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interest expense should be treated as estimated construction
costs and available for allocation under the alternative cost
method. In Haynsworth, the taxpayer included interest expense in
their estimate of anticipated development costs for purposes of
computing cost-of- goods-sold, but, as a result of payment of the
mortgage on the property, the taxpayer eliminated the interest
from its adjusted estimates. Petitioners claim that Haynsworth
indicates a long accepted practice of including interest expense
in the estimated costs of common improvements.
Treatment of the interest expense was not at issue in
Haynsworth. The interest expense mentioned in Haynsworth was
removed from the total estimated costs in a year before the years
in dispute. We reject petitioners’ argument that interest
expense should be included in estimated construction costs based
on Haynsworth or some accepted practice regarding estimated
interest expense.
Rev. Proc. 92-29, 1992-1 C.B. 748, provides an alternative
to the economic performance rules under section 461(h) for
determining when estimated construction costs may be included in
the bases of lots sold. In enacting the economic performance
rule, Congress was concerned that allowing taxpayers to take
current deductions for future obligations overstated the true
costs because the time value of money was not taken into account.
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