The Tax Court held that a custom homebuilder is subject to the Section 263A Uniform Capitalization (UNICAP) rules in the same way as a speculative homebuilder. The custom builder capitalized direct material and labor costs and post-production-period carrying costs but deducted salaries, year-end bonuses, and other miscellaneous expenses on its 2005 tax return. IRS issued a deficiency notice, making adjustments to Frontier’s income totaling almost $1.9 million under the Section 263A UNICAP rules. Frontier contended that its business model centered on sales and marketing, not production-related services. It argued that custom homebuilders differ from speculation homebuilders because their price premiums and profitability come not from cost control, but rather from the creativity of their salespeople, designers, decorators, and marketing employees. The Tax Court pointed out that the term produce includes “construct, build, install, manufacture, develop, or improve,” so the accounting method Frontier used in 2005 did not comply with IRC Sec. 263A. Frontier Custom Builders, Inc. , TC Memo 2013-231.
