The first is that in deciding “question[s] of statutory interpretation,
we begin, of course, with the words of the statute.” Phillips v. Marine Concrete
Structures, Inc., 895 F.2d 1033, 1035 (5th Cir. 1990) (en banc). This entails not
only looking to language of the statute, but also “follow[ing] ‘the cardinal rule
that statutory language must be read in context.’” Hibbs v. Winn, 542 U.S. 88,
101 (2004) (quoting Gen. Dynamics Land Sys. Inc., v. Cline, 540 U.S. 581, 596
(2004)). The second is “the well settled principle that statutes granting tax
exemptions or deferments must be strictly construed.” Elam v. Comm’r, 477
F.2d 1333, 1335 (6th Cir. 1973); see also United States v. Centennial Sav. Bank
FSB, 499 U.S. 573, 583 (1991) (“[T]ax-exemption and -deferral provisions are
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to be construed narrowly.”). As we conclude today, the Tax Court faithfully
applied both these precepts in holding that Petitioners’ contracts were not
“home construction contracts.”
                                             A.
      The “home construction contract” exception is part of a broader statutory
provision, I.R.C. § 460, covering how taxpayers must report income on long-
term contracts. Section 460 was first enacted as part of the Tax Reform Act of
1986 in response to the latitude taxpayers had previously enjoyed in choosing
a method of accounting for long-term contracts. See STAFF OF THE JOINT COMM.
ON TAX’N, 99th Cong., GENERAL EXPLANATION OF THE TAX REFORM ACT OF 1986

527 (Comm. Print 1987) (“Congress believed that the completed contract
method of accounting for long-term contracts permitted an unwarranted
deferral of income from those contracts.”). The provision removed this latitude
and instead required taxpayers to account for long-term contracts using the
percentage of completion method. See I.R.C. § 460(a).
      While § 460 generally prohibits the use of the completed contract
method, there are two exceptions found in I.R.C. § 460(e)(1) that allow the use
of this method. 9 The first (not at issue here) is an exception for long-term

      9   This provision, in full, states:

      (1) In general.—Subsections (a), (b), and (c)(1) and (2) [detailing the percentage
      of completion method of accounting] shall not apply to–
              (A) any home construction contract, or
              (B) any other construction contract entered into by a taxpayer–
                     (i) who estimates (at the time such contract is
                     entered into) that such contract will be completed
                     within the 2-year period beginning on the contract
                     commencement date of such contract, and
                     (ii) whose average annual gross receipts for the 3
                     taxable years preceding the taxable year in which
                     such contract is entered into do not exceed
                     $10,000,000.

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construction contracts expected to be completed within two years of the
commencement date, if performed by taxpayers whose annual gross receipts
averaged $10 million or less for the three preceding taxable years. I.R.C.
§ 460(e)(1)(B). The second is the exception for “home construction contracts”
at issue today. I.R.C. § 460(e)(1)(A). The exception was added in 1988 under
the TAMRA. Pub. L. No. 100-647, § 5041, 102 Stat. 3342, 3673. Although it
is unclear precisely why the exception was added, statements surrounding its
enactment suggest that Congress was concerned about problems that
homebuilders had experienced in using the percentage of completion method. 10
       The term “home construction contract” is defined in the statute under
§ 460(e)(6)(A). That provision qualifies a contract as a home construction
contract if:
       80 percent or more of the estimated total contract costs (as of the
       close of the taxable year in which the contract was entered into)
       are reasonably expected to be attributable to activities referred to
       in paragraph 4 [building, construction, reconstruction,
       rehabilitation, or integral component installation] with respect
       to—
             (i) dwelling units (as defined in section 168(e)(2)(A)(ii))
             contained in buildings containing 4 or fewer dwelling
             units (as so defined) and

       In the case of a home construction contract with respect to which the
       requirements of clauses (i) and (ii) of subparagraph (B) are not met, section
       263A shall apply notwithstanding subsection (c)(4) thereof.

I.R.C. § 460(e)(1).
        10 In particular, Senator Dennis DeConcini noted that “homebuilders receive very

small down payments and usually incur significant costs to develop the land and finish the
home before receiving the final payment,” and that “[t]he homebuilder does not receive
progress payments,” making it difficult for homebuilders to recognize income throughout the
contract under the percentage of completion method. 134 Cong. Rec. 29,962 (1988). When
the provision emerged from the conference report, Representative William Archer, Jr. stated
in support of it: “I was particularly pleased that we changed the ‘completed contract method
of accounting’ provisions under current law to exempt single family residential
construction—thereby reducing the cost of homes.” 134 Cong. Rec. 33,112 (1988).
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             (ii) improvements to real property directly related to
             such dwelling units and located on the site of such
             dwelling units.
I.R.C. § 460(e)(6)(A).
      As the Tax Court recognized, this statute creates an “80% test” that
allows a contract to qualify as a “home construction contract” if 80% of its costs
come from construction activities directed toward subsections (i) and (ii) of the
statute. Howard Hughes Co., 2014 WL 10077466, at *19. Our analysis next
turns to whether Petitioners come within either subsection.
                                          B.
      Subsection (i) of § 460(e)(6)(A) states that construction activities satisfy
the 80% test if they “are reasonably expected to be attributable to activities
referred to in paragraph (4) with respect to . . . dwelling units.” The Tax Court
held that this subsection applies “only if the taxpayer builds, constructs,
reconstructs, rehabilitates, or installs integral components to dwelling units.”
Id. at *25. A plain reading of the statute supports the Tax Court’s holding.
Subsection (i) refers to “activities . . . with respect to . . . dwelling units.” Since
a dwelling unit is “a house or apartment used to provide living
accommodations,” I.R.C. § 168(e)(2)(A)(ii)(I), this necessarily means that a
taxpayer seeking to use the completed contract method must be engaged in
construction, reconstruction, rehabilitation, or installation of an integral
component of a home or apartment. This reading is further supported by the
definition of “activities” in subsection § 460(e)(4) as “building, construction,
reconstruction, or rehabilitation of, or the installation of any integral
component to, or improvements of, real property.” Petitioners argue that this
reading imposes a “homebuilder requirement,” turning the eligibility of using
the completed contract method on the identity of the taxpayer rather than on
the costs incurred. This is incorrect. While homebuilders certainly come

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within subsection (i), the activities listed in § 460(e)(4) can encompass
subcontractors so long as their costs come from work done on a dwelling unit.
Because “the costs [P]etitioners incur[red] [we]re not the actual homes’
structural, physical construction costs,” or were not related to work on dwelling
units, Petitioners do not come within subsection (i). Howard Hughes Co., 2014
WL 10077466, at *23.
      As an alternative, Petitioners argue that the phrase “with respect to” in
the statute only requires some causal relationship between the dwelling units
and construction costs incurred. Petitioners argue that their work satisfies
this causal relationship since the common improvements and community
infrastructure in Summerlin would not have been built by Petitioners but “for
the contractually required construction of dwelling units.” The Tax Court
squarely rejected this reading, however.          It noted that “Petitioners’
interpretation of the statute would make any construction cost tangentially
related to a dwelling unit . . . a cost to be counted in determining whether a
contract is a home construction contract.” Id. at *21. The Tax Court correctly
recognized that this interpretation could not be harmonized with the narrow
exceptions to the percentage of completion method for long-term contracts
provided by Congress and the principle that tax deferments are to be strictly
construed.
      Furthermore, if construction costs need only have some causal
relationship with a dwelling unit to come within subsection (i), then costs from
“improvements to real property directly related to such dwelling units and
located on the site of such dwelling units” should also come within
subsection (i).   However, Congress has separately codified those costs in
subsection (ii). And in statutory interpretation we generally follow “the rule
against superfluities, [which] instructs courts to interpret a statute to
effectuate all its provisions, so that no part is rendered superfluous.” Hibbs,
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542 U.S. at 89. We cannot accept Petitioners’ broad reading of “with respect
to” as it would render subsection (ii) superfluous.
                                              C.
       Petitioners next argue that their construction contracts fall within
subsection (ii) of § 460(e)(6)(A).          The Tax Court correctly rejected that
argument       because      Petitioners’     construction      activities     for   common
improvements were not “located on the site of such dwelling units.” The court
held that the word “site” in the statute meant a single site of a building
otherwise described as a “lot.” Howard Hughes Co., 2014 WL 10077466, at *22.
Because Petitioners never made improvements on the lots where homes were
built, the Tax Court concluded that Petitioners’ construction activities did not
come within the plain language of the statute. Petitioners argue here, as they
did below, that the word “located on the site” refers to “construction that occurs
in the residential subdivision” or “at least the entire village.” In particular,
Petitioners point to the fact that the term “site” is used in the singular,
implying that a single “site” will include many “dwelling units.” But the Tax
Court’s construction of the word “site” takes into account that a single “site”
will include “dwelling units,” and it is consistent with the statute. As the Tax
Court observed, subsection (i) of the statute allows “a construction contract for
a building with four or fewer dwelling units to still be considered a home
construction contract.” Id. at *22. A single “site” of “a building” (otherwise
known as a “lot”) would thus include “dwelling units,” plural, because
subsection (i) contemplates that buildings can include more than one dwelling
unit. Petitioners’ contrary reading of “site” is far too broad 11 and conflicts with

       11While Petitioners state that “site” can mean a subdivision or a village, they offer no
limiting definition of the term. Under Petitioners’ definition, “site” could mean a location
even broader than a village.
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the principle that statutes granting tax deferment are construed narrowly.
Petitioners do not fall within the plain language of subsection (ii).
       Apart from the statutory text, Petitioners argue that they qualify for the
tax deferment contemplated by the statute as the result of a Treasury
regulation that flows from subsection (ii). That regulation states:
       A taxpayer includes in the cost of the dwelling units their allocable
       share of the cost that the taxpayer reasonably expects to incur for
       any common improvements (e.g., sewers, roads, clubhouses) that
       benefit the dwelling units and that the taxpayer is contractually
       obligated, or required by law, to construct within the tract or tracts
       of land that contain the dwelling units.
Treas. Reg. § 1.460-3(b)(2)(iii). Petitioners argue that this regulation allows
them to count their common improvement costs in the 80% test since it directly
refers to the type of “common improvements” they constructed. Furthermore,
Petitioners argue that the regulations show that the term “site” has a broader
meaning than the Tax Court’s interpretation.                  This is because § 1.460-
3(b)(2)(iii) uses the phrase “tracts of land that contain the dwelling units” and
another regulation uses the phrase “at the site of [] the dwelling units,” Treas.
Reg. § 1.460-3(b)(2)(i)(B), instead of the statutory phrase “on the site of such
dwelling units.”
       Petitioners’ arguments are unpersuasive. The Commissioner repeatedly
rejected Petitioners’ reading of the regulation at oral argument, in the briefing,
and in previous internal memoranda. See I.R.S. Tech. Adv. Mem. 200552012,
2005 WL 3561182 (Dec. 30, 2005). 12 Assuming, arguendo, that the regulation

       12 The Commissioner asserted in the briefing and admitted at oral argument that this
regulation is not derived from the language of § 460(e)(6)(A) but is instead derived from a
general grant of rulemaking authority under § 460(h). The Commissioner argued that the
regulation was promulgated to remedy a gap in the statute. It was previously thought that
§ 460(e)(6)(A) would not allow “a builder of a planned community . . . [to] us[e] the completed
contract method of accounting based on common improvement costs, if the allocable share of
those costs exceed[ed] 20 percent of the total allocable costs of a contract for the sale of a
house within a community.” The ensuing regulation was designed, according to the
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does construe § 460(e)(6)(A)(ii), the Tax Court concluded that Petitioners do
not come within this regulation. Section 1.460-3(b)(2)(iii) allows a taxpayer to
“include in the cost of the dwelling units . . . any common improvements.”
Treas. Reg. § 1.460-3(b)(2)(iii) (emphasis added). The Tax Court noted that
this meant that “the taxpayer must [have] at some point incur[red] some
construction cost with respect to the dwelling unit to include [common
improvement] costs in the dwelling unit cost.” Howard Hughes Co., 2014 WL
10077466, at *23. However, “Petitioners ha[d] no dwelling unit costs in which
to include the common improvement costs.” Id.
       Petitioners argue that the Tax Court improperly inferred a prohibition
from an affirmative regulation and that the Tax Court unfairly imputed a
requirement to incur dwelling unit costs from § 460(e)(6)(A)(i), when the
regulation only modifies § 460(e)(6)(A)(ii). The Tax Court properly interpreted
the plain language of the regulation. The regulation sets out how common
improvement costs can be eligible for inclusion in the 80% test, and Petitioners’
costs are not eligible under the plain terms of the regulation. 13 As the Tax
Court noted, the plain text refers to the “costs of the dwelling units,” meaning
that there must be dwelling unit costs before taxpayers can count their
common improvement costs towards the 80% test.
       Finally, Petitioners point to regulations proposed in 2008 (but not yet
adopted) providing that taxpayers can meet the 80% test with “a contract for
the construction of common improvements . . . even if the contract is not for

Commissioner, to address this issue. The Commissioner’s reading of the regulation as having
no basis in § 460(e)(6)(A) may be problematic. However, we need not decide that or delve into
the issue any deeper because Petitioners do not come within the regulation even if it does
modify § 460(e)(6)(A)(ii).
        13 Like any measure defining the eligibility for a particular benefit, this regulation

will necessarily be exclusory or “prohibitive” in applications where an entity does not meet
the eligibility criteria.
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    Case: 14-60915      Document: 00513254290         Page: 16    Date Filed: 10/30/2015

                         No. 14-60915 cons/w No. 14-60921
the construction of any dwelling unit.”               73 Fed. Reg. 45,180, 45,180
(Aug. 4, 2008); see also Prop. Treas. Reg. § 1.460-3(b)(2) (2008). Petitioners
argue that these regulations “refute the Tax Court’s interpretation of the
statute” and show that the statute does not limit the statute to “only those
taxpayers with direct dwelling-unit-construction costs.” But we have noted
that “proposed regulations are entitled to no deference until final.” Matter of
Appletree Markets, Inc., 19 F.3d 969, 973 (5th Cir. 1994); see also id. (“To give
effect to regulations that have merely been proposed would upset the balance
of powers among the constitutional branches.”). We attach no weight to the
proposed regulations. 14      Petitioners’ construction costs do not fall within
§ 460(e)(6)(A)(ii).
                                 IV. CONCLUSION
       Petitioners’ contracts are not “home construction contracts” under I.R.C.
§ 460(e)(6)(A). We AFFIRM.

       14 The proposed regulations, if anything, undermine Petitioners’ position that the
statute includes common improvement costs in the 80% test without dwelling unit
construction. The preamble to the proposed regulations states that they “expand the types
of contracts eligible for the home construction contract exemption.” 73 Fed. Reg. 45,180,
45,180 (Aug. 4, 2008). This passage suggests the proposed regulations are beyond the scope
of § 460(e)(6)(A). But, as Petitioners note elsewhere in their briefing, regulations cannot
“expand the universe of qualifying costs.”
                                            16