Revision Date: July 20, 2006
CONSTRUCTION/REAL ESTATE INDUSTRY
CLAIM REVENUE UNDER A LONG-TERM CONTRACT
Whether the contractor-taxpayer must include "claim revenue" (also referenced
by the regulations as “contingent compensation”) in the total contract price in
determining the gross income from a long-term contract under I.R.C. § 460 in the
taxable year when additional work is performed.
Contractor enters into a "long-term contract" (as defined under section 460(f))
with a client for the building, installation, or construction of property, scheduled
for completion three years later. The contract does not involve home
construction, and contractor's average annual gross receipts for the immediately
preceding three taxable years exceeded $10,000,000.
During the course of construction, contractor performed additional work and
incurred additional costs attributable to customer caused delays, errors in
specifications and designs, unpriced change orders, or other unanticipated work.
The contractor deducted these costs for tax purposes. Although client agreed to
the additional work, the parties had not agreed to a price for the extra work
performed. The parties will negotiate the price at a later time. The contract
provisions dealing with change orders provide a legal basis for a claim under
contract law in the controlling jurisdiction.
In determining the amount of gross income from the contract under section 460
for the taxable year at issue, the contractor used the original contract price in the
section 460 computation. Contractor did not increase the total contract price, for
purposes of section 460, for the revenue attributable to the additional work
performed during the taxable year ("claim revenue").
For book purposes, however, contractor accrued additional income attributable to
the additional work performed in accordance with the Accounting Standards
Division of the American Institute of Certifie