rp-23-09.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.204: Changes in accounting periods and in methods of accounting.
(Also: Part I, Sections 446, 460, 461, 481, 1011, 1012, 1016;
1.446-1, 1.460-1, 1.460-3,
1.460-4, 1.460-5, 1.461-1, and 1.461-4.)

Rev. Proc. 2023-9

SECTION 1. PURPOSE

This revenue procedure obsoletes Rev. Proc. 92-29, 1992-1 C.B. 748, and provides
new rules and conditions for implementing the optional safe harbor method of
accounting for real estate developers (developers) to determine when common
improvement costs may be included in the basis of individual units of real property
(units) in a real property development project (project) held for sale to determine the
gain or loss from sales of those units (Alternative Cost Method). Under this revenue
procedure, the Alternative Cost Method is a method of accounting under §§ 446 and
481 of the Internal Revenue Code (Code) and is an alternative to the general

requirements under § 461(h).
1
Under the Alternative Cost Method, a developer
includes the share of the estimated cost of common improvements allocable to the
units sold in the basis of such units regardless of whether the costs have been incurred
under § 461(h), subject to the alternative cost limitations set forth in this revenue
procedure. This revenue procedure also provides guidance on the application of the
Alternative Cost Method to contracts accounted for under § 460 and the regulations
thereunder.

SECTION 2. BACKGROUND

.01 Section 1011 provides, in part, that the adjusted basis for determining gain or loss
from the sale or other disposition of property is the taxpayer’s basis in the property,
determined under § 1012, adjusted as provided in § 1016. Section 1012 provides that the
basis of property is the cost of such property. Section 1.1016-2(a) provides that the cost
or other basis is properly adjusted for any expenditure properly chargeable to a capital
account, including the cost of improvements and betterments made to the property.
.02 A developer may allocate the costs of certain common improvements to the bases
of lots held for sale “[i]f an analysis of the common improvements indicated that (1) the
basic purpose of the taxpayer in constructing the common improvement is to induce sales
of the lots and (2) the taxpayer does not retain too much ownership and control of the
common improvements.” Norwest Corp. and Subsidiaries v. Commissioner, 111 T.C. 105,
134-35 (1998). See also Rev. Rul. 68-478, 1968-2 C.B. 330; Rev. Rul. 81-83, 1981-1 C.B.
434.

1
Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax
Regulations (26 CFR part 1).

.03 Section 461(h)(1) provides that, in determining whether an amount has been
incurred with respect to any liability during any taxable year, the all events test is not
treated as met any earlier than when economic performance with respect to such liability
occurs. The term “liability”, as defined in §1.446-1(c)(1)(ii)(B), includes any item
allowable as a deduction, cost, or expense for federal income tax purposes, as well as
any amount otherwise allowable as a capitalized cost, as a cost taken into account in
computing cost of goods sold, as a cost allocable to a long-term contract, or as any
other cost or expense.
.04 Under § 461, developers cannot add common improvement costs to the basis of
the benefitted units until such costs are incurred under § 461(h). Thus, any common
improvement costs that have not been incurred under § 461(h) when the benefitted
units are sold cannot be included in the basis of the units in determining the gain or
loss resulting from the sales.
.05 On April 9, 1992, the Internal Revenue Service (IRS) issued Rev. Proc. 92-29,
which provided procedures under which the IRS would consent to developers including
the estimated cost of common improvements in the basis of units in a project sold
without meeting the economic performance requirements of § 461(h) (92-29 alternative
cost method). In order for a developer to receive consent to use the 92-29 alternative
cost method for a project, the developer was required to file a request to use the 92-29
alternative cost method with the developer’s applicable District Director on or before
the due date of the developer’s original federal income tax return (determined with
regard to extensions of time) for the taxable year in which the first benefitted unit in the
project was sold. The developer also had to attach a copy of the request to the

developer’s timely filed (determined with regard to extensions of time) original federal
income tax return for the taxable year. A request had to be filed for each project, and
the request required detailed information about the developer, the project, and the
common improvement cost calculations under the 92-29 alternative cost method. See
section 6.04 of Rev. Proc. 92-29. Rev. Proc. 92-29 obsoleted Rev. Proc. 75-25, 1975-
1 C.B. 720, with respect to sales of property after December 31, 1992.
.06 The use of the 92-29 alternative cost method was also conditioned on the
developer’s agreement to extend the statutory period of limitation for assessing any tax
deficiency arising from employing that method for each taxable year in which the 92-29
alternative cost method was used. To satisfy this condition, the developer executed
and filed a consent on Form 921, Consent to Extend the Time to Assess Income Tax,
or Form 921-A, Consent Fixing Period of Limitation On Assessment of Income and
Profits Tax, as applicable. In addition, developers were required to file annual
statements with the District Director for each project for which the 92-29 alternative
cost method was used. The annual statements required detailed information about the
developer, the project, and updates to the common improvement cost calculations
under the 92-29 alternative cost method. See section 8.02 of Rev. Proc. 92-29. The
developer also had to attach a copy of the annual statement to the developer’s timely
filed (determined with regard to extensions of time) original federal income tax return
for the taxable year. If the project could not be completed within the original estimated
completion period, a developer was required to file a supplemental request for consent
to extend the period to use the 92-29 alternative cost method and to agree to extend
the statutory period of limitation to assess income tax for each additional taxable year

that the 92-29 alternative cost method was used.
.07 Section 460(a) generally requires that the taxable income from a long-term
contract be determined under the percentage-of-completion method (PCM). Section
460(f)(1) defines a long-term contract to include any contract for the construction of
property if the contract is not completed in the taxable year it is entered into. For this
purpose, a contract is for the construction of property if (1) construction is required in
order to fulfill a taxpayer’s contractual obligations, and (2) the construction of the
property was not completed when the contract was entered into. How the parties
characterize their agreement, for example, as a contract for the sale of property, is
irrelevant. Section 1.460-1(b)(2)(i). Nonetheless, a contract is not a construction
contract if it requires the taxpayer to transfer land and the estimated total allocable
contract costs attributable to the taxpayer’s construction activities (exclusive of the cost
of the land) are less than 10 percent of the total contract price (de minimis test).
Section 1.460-1(b)(2)(ii). Accordingly, contracts for the sale of units that do not meet
the de minimis test are long-term contracts for purposes of § 460.
.08 Section 460(e)(1) exempts from the required use of the PCM the following
construction contracts (exempt construction contracts): (1) home construction
contracts (defined in § 460(e)(5)) and (2) other construction contracts of taxpayers,
other than tax shelters, who meet the § 448(c) gross receipts test, and who estimate
that the contracts will be completed within two years of the contract commencement
date (generally the date the taxpayer first incurs allocable contract costs). A long-term
construction contract is a home construction contract if a taxpayer reasonably expects
to attribute 80 percent or more of the estimated total allocable contract costs,

determined as of the close of the contracting year, to the construction of (1) dwelling
units contained in buildings containing 4 or fewer dwelling units and (2) improvements
to real property directly related to, and located at the site of, the dwelling units (80-
percent test). Section 1.460-3(b)(2). A contract’s share of common improvement
costs is counted toward meeting the 80 percent test only if there are “dwelling unit
costs.” Howard Hughes Co., LLC v. Commissioner, 805 F.3d 175, 184-185 (5th Cir.
2015). An exempt construction contract may be accounted for under a number of
“exempt methods,” which include the completed contract method described in § 1.460-
4(d) (CCM) and the accrual method. See § 1.460-4(c)(1).
.09 In general, for exempt construction contracts using the CCM, a taxpayer must
annually allocate to each contract all costs that are incident to or necessary for the
taxpayer's performance under the contract. Section 1.460-5(d). Upon contract
completion, a taxpayer generally takes into account the gross contract price and those
allocable contract costs that have been incurred. Section 1.460-4(d). A contract is
completed upon the earlier of (1) use of the subject matter of the contract by the
customer for its intended purpose (other than for testing) and at least 95 percent of the
total allocable contract costs attributable to the subject matter have been incurred by
the taxpayer; or (2) final completion and acceptance of the subject matter of the
contract. Section 1.460-1(c)(3)(i).
.10 The Department of the Treasury (Treasury Department) and the IRS recognize
that aspects of Rev. Proc. 92-29 are outdated due to the enactment of the Internal
Revenue Service Restructuring and Reform Act of 1998, Public Law No. 105-206, 112
Stat. 685 (1998), and the Bipartisan Budget Act of 2015, Public Law No. 117-74, 129

Stat. 584 (2015). The Treasury Department and the IRS also recognize that certain
terms and conditions in Rev. Proc. 92-29, including those described in section 2.06 of
this revenue procedure, place additional administrative burdens on developers and the
IRS. Lastly, the Treasury Department and the IRS recognize that the application of the
92-29 alternative cost method to contracts accounted for under § 460 may be unclear.
Accordingly, this revenue procedure provides updates to Rev. Proc. 92-29 to reflect
current law; to reduce the administrative, recordkeeping, and compliance burdens
associated with the use of the 92-29 alternative cost method; and to clarify its
application to contracts accounted for under § 460 and the regulations thereunder.
.11 Under this revenue procedure, the Alternative Cost Method is a method of
accounting under § 446. Sections 446(e) and 1.446-1(c) require taxpayers to secure
the consent of the Commissioner of Internal Revenue (Commissioner) before changing
a method of accounting for federal income tax purposes. Section 1.446-1(e)(3)(ii)
authorizes the Commissioner to prescribe administrative procedures setting forth the
limitations, terms, and conditions necessary to permit a taxpayer to obtain consent to
change a method of accounting.
.12 This revenue procedure provides new rules and procedures for developers to
use the Alternative Cost Method for certain common improvement costs. Developers
that want to use the Alternative Cost Method generally will be required to apply the
method to all qualifying projects in a trade or business instead of on a per-project basis
as required under Rev. Proc. 92-29. Additionally, section 8 of this revenue procedure
provides the exclusive procedures for taxpayers that want to change their method of
accounting to apply the Alternative Cost Method. To ease the administrative burden

faced by taxpayers to comply with the change to the Alternative Cost Method for the
first taxable year beginning after December 31, 2022, this revenue procedure (1)
permits certain taxpayers to use a short Form 3115, Application for Change in
Accounting Method, to make method changes to apply the Alternative Cost Method if
each change results in a § 481(a) adjustment of zero, and (2) waives the eligibility rule
in section 5.01(1)(f) of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, which prohibits
taxpayers from filing an automatic method change if the taxpayer has made or
requested a change for the same item during the 5 taxable years ending with the year
of change.
SECTION 3. SCOPE
.01 Scope
. The Alternative Cost Method is available to developers using an overall
accrual method of accounting that are contractually obligated or required by law to
provide common improvements, as defined in section 4.02 of this revenue procedure,
as part of a qualifying project, as defined in section 4.01 of this revenue procedure.
The Alternative Cost Method must be applied to all projects in a trade or business that
meet the definition of a qualifying project. That is, the Alternative Cost Method is
applied on a trade or business-by-trade or business basis pursuant to § 1.446-1(d).
However, the alternative cost limitation in section 5.03 of this revenue procedure is
calculated on a project-by-project basis. Any common improvement costs incurred
with respect to one qualifying project may not be included in the Alternative Cost
Method calculations of a separate qualifying project.
SECTION 4. DEFINITIONS
.01 Qualifying Project
.

(1) General Definition. For purposes of this revenue procedure, the term
“qualifying project” means any project of a developer for which common improvement
costs will be incurred, provided such costs are properly allocable to–
(a) contracts that are properly accounted for under the CCM and for which one or
more benefitted units are the subject matter, and/or
(b) benefitted units, the sales of which are properly accounted for under an
accrual method.
(2) Reasonable Method
. For purposes of the definition of a qualifying project, a
developer may use any reasonable method to define a project in light of the common
improvements to be provided. For example, a developer is using a reasonable method
to define a project when it separates commercial and residential projects that provide for
different common improvements.
.02 Common Improvement. For purposes of this revenue procedure, the term
“common improvement” means any real property or improvements to real property that
benefit two or more units that are separately held for sale by a developer. The
developer must be contractually obligated or required by law to provide the common
improvement and must not be able to recover the cost of the common improvement
through depreciation. See Rev. Rul. 76-247, 1976-1 C.B. 217, for guidance regarding
the necessary contractual obligation. Examples of common improvements include
streets, sidewalks, sewer lines, playgrounds, clubhouses, tennis courts, and swimming
pools that the developer is contractually obligated or required by law to make, as long
as the costs are not properly recoverable through depreciation. However, common
improvement costs do not include, for example, the costs to manage, mow, maintain,

or repair the property, construction period interest, or property taxes.
.03 CCM Contract
. For purposes of this revenue procedure, the term “CCM
contract” means any contract that is properly accounted for under the CCM and for
which one or more benefitted units in a qualifying project are the subject matter.
SECTION 5. APPLICATION OF ALTERNATIVE COST METHOD
.01 Developers Using an Accrual Method of Accounting
. A developer that uses an
accrual method to account for the sale of units in a qualifying project and meets the
scope requirements of section 3 of this revenue procedure is permitted to include in
the basis of units sold (or make an adjustment to income with respect to units sold in
prior taxable years) their allocable share of the estimated cost of common
improvements, as determined under section 5.03 of this revenue procedure,
regardless of whether the costs are incurred under § 461(h), subject to the alternative
cost limitation in section 5.04 of this revenue procedure.
.02 Developers Using CCM. A developer that uses the CCM to account for a CCM
contract and meets the scope requirements of section 3 of this revenue procedure is
permitted to treat a CCM contract’s allocable share of the estimated cost of common
improvements, as determined under section 5.03 of this revenue procedure, as
incurred allocable contract costs for purposes of determining income under § 1.460-
4(d)(1) in the CCM contract’s completion year (or making an adjustment to income for
CCM contracts completed in prior taxable years), regardless of whether the costs are
incurred under § 461(h), subject to the alternative cost limitation in section 5.04 of this
revenue procedure. However, the Alternative Cost Method is disregarded for purposes
of determining the year in which a CCM contract is complete under § 1.460-1(c)(3)(i).

.03 Allocable Share of Estimated Cost of Common Improvements.
(1) Under the A lternative Cost M ethod, a developer allocates the estimated cost of
common improvements to all the benefitted units in the qualifying project (and, in the
case of a developer using the CCM, all the CCM contracts from the qualifying project).
The allocation of the estimated cost of common improvements among the benefitted
units (or CCM contracts) in the qualifying project is made using any method that is
applied on a consistent basis within that qualifying project and reasonably reflects the
benefits provided to the units (or the CCM contracts) in that qualifying project. For
example, a pro rata allocation of the estimated cost of common improvements or an
allocation of the estimated cost of common improvements based on the relative costs
to be incurred for the benefitted unit, on the relative size of the benefitted unit, or on
the relative fair market value of the benefitted unit may be reasonable. Additionally, an
allocation of a portion of the estimated cost of common improvements for certain
common improvements based on one of the foregoing approaches and a different
portion of the estimated cost of common improvements for other common
improvements based on another of the foregoing approaches may be reasonable. If
so, such an allocation method must be applied consistently among all benefitted units
(or CCM contracts) in the qualifying project, as indicated above.
(2) The “estimated cost of common improvements” as of the end of any taxable
year is equal to the amount of common improvement costs incurred under § 461(h) as
of the end of the taxable year, plus the amount of common improvement costs the
developer reasonably anticipates it will incur under § 461(h) during the ten succeeding
taxable years (ten-taxable year horizon). The estimated cost of common

improvements may change from taxable year to taxable year as, for example, (1) the
developer performs obligations at costs that differ from its previous estimate, (2) the
developer changes its estimate of costs, (3) the developer undertakes new legal
obligations or is released from existing ones, and (4) a new taxable year is added to
the ten-taxable year horizon for estimating costs. A developer may not adjust the
estimated cost of common improvements for a prior taxable year when events after
filing the prior year original federal income tax return show that the original estimate
has been either understated or overstated. If, after the original return is filed, it is
determined that a greater or lesser amount should have been claimed, the correction is
made in and for the year the determination is made. The adjustment to the estimated
cost of common improvements is allocated to all of the benefitted units (and/or CCM
contracts) in the project, including units that were sold (or CCM contracts that were
completed) in prior taxable years. In the case of units that were sold (or CCM
contracts that were completed) in a prior taxable year, their allocable share of the
adjustment gives rise to a current year adjustment to income rather than an amended
return or an administrative adjustment request, subject to the alternative cost limitation
under section 5.04 of this revenue procedure. See section 5.06(3), Example 3, of this
revenue procedure.
.04 Alternative Cost Limitation
.
(1) The sum of the amount of estimated cost of common improvements included
in the basis of (or otherwise taken into account with respect to) all of the units in the
qualifying project that have been sold as of the end of the taxable year, or treated as
incurred allocable contract costs for purposes of determining income under § 1.460-

4(d)(1) for CCM contracts completed as of the end of the taxable year, may not exceed
the total amount of common improvement costs that have been incurred, within the
meaning of § 461(h), with respect to the qualifying project as of the end of the taxable
year (alternative cost limitation). If the alternative cost limitation precludes a developer
from including the entire allocable share of the estimated cost of common
improvements in the basis of the units sold (or treating the entire allocable share of the
estimated cost of common improvements as incurred allocable contract costs of
completed CCM contracts) in that taxable year, the costs not included in such year
may be taken into account in a subsequent taxable year to the extent additional
common improvement costs have been incurred under § 461(h). The common
improvement costs incurred in a subsequent year are allocated first to the units already
sold (or CCM contracts already completed) and then to the units sold in such
subsequent year (or CCM contracts completed in such subsequent year). See section
5.06(2), Example 2, of this revenue procedure.
(2) The alternative cost limitation must be applied on a project-by-project basis.
Thus, the common improvement costs incurred with respect to one qualifying project
may not be included in the alternative cost limitation of a second qualifying project.
.05 Other Provisions in the Code
. The Alternative Cost Method does not affect the
application of general capitalization rules to developers under §§ 263(a) and 263A.
Thus, common improvement costs incurred under § 461(h) are allocated among the
benefitted units and may provide the basis for additional computations (for example,
interest capitalization under § 263A(f)).

.06 Examples. The following examples illustrate the application of the Alternative

Cost Method.
(1) Example 1. (a) Facts
. Developer will build 10 houses as part of the same
project on a tract of land. The project is expected to take 3 years to complete.
Developer is contractually obligated to provide common improvements that will benefit
all the houses on the tract equally. Developer estimates that the common improvement
costs will total $500,000, and the estimate does not change during
the project. The common improvement costs are not properly recoverable through
depreciation by Developer. Pursuant to section 5.03 of this revenue procedure,
Developer allocates the estimated cost of common improvements pro rata to each
house. Accordingly, each house’s allocable share of the estimated cost of the common
improvements is $50,000 ($500,000/10 houses). During Year 1, Developer sells four
houses and incurs, within the meaning of § 461(h), $250,000 of common improvement
costs. In Year 2, Developer sells four houses and incurs, within the meaning of §
461(h), $150,000 of common improvement costs. In Year 3, Developer sells two
houses and incurs, within the meaning of § 461(h), $100,000 of common improvement
costs. Developer uses an accrual method of accounting to account for the sale of all
10 houses in the development project and uses the Alternative Cost Method.
(b) Year 1 --(i) Alternative Cost Method Used
. Because Developer used the
Alternative Cost Method, Developer includes $200,000 of estimated cost of common
improvements in the aggregate bases of the four houses sold during Year 1 in
determining the gain or loss resulting from the sales. This amount is the allocable share
of the estimated cost of common improvements for the four houses as of the end of
Year 1, $200,000 ($50,000 x 4) and does not exceed the amount of the common

improvement costs incurred with respect to the qualifying project under § 461(h) as of
the end of Year 1 (that is, the alternative cost limitation), $250,000.
(ii) Alternative Cost Method Not Used
. If Developer had not used the
Alternative Cost Method, Developer would allocate the $250,000 of common
improvement costs incurred to all 10 houses in the project and only include $100,000
($250,000/10 x 4) of common improvement costs in the aggregate bases of the houses
sold during Year 1 in determining the gain or loss resulting from the sales.
(c) Year 2 --(i) Alternative Cost Method Used. Because Developer used the
Alternative Cost Method, Developer includes $200,000 of estimated cost of common
improvements in the aggregate bases of the four houses sold during Year 2 in
determining the gain or loss resulting from the sales. This amount is the allocable share
of the estimated cost of common improvements as of the end of Year 2 for the four
houses, $200,000 ($50,000 x 4). The total amount of estimated cost of common
improvements included in the bases of all of the houses sold as of the end of Year 2,
$400,000 ($200,000 in Year 1 + $200,000 in Year 2), does not exceed the amount of
the common improvement costs incurred with respect to the qualifying project under
§ 461(h) as of the end of Year 2 (that is, the alternative cost limitation), $400,000.
(ii) Alternative Cost Method Not Used. If Developer had not used the
Alternative Cost Method, it would allocate the $150,000 of common improvement costs
incurred in Year 2 to all 10 houses in the project ($15,000 to each house). The
$60,000 allocated to the four houses sold in Year 1 would be recovered as a reduction
to Developer’s income in Year 2. The $60,000 allocated to the 4 houses sold in Year 2
would be included in their aggregate adjusted bases (along with the $100,000 of

common improvement costs incurred in Year 1) in determining the gain or loss
resulting from the sales. The remaining $30,000 allocated to the 2 houses that were
not yet sold as of the end of Year 2 would be included in their aggregate adjusted
bases and recovered when those houses are sold in Year 3.
(d) Year 3 --(i) Alternative Cost Method Used
. Because Developer used the
Alternative Cost Method, Developer includes $100,000 of estimated cost of common
improvements in the aggregate bases of the two houses sold during Year 3 in
determining the gain or loss resulting from the sales. This amount is the allocable
share of the estimated cost of common improvements as of the end of Year 3 for the
two houses, $100,000 ($50,000 x 2). The total amount of estimated cost of common
improvements included in the bases of all of the houses sold as of the end of Year 3,
$500,000 ($200,000 in Year 1 + $200,000 in Year 2 + $100,000 in Year 3), does not
exceed the amount of the common improvement costs incurred with respect to the
qualifying project under § 461(h) as of the end of Year 3 (that is, the alternative cost
limitation), $500,000.
(ii) Alternative Cost Method Not Used. If Developer had not used the
Alternative Cost Method, it would allocate the $100,000 common improvement costs
incurred in Year 3 to all 10 houses in the project ($10,000 to each house). The
$80,000 allocated to the 8 houses sold in Year 1 and Year 2 would be recovered as a
reduction to Developer’s income in Year 3. The remaining $20,000 allocated to the 2
houses sold in Year 3 would be included in their aggregate adjusted bases (along with
the $80,000 of common improvement costs incurred in Year 1 and Year 2 and
allocated to such houses) in determining the gain or loss resulting from the sales.

(2) Example 2 . (a) Facts. The facts are the same as in Example 1, except that
the project is expected to take 4 years to complete, and Developer incurs, within the
meaning of § 461(h), $30,000 of common improvement costs in Year 2, $130,000 of
common improvement costs in Year 3, and $90,000 of common improvement costs in
Year 4. In addition, Developer sells only one house in Year 3 and one house in
Year 4.
(b) Year 1. Alternative Cost Method Used. The results in Year 1 are the same
as in Example 1.
(c) Year 2 . Alternative Cost Method Used. Because Developer used the
Alternative Cost Method, Developer may include $80,000 of estimated cost of common
improvements in the aggregate bases of the four houses sold during Year 2 in
determining the gain or loss resulting from the sales. The total amount of estimated
cost of common improvements allocable to all of the houses sold as of the end of
Year 2, $400,000 ($200,000 in Year 1 + $200,000 in Year 2), exceeds the alternative
cost limitation of $280,000 ($250,000 + $30,000) by $120,000 ($400,000 - $280,000).
The estimated cost not yet taken into account because of the alternative cost limitation,
$120,000, may be taken into account when common improvement costs are incurred
in a subsequent year.
(c) Year 3 . Alternative Cost Method Used. Because Developer used the
Alternative Cost Method, Developer may take into account $130,000 of estimated cost
of common improvements in Year 3. The total amount of estimated cost of common
improvements allocable to all of the houses sold as of the end of Year 3, $450,000
($200,000 in Year 1 + $200,000 in Year 2 + $50,000 in Year 3), exceeds the

alternative cost limitation of $410,000 ($250,000 + $30,000 + 130,000) by $40,000
($450,000 - $410,000). Developer first allocates $120,000 of the estimated cost to the
four houses sold in Year 2 and recovers the amount as a reduction to income in
Year 3. Developer includes the remaining $10,000 ($130,000 - $120,000) in the basis
of the house sold in Year 3 in determining the gain or loss resulting from the sale. The
estimated cost not included in basis because of the alternative cost limitation, $40,000,
may be taken into account when the remaining $90,000 of common improvement costs
are incurred in Year 4.
(3) Example 3 . (a) Facts
. The facts are the same as in Example 1, except that in
Year 2, after the filing of Developer’s original federal income tax return for Year 1,
Developer determines that the estimated cost for common improvements increased
from $500,000 to $700,000. Further, during Year 2, Developer incurs, within the
meaning of § 461(h), $340,000 of common improvement costs (rather than $150,000).
In Year 3, after the filing of Developer’s original federal income tax return for Year 2,
Developer determines that the estimated cost for common improvements decreased
from $700,000 to $625,000. During Year 3, Developer incurs, within the meaning of
§ 461(h), $35,000 of common improvement costs (rather than $100,000).
(b) Year 2 . Alternative Cost Method Used. Developer does not amend its
federal income tax return or file an administrative adjustment request for Year 1 to
account for the change in the estimated cost of common improvements. The
correction to the estimated cost of common improvements is made in Year 2. The
$200,000 increase to the estimate of the cost of common improvements is allocated
equally to all 10 homes in the project. The total amount of estimated cost of common

improvements taken into account for Year 2 is $360,000, comprised of $280,000
($700,000/10 x 4) of estimated cost of common improvements included in the
aggregate bases of the four houses sold during Year 2 plus $80,000 of the Year 2
increase to the estimate of the cost of common improvements that is allocated to the
four houses sold in Year 1 ($20,000 x 4), which reduces Developer’s income for Year
2. The total amount of estimated cost of common improvements included in the bases
of (or otherwise taken into account with respect to) all of the houses sold as of the end
of Year 2, $560,000 ($200,000 in Year 1 + $360,000 in Year 2), does not exceed the
amount of the common improvement costs incurred with respect to the qualifying
project under § 461(h) as of the end of Year 2 (that is, alternative cost limitation),
$590,000.
(c) Year 3 . Alternative Cost Method Used
. Developer does not amend its
federal income tax return or file an administrative adjustment request for Year 2 to
account for the change in the estimated cost of common improvements. The
correction to the estimated cost of common improvements is made in Year 3. The
$75,000 downward adjustment to the estimate of the cost of common improvements is
allocated equally to all 10 homes in the project. The total amount of estimated cost of
common improvements taken into account in Year 3 is $65,000, which is comprised of
$125,000 ($625,000/10 x 2) of common improvement costs included in the aggregate
bases of the two houses sold during Year 3 minus $60,000 of the Year 3 decrease in
the estimate of the cost of common improvements allocable to the eight houses sold in
Year 1 and Year 2 ($7,500 x 8), which increases Developer’s income in Year 3. The
total amount of estimated cost of common improvements included in the bases of (or

otherwise taken into account with respect to) all of the houses sold as of the end of
Year 3, $625,000 ($200,000 in Year 1 + $360,000 in Year 2 + $65,000 in Year 3), does
not exceed the amount of the common improvement costs incurred with respect to the
qualifying project under § 461(h) as of the end of Year 3 (that is, alternative cost
limitation), $625,000.
(4) Example 4 . (a) Facts
. The facts are the same as in Example 1, except that
the 10 houses are each the subject matter of a CCM contract. Each CCM contract
requires Developer to construct a house and common improvements. In Years 1, 2,
and 3, when Developer sells four, four and two houses, respectively, it has incurred,
without regard to the Alternative Cost Method, at least 95 percent of the estimated
allocable costs of each of the respective CCM contracts.
(b) Year 1--(i) Alternative Cost Method Used. Because Developer used the
Alternative Cost Method, Developer treats $200,000 of estimated cost of common
improvements as incurred allocable contract costs for purposes of determining income
upon completion of the four CCM contracts in Year 1. This amount is the allocable
share of the estimated cost of common improvements for the four CCM contracts
completed in Year 1, $200,000 ($50,000 x 4), and does not exceed the amount of the
common improvement costs incurred with respect to the qualifying project under
§ 461(h) as of the end of Year 1 (that is, the alternative cost limitation), $250,000.
(ii) Alternative Cost Method Not Used. If Developer had not used the
Alternative Cost Method, Developer would have allocated the $250,000 of common
improvement costs incurred to all 10 CCM contracts for houses in the project and only
treated $100,000 ($250,000/10 x 4) of common improvement costs as incurred

allocable contract costs for purposes of determining income upon the completion of the
four CCM contracts in Year 1.
(c) Year 2—(i) Alternative Cost Method Used
. Because Developer used the
Alternative Cost Method, Developer treats $200,000 of estimated cost of common
improvements as incurred allocable contract costs for purposes of determining income
upon completion of the four CCM contracts in Year 2. This amount is the allocable
share of the estimated cost of common improvements for the four CCM contracts
completed during Year 2, $200,000 ($50,000 x 4). The total amount of estimated cost
of common improvements treated as incurred allocable contract costs for all eight
CCM contracts completed as of the end of Year 2, $400,000 ($200,000 in Year 1 +
$200,000 in Year 2), does not exceed the amount of the common improvement costs
incurred with respect to the qualifying project under § 461(h) as of the end of Year 2
(that is, the alternative cost limitation), $400,000.
(ii) Alternative Cost Method Not Used. If Developer had not used the
Alternative Cost Method, it would have allocated the $150,000 of common
improvement costs incurred in Year 2 to all 10 CCM contracts ($15,000 to each
contract). The $60,000 allocated to the four CCM contracts completed in Year 1 would
have been recovered as a reduction to Developer’s income in Year 2. The $60,000
allocated to the four CCM contracts completed in Year 2 would have been treated as
incurred allocable contract costs for purposes of determining income upon completion
of the contracts (along with the $100,000 of common improvement costs incurred in
Year 1 and allocated to such contracts). The remaining $30,000 allocated to the two
CCM contracts that were not yet completed as of the end of Year 2 would be included

in the allocable contract costs for such contracts and recovered when those contracts
were completed in Year 3.
(d) Year 3--(i) Alternative Cost Method Used
. Because Developer used the
Alternative Cost Method, Developer treats $100,000 of estimated costs of common
improvements as incurred allocable contract costs for purposes of determining income
upon completion of the two CCM contracts in Year 3. This amount is the allocable
share of the estimated cost of common improvements for the two CCM contracts
completed during Year 3, $100,000 ($50,000 x 2). The total amount of estimated cost
of common improvements treated as incurred allocable contract costs for all ten CCM
contracts completed as of the end of Year 3, $500,000 ($200,000 in Year 1 + $200,000
in Year 2 + $100,000 in Year 3), does not exceed the amount of the common
improvement costs incurred with respect to the qualifying project under § 461(h) as of
the end of Year 3 (that is, the alternative cost limitation), $500,000.
(ii) Alternative Cost Method Not Used. If Developer had not used the
Alternative Cost Method, it would have allocated the $100,000 common improvement
costs incurred in Year 3 to all 10 CCM contracts ($10,000 to each contract). The
$80,000 allocated to the eight CCM contracts completed in Year 1 and in Year 2 would
have been recovered as a reduction to Developer’s income in Year 3. The remaining
$20,000 allocated to two CCM contracts completed in Year 3 would have been treated
as incurred allocable contract costs for such contracts (along with the $80,000 of
common improvement costs incurred in Year 1 and Year 2 and allocated to such
contracts).
SECTION 6. RETENTION AND PRODUCTION OF RECORDS

.01 In General. A developer using the Alternative Cost Method must keep, and
timely provide to the Commissioner upon request, records and books of account that
are sufficient to establish compliance with the requirements of this revenue procedure.
See § 1.6001-1. If a developer fails to provide the required records in a timely manner
or fails to demonstrate reasonable cause for the failure to maintain and produce the
required records, the developer’s method of accounting for its common improvement
costs may be changed at the discretion of the Commissioner to a proper method of
accounting. See Rev. Proc. 2002-18, 2002-13 I.R.B. 678.
.02 Sufficiency of Records. The records and books of account that are sufficient to
establish compliance with the requirements of this revenue procedure will include
sufficient information to support (1) the estimated cost of common improvements for
each qualifying project, including documentation showing how the developer
determined the estimated cost of common improvements and that the estimate was
reasonable, and any changes to that estimate, (2) the allocation of the estimated cost
of common improvements to each of the benefitted houses, parcels or lots in the
qualifying project (and to each CCM contract), (3) the application of the alternative cost
limitation to the qualifying project, and (4) the taxpayer’s contractual obligation or legal
requirement to provide the common improvements.
.03 Retention Period for Records. Pursuant to § 1.6001-1(e), all books and records
required to be maintained in section 6.02 of this revenue procedure are required to be
retained so long as the contents thereof may become material in the administration of
any internal revenue law. For this purpose, such books and records need to be
retained, at a minimum, as long as costs of the qualifying project may be incurred or

taken into account and for 3 years after the filing of the federal tax return for the last
taxable year in which the costs of the qualifying project may be incurred or taken into
account.
SECTION 7. TAXPAYERS THAT DO NOT USE THE ALTERNATIVE COST
METHOD
A developer that fails to substantially comply with the provisions of this revenue
procedure, including a developer whose estimates of common improvement costs are
unreasonable under the circumstances, will not be permitted to use the Alternative
Cost Method and therefore must include only common improvement costs that have
been incurred under § 461(h) in the basis of benefitted units (or in allocable contract
costs) of a project for the purpose of determining the gain or loss resulting from the
sale of the units (or income upon CCM contract completion).
SECTION 8. CHANGE IN METHOD OF ACCOUNTING
.01 In general
. The Alternative Cost Method is a method of accounting subject to
§ 446 and the regulations under § 446. A change to the Alternative Cost Method as
provided in this revenue procedure is a change in method of accounting to which
§§ 446(e) and 481 apply. An eligible taxpayer that wants to change to the Alternative
Cost Method as defined in section 5 of this revenue procedure, or that wants to change
from the 92-29 alternative cost method, must use the automatic change procedures in
Rev. Proc. 2015-13 or its successor.
.02 Automatic change procedures. Rev. Proc. 2022-14 is modified to add new
section 20.14 to read as follows:
.14 Alternative Cost Method.
(1) Description of change. This change applies to a taxpayer that wants to

change its method of accounting for common improvement costs either to (1) use the
Alternative Cost Method in accordance with Rev. Proc. 2023-9; or (2) discontinue
using the alternative cost method under Rev. Proc. 92-29 (92-29 alternative cost
method) and instead account for common improvement costs using an accrual method
of accounting under § 461.
(2) Applicability
. This change applies to a taxpayer:
(a) that wants to change to the Alternative Cost Method described in Rev. Proc.
2023-9, for all of its qualifying projects within a trade or business, including taxpayers
that want to change their method of allocating adjustments to the estimated cost of
common improvements for all of their qualifying projects within a trade or business;
(b) that, on the first day of the first taxable year beginning after December 31,
2022, in the same trade or business, uses the 92-29 alternative cost method for one or
more qualifying projects that are in progress and an accrual method under § 461 to
account for common improvement costs for one or more qualifying projects that are in
progress (legacy rule). For purposes of this section, a qualifying project is in progress
if the developer has sold at least one unit in the project in a prior taxable year (or in the
case of a developer that uses the completed contract method, has completed at least
one contract in the project in a prior taxable year) and holds units in the project
available for sale during the taxable year. In this situation, the taxpayer is not required
to change to the Alternative Cost Method for such qualifying projects in progress using
an accrual method under § 461 as long as all new qualifying projects in the trade or
business are accounted for using the Alternative Cost Method
in accordance with Rev.
Proc. 2023-9; or

(c) that, on the first day of the first taxable year beginning after December 31,
2022, wants to change from the 92-29 alternative cost method to an accrual method
under § 461 for all of its qualifying projects in a trade or business.
(3) Inapplicability
. This change does not apply to a taxpayer that is using the
Alternative Cost Method described in Rev. Proc. 2023-9 that wants to change its
method of allocating the estimated cost of common improvements among the
benefitted units in the qualifying project (and in the case of a taxpayer using the
completed contract method described in § 1.460-4(d) (CCM), a taxpayer that wants to
change its method of allocating the estimated cost of common improvements among
all the CCM contracts, as defined in section 4.03 of Rev. Proc. 2023-9, in the qualifying
project).
(4) Short Form 3115 in lieu of a standard Form 3115 for certain taxpayers.
(a) Applicability. The procedures described in section 20.14(4)(b) may be used
by a taxpayer to make a change in method of accounting described in section
20.14(2)(a) or (b) for the taxpayer’s first taxable year beginning after December 31,
2022, provided the taxpayer otherwise meets the requirements of this section
20.14(4)(a). A taxpayer may use a short Form 3115 in lieu of a standard Form 3115
only if the § 481(a) adjustment required by each such change is zero, and the taxpayer
either: (1) is currently using the 92-29 alternative cost method for all qualifying projects
and wants to change to the Alternative Cost Method in accordance with Rev. Proc.
2023-9 for all trades or businesses with such qualifying projects for the taxpayer’s first
taxable year beginning after December 31, 2022; or (2) wants to apply the legacy rule
described in section 20.14(2)(b) of this revenue procedure to change to the Alternative

Cost Method in accordance with Rev. Proc. 2023-9 for the taxpayer’s first taxable year
beginning after December 31, 2022. Notwithstanding any provisions of this section
20.14, a taxpayer making more than one change in method of accounting under this
revenue procedure for the same year of change is not permitted to net the § 481(a)
adjustments to determine if the taxpayer meets the requirements to use the
streamlined method change procedures.
(b) Short Form 3115
. A taxpayer making a change under section 20.14(4)(a)
for the taxpayer’s first taxable year beginning after December 31, 2022, is required to
complete only the following information on Form 3115 (Rev. 2018):
(i) The identification section of page 1 (above Part I);
(ii) The signature section at the bottom of page 1;
(iii) Part I, line 1(a); and
(iv) For taxpayers using the legacy rule, Part II, line 16(a) identifying any
qualifying projects in progress for which the taxpayer used the 92-29 alternative cost
method and any qualifying projects in progress for which taxpayer will continue to use
an accrual method of accounting.
(5) Eligibility rule temporarily inapplicable
. The eligibility rule in section 5.01(1)(f)
of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, does not apply to the changes described in
this section 20.14 for the taxpayer’s first taxable year beginning after December 31,
2022.
(6) Examples. The following examples illustrate the application of the Alternative
Cost Method in accordance with Rev. Proc. 2023-9.
(a) Example 1. (i) Facts. Developer, a calendar year taxpayer that uses an

overall accrual method of accounting, is in the business of developing residential
subdivisions. As of December 31, 2022, Developer has two subdivision projects in
progress in its only trade or business, Project A and Project B; both projects are
separate qualifying projects, as defined in section 4.01 of Rev. Proc. 2023-9.
Developer sold the first lots in both projects during the 2022 taxable year. Developer
requested consent to use the 92-29 alternative cost method for Project A in 2022.
Developer has not requested consent to use the 92-29 alternative cost method for
Project B.
(ii)
Application of the Alternative Cost Method in accordance with Rev. Proc.
2023-9 for all qualifying projects. Developer wants to use the Alternative Cost Method
for both qualifying projects. Developer must file a change in method of accounting
using the automatic change in method of accounting procedures of this section 20.14
and must calculate the § 481(a) adjustment resulting from changing the method of
accounting for Project A and Project B, if any.
(b) Example 2. Application of the legacy rule. The facts are the same as in
Example 1, except that Developer wants to use the Alternative Cost Method for Project
A but not for Project B. Pursuant to section 20.14 of this revenue procedure,
Developer does not have to apply the Alternative Cost Method to Project B. However,
if the Developer applies the Alternative Cost Method for Project A, then the Developer
must also apply the Alternative Cost Method to all new qualifying projects in its trade or
business for taxable years beginning after December 31, 2022. Developer must also
calculate the § 481(a) adjustment resulting from changing the method of accounting for
Project A, if any.

(7) Designated automatic accounting method change number.
(a) Change to the Alternative Cost Method in accordance with Rev. Proc. 2023-
9. The designated automatic accounting method change number for a change to the
Alternative Cost Method in accordance with section 20.14(2)(a) is “266.”
(b) Legacy rule. The designated automatic accounting method change number
for a taxpayer that wants to apply the legacy rule described in section 20.14(2)(b) for
the taxpayer’s first taxable year beginning after December 31, 2022, is “267.”
(c) Change to an accrual method. The designated automatic accounting
method change number for a change to an accrual method in accordance with section
20.14(2)(c) for the taxpayer’s first taxable year beginning after December 31, 2022, is
“268.”
(8) Contact information. For further information regarding a change under this
section 20.14, contact Maria Castillo Valle at (202) 317-7003 (not a toll-free call).
SECTION 9. EFFECT ON OTHER DOCUMENTS
.01 This revenue procedure obsoletes Rev. Proc. 92-29 for taxable years beginning
after December 31, 2022.
.02 This revenue procedure modifies and amplifies Rev. Proc. 2022-14.
SECTION 10. EFFECTIVE DATE
.01 This revenue procedure is effective for taxable years beginning after December
31, 2022.
.02 Developers that have received consent pursuant to Rev. Proc. 92-29 to use the
92-29 alternative cost method cannot use the 92-29 alternative cost method for taxable
years beginning after December 31, 2022. Developers who wish to use the Alternative

Cost Method must follow the rules and satisfy the conditions in this revenue procedure
for taxable years beginning after December 31, 2022.
SECTION 11. PAPERWORK REDUCTION ACT
The collection of information contained in this revenue procedure has been
submitted to the Office of Management and Budget for review under OMB control
number 1545-0123 in accordance with the Paperwork Reduction Act (44 U.S.C.
3507(d)). An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of information displays a
valid OMB control number. The collection of information in this revenue procedure is
in section 8. This information is necessary and will be used to determine whether the
taxpayer properly changed to a permitted method of accounting. The collections of
information are required for the taxpayer to obtain consent to change its method of
accounting.
SECTION 12. DRAFTING INFORMATION
The principal author of this revenue procedure is Maria Castillo Valle of the Office of
Associate Chief Counsel (Income Tax & Accounting). For further information regarding
this revenue procedure, contact Ms. Castillo Valle at (202) 317-7003.

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