A Victory for Residential Home Builders

A win for the residential home building industry, Shea Homes, Inc. (Shea) v. Commissioner could have a significant impact on how a few home builders defer revenue recognition.  The case found in favor of Shea, which allows Shea to defer recognition of revenue until 95% of the entire development was completed and sold.  The tax court emphasis that Shea’s developments were not simply a conglomerate of independent homes, but rather a lifestyle inside of a community, including various amenities such as golf course, cafes and amphitheater.  Shea focused on the marketing and sales process that was selling “The Dream” to then sell a home in the development.  The case is groundbreaking in that it permits homebuilders to use the completed method of revenue recognition for the first time.  However, the Court makes it abundantly clear that the facts and circumstances to allow this ruling to apply must be substantially the same and there must be no apparent attempt to internally defer the revenue recognition over an unreasonable period of time.

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