Category: Accounting Periods & Methods Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com THIS MEMO IS A FOLLOW UP TO: Fixture--Definition of; Storage Tanks as Real Property; IRC: 460. I refer to our telephone conversation of this morning and our follow up conversation this afternoon. Your client constructs specialty products such as large, custom-made tanks and related piping to be installed in a factory. Normally, the taxpayer does not install the constructed items. The taxpayer's gross receipts have been less than $10 million at all times. The issue is whether it is permissible to use the completed contract method of accounting. Internal Revenue Code (IRC) Section 460 generally requires taxpayers to use the percentage of completion method of accounting for long-term contracts. Section 460(e) provides an exception for certain construction contracts for taxpayers whose average annual gross receipts for the three prior tax years do not exceed $10 million. Such taxpayers are allowed to use the long-term contract rules in effect prior to Section 460 including the completed contract method. IRC Section 460(e)(4) provides a restriction on the types of construction contracts eligible for the $10 million exception. In order to qualify for the exception, the contract must be for the building, construction, reconstruction, or rehabilitation of, or installation of any integral component to, or improvement of, real property. It appears superficially that construction of custom-made tanks and related piping systems would not qualify under the standard set forth in Section 460(e)(4). It may be the case that we could argue that the items constructed by your client are real property by virtue of being permanently affixed to land and/or a building. As we discussed, you should talk to your client about whether the items in question really are permanently affixed. Please let me know how you wish to proceed. |
