Background:

• Most long-term construction contracts (contracts lasting more than one year) are required to be reported under Section 460 of the Internal Revenue Code using the percentage-of-completion method. Contract revenue earned is computed by determining how much of the contract has been completed compared to the total estimated contract amount. Regulations require an increase of the contract revenue amount as soon as it is reasonably possible to estimate that payments on it will be received, even when the payments are being disputed between the owner and contractor.

AGC Message:

• Taxes Paid After the “All Events Test” has Been Performed. The general rule for accrual basis taxpayers is that income generally should not be taxed until the “all events test” is met to assure the receipt of income. Construction contracting and contracting law is very complex. The tax code should respect this complexity and not require a contractor to pay taxes on revenue amounts that are in dispute. The construction industry is the only industry that has been singled out with taxation prior to an economic transfer of value.
• Payments in Dispute Should Not Be Considered for Taxation. AGC believes that taxpayers reporting using the percentage-of-completion accounting method for long-term contracts should be required to include in the contract amount only items for which the “all events test” has been met. 
  Forcing Taxation While In Dispute Unjustly Penalizes Contractor. The contractor is not allowed to take costs attributable to subcontractors and suppliers that have filed claims against the general contractor because the “all events test” is not met.
• Contracts Are Dynamic Agreements and Should Only Be Modified When Agreements As to Scope and Price Are Achieved. The “all events test” should apply to both revenue and costs. To do otherwise causes taxation prior to the creation of income. Regulation 1.460-4(d) contains clear provisions for reporting disputed contract items for contracts reported on the completed contract method. These provisions should apply to all contracts including those reported on the percentage-of-completion method as has been the longstanding practice of the construction industry.