CCA 200922040: Percentage-of-completion contract price included expected customer entitlements

Plain-English summary

Chief Counsel explained contract price for the percentage-of-completion method under section 460. Quoting Notice 89-15, the email stated that expected contract revenue includes all amounts the taxpayer is or will be entitled to receive from the customer under the contract or another rule of law. This includes retainages payable only after satisfactory completion and amounts available through quasi-contractual remedies. Later section 460 regulations had not changed the rule that contract price reflects what the customer pays for performance of the taxpayer's long-term-contract obligations. A possible claim against the customer for cost overruns was identified as a separate issue for further discussion.

Ruling snapshot

• Question: What amounts belonged in contract price under the percentage-of-completion method?
• Outcome: Advice given: include expected entitlements from the customer, including retainages; a cost-overrun claim required separate consideration.
• Key authorities: IRC § 460; Notice 89-15, 1989-1 C.B. 634, Q&A 27.

Full text (IRS public release)

ID: CCA_2009042110555542 Number: 200922040
Release Date: 5/29/2009
Office: ----------------------------
UILC: 460.02-00

From: ----------------------
Sent: Tuesday, April 21, 2009 10:55:58 AM
To: ---------------------
Cc: ----------------
Subject: RE: Further question on 460

The following definition of contract price for PCM purposes is taken from Notice 89-15, 1989-1 C.B. 634, Q&A 27:

All amounts that the taxpayer is or will be entitled to receive from the customer under the contract, or any other rule of law (including, for example, the contract law rule of quantum meruit, or other quasi- contractual remedies) must be included in total expected contract revenues, including amounts, such as retainages, that the customer has contracted to pay only upon satisfactory completion of the contract.

[Emphasis supplied.]

Nothing in the section 460 regulations subsequently published was intended to, or did, change the rule providing that contract price is what the customer pays for the performance of the taxpayer's obligations under a long-term contract.

If the taxpayer has a claim against the customer for these cost overruns, that raises a separate issue, which we can discuss if you like.

Hope this helps.

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