§460 — Special rules for long-term contracts
30 cases·8 followed·3 distinguished·7 criticized·12 cited—27% support
Statute Text — 26 U.S.C. §460
In the case of any long-term contract, the taxable income from such contract shall be determined under the percentage of completion method (as modified by subsection (b)).
Except as provided in paragraph (3), in the case of any long-term contract with respect to which the percentage of completion method is used—
the percentage of completion shall be determined by comparing costs allocated to the contract under subsection (c) and incurred before the close of the taxable year with the estimated total contract costs, and
upon completion of the contract (or, with respect to any amount properly taken into account after completion of the contract, when such amount is so properly taken into account), the taxpayer shall pay (or shall be entitled to receive) interest computed under the look-back method of paragraph (2).
In the case of any long-term contract with respect to which the percentage of completion method is used, except for purposes of applying the look-back method of paragraph (2), any income under the contract (to the extent not previously includible in gross income) shall be included in gross income for the taxable year following the taxable year in which the contract was completed. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under subparagraph (B) shall be treated as an increase in the tax imposed by this chapter for the taxable year in which the contract is completed (or, in the case of interest payable with respect to any amount properly taken into account after completion of the contract, for the taxable year in which the amount is so properly taken into account).
The interest computed under the look-back method of this paragraph shall be determined by—
first, allocating income under the contract among taxable years before the year in which the contract is completed on the basis of the actual contract price and costs instead of the estimated contract price and costs,
second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each taxable year referred to in subparagraph (A) which would result solely from the application of subparagraph (A), and
then using the adjusted overpayment rate (as defined in paragraph (7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).
For purposes of the preceding sentence, any amount properly taken into account after completion of the contract shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such amount was properly taken into account) such amount to its value as of the completion of the contract. The taxpayer may elect with respect to any contract to have the preceding sentence not apply to such contract.
In the case of any long-term contract, the Secretary may prescribe a simplified procedure for allocation of costs to such contract in lieu of the method of allocation under subsection (c).
Paragraph (1)(B) shall not apply to any contract—
the gross price of which (as of the completion of the contract) does not exceed the lesser of—
$1,000,000, or
1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and
which is completed within 2 years of the contract commencement date.
For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply.
In the case of a pass-thru entity—
the look-back method of paragraph (2) shall be applied at the entity level,
in determining overpayments and underpayments for purposes of applying paragraph (2)(B)—
any increase in the income under the contract for any taxable year by reason of the allocation under paragraph (2)(A) shall be treated as giving rise to an underpayment determined by applying the highest rate for such year to such increase, and
any decrease in such income for any taxable year by reason of such allocation shall be treated as giving rise to an overpayment determined by applying the highest rate for such year to such decrease, and
any interest required to be paid by the taxpayer under paragraph (2) shall be paid by such entity (and any interest entitled to be received by the taxpayer under paragraph (2) shall be paid to such entity).
This paragraph shall not apply to any closely held pass-thru entity.
This paragraph shall not apply to any contract unless substantially all of the income from such contract is from sources in the United States.
For purposes of this paragraph—
The term “highest rate” means—
the highest rate of tax specified in section 11, or
if at all times during the year involved more than 50 percent of the interests in the entity are held by individuals directly or through 1 or more other pass-thru entities, the highest rate of tax specified in section 1.
The term “pass-thru entity” means any—
partnership,
S corporation, or
trust.
The term “closely held pass-thru entity” means any pass-thru entity if, at any time during any taxable year for which there is income under the contract, 50 percent or more (by value) of the beneficial interests in such entity are held (directly or indirectly) by or for 5 or fewer persons. For purposes of the preceding sentence, rules similar to the constructive ownership rules of section 1563(e) shall apply.
In the case of any long-term contract with respect to which an election under this paragraph is in effect, the 10-percent method shall apply in determining the taxable income from such contract.
For purposes of this paragraph—
The 10-percent method is the percentage of completion method, modified so that any item which would otherwise be taken into account in computing taxable income with respect to a contract for any taxable year before the 10-percent year is taken into account in the 10-percent year.
The term “10-percent year” means the 1st taxable year as of the close of which at least 10 percent of the estimated total contract costs have been incurred.
An election under this paragraph shall apply to all long-term contracts of the taxpayer which are entered into during the taxable year in which the election is made or any subsequent taxable year.
This paragraph shall not apply to any taxpayer which uses a simplified procedure for allocation of costs under paragraph (3)(A).
The 10-percent method shall be taken into account for purposes of applying the look-back method of paragraph (2) to any taxpayer making an election under this paragraph.
Paragraph (1)(B) shall not apply with respect to any taxable year (beginning after the taxable year in which the contract is completed) if—
the cumulative taxable income (or loss) under the contract as of the close of such taxable year, is within
10 percent of the cumulative look-back taxable income (or loss) under the contract as of the close of the most recent taxable year to which paragraph (1)(B) applied (or would have applied but for subparagraph (B)).
Paragraph (1)(B) shall not apply in any case to which it would otherwise apply if—
the cumulative taxable income (or loss) under the contract as of the close of each prior contract year, is within
10 percent of the cumulative look-back income (or loss) under the contract as of the close of such prior contract year.
For purposes of this paragraph—
The term “contract year” means any taxable year for which income is taken into account under the contract.
The look-back income (or loss) is the amount which would be the taxable income (or loss) under the contract if the allocation method set forth in paragraph (2)(A) were used in determining taxable income.
The amounts taken into account after the completion of the contract shall be determined without regard to any discounting under the 2nd sentence of paragraph (2).
This paragraph shall only apply if the taxpayer makes an election under this subparagraph. Unless revoked with the consent of the Secretary, such an election shall apply to all long-term contracts completed during the taxable year for which election is made or during any subsequent taxable year.
The adjusted overpayment rate for any interest accrual period is the overpayment rate in effect under section 6621 for the calendar quarter in which such interest accrual period begins.
For purposes of subparagraph (A), the term “interest accrual period” means the period—
beginning on the day after the return due date for any taxable year of the taxpayer, and
ending on the return due date for the following taxable year.
For purposes of the preceding sentence, the term “return due date” means the date prescribed for filing the return of the tax imposed by this chapter (determined without regard to extensions).
In the case of a long-term contract, all costs (including research and experimental costs) which directly benefit, or are incurred by reason of, the long-term contract activities of the taxpayer shall be allocated to such contract in the same manner as costs are allocated to extended period long-term contracts under section 451 and the regulations thereunder.
In the case of a cost-plus long-term contract or a Federal long-term contract, any cost not allocated to such contract under paragraph (1) shall be allocated to such contract if such cost is identified by the taxpayer (or a related person), pursuant to the contract or Federal, State, or local law or regulation, as being attributable to such contract.
Except as provided in subparagraphs (B) and (C), in the case of a long-term contract, interest costs shall be allocated to the contract in the same manner as interest costs are allocated to property produced by the taxpayer under section 263A(f).
In applying section 263A(f) for purposes of subparagraph (A), the production period shall be the period—
beginning on the later of—
the contract commencement date, or
in the case of a taxpayer who uses an accrual method with respect to long-term contracts, the date by which at least 5 percent of the total estimated costs (including design and planning costs) under the contract have been incurred, and
ending on the contract completion date.
In applying section 263A(f) for purposes of subparagraph (A), paragraph (1)(B)(iii) of such section shall be applied on a contract-by-contract basis; except that, in the case of a taxpayer described in subparagraph (B)(i)(II) of this paragraph, paragraph (1)(B)(iii) of section 263A(f) shall be applied on a property-by-property basis.
This subsection shall not apply to any—
independent research and development expenses,
expenses for unsuccessful bids and proposals, and
marketing, selling, and advertising expenses.
For purposes of paragraph (4), the term “independent research and development expenses” means any expenses incurred in the performance of research or development, except that such term shall not include—
any expenses which are directly attributable to a long-term contract in existence when such expenses are incurred, or
any expenses under an agreement to perform research or development.
Solely for purposes of determining the percentage of completion under subsection (b)(1)(A), the cost of qualified property shall be taken into account as a cost allocated to the contract as if subsection (k) of section 168 had not been enacted.
For purposes of this paragraph, the term “qualified property” means property described in section 168(k)(2) which has a recovery period of 7 years or less.
For purposes of this section—
The term “Federal long-term contract” means any long-term contract—
to which the United States (or any agency or instrumentality thereof) is a party, or
which is a subcontract under a contract described in subparagraph (A).
For purposes of paragraph (1), the rules of section 168(h)(2)(D) (relating to certain taxable entities not treated as instrumentalities) shall apply.
Subsections (a), (b), and (c)(1) and (2) shall not apply to—
any residential construction contract, or
any other construction contract entered into by a taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3))—
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
who meets the gross receipts test of section 448(c) for the taxable year in which such contract is entered into.
In the case of a residential construction contract with respect to which the requirements of clauses (i) and (ii) of subparagraph (B) (determined by substituting “3-year” for “2-year” in subparagraph (B)(i) for any residential construction contract which is not a home construction contract) are not met, section 263A shall apply notwithstanding subsection (c)(4) thereof.
For purposes of paragraph (1)(B)(ii), in the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership.
Any change in method of accounting made pursuant to paragraph (1)(B)(ii) shall be treated as initiated by the taxpayer and made with the consent of the Secretary. Such change shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change.
For purposes of this subsection, the term “construction contract” means any contract for the building, construction, reconstruction, or rehabilitation of, or the installation of any integral component to, or improvements of, real property.
For purposes of this subsection—
The term “home construction contract” means any 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 (3) with respect to—
dwelling units (as defined in section 168(e)(2)(A)(ii)) contained in buildings containing 4 or fewer dwelling units (as so defined), and
improvements to real property directly related to such dwelling units and located on the site of such dwelling units.
For purposes of clause (i), each townhouse or rowhouse shall be treated as a separate building.
The term “residential construction contract” means any contract which would be described in subparagraph (A) if clause (i) of such subparagraph reads as follows:
dwelling units (as defined in section 168(e)(2)(A)(ii)), and”.
For purposes of this section—
The term “long-term contract” means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into.
A contract for the manufacture of property shall not be treated as a long-term contract unless such contract involves the manufacture of—
any unique item of a type which is not normally included in the finished goods inventory of the taxpayer, or
any item which normally requires more than 12 calendar months to complete (without regard to the period of the contract).
For purposes of this subsection, under regulations prescribed by the Secretary—
2 or more contracts which are interdependent (by reason of pricing or otherwise) may be treated as 1 contract, and
a contract which is properly treated as an aggregation of separate contracts may be so treated.
For purposes of this section, the term “contract commencement date” means, with respect to any contract, the first date on which any costs (other than bidding expenses or expenses incurred in connection with negotiating the contract) allocable to such contract are incurred.
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations to prevent the use of related parties, pass-thru entities, intermediaries, options, or other similar arrangements to avoid the application of this section.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.460-0 Outline of regulations under section 460
- Treas. Reg. §Treas. Reg. §1.460-0(a) In general.
- Treas. Reg. §Treas. Reg. §1.460-0(b) Scope of look-back method.
- Treas. Reg. §Treas. Reg. §1.460-0(c) Operation of the look-back method.
- Treas. Reg. §Treas. Reg. §1.460-0(d) Simplified marginal impact method.
- Treas. Reg. §Treas. Reg. §1.460-0(e) Delayed reapplication method.
- Treas. Reg. §Treas. Reg. §1.460-0(f) Look-back reporting.
- Treas. Reg. §Treas. Reg. §1.460-0(g) Mid-contract change in taxpayer.
- Treas. Reg. §Treas. Reg. §1.460-0(h) Examples.
- Treas. Reg. §Treas. Reg. §1.460-0(i) §1.460-0(i)
- Treas. Reg. §Treas. Reg. §1.460-0(j) Election not to apply look-back method in de minimis cases.
- Treas. Reg. §Treas. Reg. §1.460-0(k) Applicability date.
- Treas. Reg. §Treas. Reg. §1.460-0(v) Years affected by look-back only.
- Treas. Reg. §Treas. Reg. §1.460-1 Long-term contracts
- Treas. Reg. §Treas. Reg. §1.460-1(a) Overview—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(b) Terms—(1) Long-term contract.
- Treas. Reg. §Treas. Reg. §1.460-1(c) Entering into and completing long-term contracts—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(d) Allocation among activities—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(e) Severing and aggregating contracts—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(f) Classifying contracts—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(g) Special rules for activities benefitting long-term contracts of a related party—(1) Related party use of PCM—(i) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(h) Effective date—(1) In general.
- Treas. Reg. §Treas. Reg. §1.460-1(i) §1.460-1(i)
- Treas. Reg. §Treas. Reg. §1.460-1(j) Examples.
- Treas. Reg. §Treas. Reg. §1.460-2 Long-term manufacturing contracts
30 Citing Cases
Exception for Certain Manufacturing Contracts Respondent's primary position is that the Petromaxx SPA is a manufacturing contract and that it fails to meet the section 460(f)(2) requirements to be treated as a long-term contract. Accordingly, respondent asserts, petitioner is required to use the accrual method ofaccounting. Petitioner disagrees, arguing that section 460(f)(2) is inapplicable because the contracts are construction contracts--not manufacturing contracts.
The public policy concerns that underpin the pre-existing duty rule do not seem to be present here." In addition, we do not agree with respondent that section 1.460-1(b)(2), Income Tax Regs., codifies the preexisting duty rule.
We disagree with respondent's conclusion that the integration clause ofthe purchase and sale agreements necessarily excludes these documents.
The public policy concerns that underpin the pre-existing duty rule do not seem to be present here." In addition, we do not agree with respondent that section 1.460-1(b)(2), Income Tax Regs., codifies the preexisting duty rule.
We disagree with respondent's conclusion that the integration clause ofthe purchase and sale agreements necessarily excludes these documents.
We disagree with respondent's conclusion that the integration clause ofthe purchase and sale agreements necessarily excludes these documents.
460 provides in pertinent part: 1.
The regulation is a reasonable interpretation of, and plainly consistent with, the underlying statute.11 In light of the foregoing, we hold that section 1.460- 6(c)(2)(vi), Income Tax Regs., is valid because it harmonizes with the plain language, origin, and purpose of section 460.
Section 460: Allocation of Costs to Long-Term Contracts Qwest’s cost allocation to its customer contracts is governed by section 460. Section 460 contains special rules for the tax reporting of long-term contracts. In general, section 460 requires that the taxable income from a long-term contract shall be determined under the percentage of completi
n these cases is whether Shea Homes, Inc., and Subsidiaries, Shea Homes, LP, and Vistancia, LLC, properly reported income and loss from the sale of homes in their planned developments using the completed contract method of accounting provided for in section 460. The resolution of this issue turns on the determination of whether the home sale contracts include the development amenities or are limited to the house and the lot on which it sits. FINDINGS OF FACT The parties’ stipulation of facts and
perly reported income on the completed contract method. Respondent further alleges that certain other contracts are not long-term contracts or construction contracts and that petitioners cannot account for the gain or loss from these contracts under section 460. FINDINGS OF FACT The parties’ stipulation of facts and supplemental stipulation of facts, both with accompanying exhibits, are incorporated herein by this reference. At the time petitioners filed the petitions, their principal place of b
her section 1.460-6(c)(2)(vi)(A) and (B), Income Tax Regs., is invalid to the extent it contains no requirement that disputed long-term contract claims meet the “all events test” to be includable in the estimated contract price within the context of section 460. Summary judgment may be granted if the pleadings and other materials demonstrate that no genuine issue exists as to any material fact and that a decision may be rendered as a matter of law. See Rule 121(b); Sundstrand Corp. v. Commission
Under section 460 as enacted by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 804, 100 Stat. 2358, gross income from a long-term contract is taken into account as the work progresses. The amount of gross income from a long-term contract that is accrued for each taxable year is that proportion of the expected total contract income that the amount of co
Because of its obligations to deliver blue-top lots, OPLP elected to use the completed contract method of accounting (CCM) and defer profits under the percentage of completion method of accounting (PCM), as permitted under section 460 and Treasury Regulation § 1.460-4(d).
involved with the projects. Petitioner's bid sheets were papers that petitioner prepared to calculate and place a bid on a project offered to contractors (or subcontractors). Each bid sheet SPetitioner used the percentage of completion method under sec. 460 to compute its taxable income. - 6 - contained an estimate of the amounts and types of costs that petitioner expected to incur in performing the project. Petitioner further characterized its projects as: (1) Substantial renovation or (2) rep
useful life of a Federal-aid highway. See 23 U.S.C. sec. 116 (2006); see also id. sec. 101(a)(31) (defining the word “Secretary” for purposes of tit. 23 as the “Secretary of Transportation”). Petitioner used the percentage of completion method under sec. 460 to compute its taxable income. Respondent concedes in his opening brief that petitioner’s work on the bridges met the first prong but advances no argument as to petitioner’s work on the other types of property. Each of those other types of p
e years in issue were July 31, 1994 through 1996. Before and during the years in issue, Qwest was known by different names, but for convenience, it will be referred to only (continued...) - 3 - These contracts were long-term contracts as defined by section 460. After Qwest contracted with the third-party customers, it decided to install for its own potential future use or sale additional conduit or fiberoptic cable along the same route as the customers’ conduit or cable.3 Because Qwest was engag
of New York, New York, announced the criminal indictment of Baron, Bressman, and 12 other members of Baron. Among other things, the 174-count indictment charged the defendants with violating the New York Enterprise Corruption Statute, NY Penal Law, sec. 460.20 (Consol. 1993). In the fall of 1997, Baron pleaded guilty to the charges filed against it. On December 15, 1997, Bressman pleaded -5- guilty to New York felony charges of enterprise corruption and grand larceny. OPINION Petitioner argues
rs. Two of the partnership's partners are partnerships. P filed a motion for reasonable litigation costs pursuant to sec. 7430, I.R.C., and contended that R was not substantially justified in determining that petitioner was not entitled, pursuant to sec. 460, I.R.C., to use the percentage of completion method of accounting. 1. Held: R's position, relating to whether P was entitled to use PCM, was not substantially justified. 2. Held, further, first-tier partners that meet the net worth requireme
, are to the Internal Revenue Code as amended and in effect for the years under consideration. Rule references are to this Court's Rules of Practice and Procedure. 5 The questions raised in this opinion have been largely obviated by the enactment of sec. 460, added by the Tax Reform Act of 1986, Pub. L. 99-514, sec. 804(a), 100 Stat. 2085, 2358, which, with limited exceptions, prohibits the use of the completed contract method for the Federal tax reporting of income and deductions of long-term c