Howard Hughes Corp (NYSE:HHC), a land developer, is challenging the U.S Internal Revenue Service over a $144.1 billion tax bill that is tied to the company’s Summerlin land sales. The land sales, which center on a sizable planned community in southern Nevada, have brewed a tax battle that could rattle the entire real estate industry.

Bill Ackman

The Tax trial, which is slated for November 5th in Las Vegas, will predominantly focus on the controversial ‘completed contract method’, an accounting practice that has been heavily scrutinized by the IRS for years.

Being the chairperson of Howard Hughes Corp (NYSE:HHC), William Ackman, the activist investor, has key interests in this case. In addition to being the chairperson, Ackman’s hedge fund, Pershing Square, owned 3.6 million shares in Howard Hughes at the end of June, making it a key stakeholder in this case. All this comes as Ackman, alongside other notable business moguls, tries to formulate a plan to avert the fiscal cliff.

Ackman will therefore have to balance the fiscal cliff avoidance plan and his responsibility as chairperson, to provide oversight to Howard Hughes in its battle against the IRS. Court records reveal that the IRS’s argument implies that Howard Hughes improperly deferred taxes on income from property sales. The said property sales are residential lots at Summerlin. The IRS further argued that Howard Hughes was obliged to pay taxes immediately when it booked the sales, rather than when the whole project was at its final stretch.

Howard Hughes, on the other hand, uses the IRS exemption for home construction as its defense, arguing that its actions are permissible. Howard Hughes further contends that developers usually pay up-front costs, and that establishing taxable gains is only possible towards the end of their projects. As expected, both the IRS and the Howard Hughes declined to shed further light on the matter, underscoring the sensitive nature of litigation processes.

Interestingly, the IRS’s case with Howard Hughes Corp (NYSE:HHC) is not an isolated event. The IRS has had previous battles with other property developers, signaling the controversial nature of the completed contract method. The IRS even noted in 2009, statements that the misuse of the CCM among property developers had been on an increase.

The flip side

This case has a very interesting flip side. In the event that the IRS wins the case, Howard Hughes will not take the bullet. Instead, General Growth Properties will take the knockout blow. Howard Hughes Corp (NYSE:HHC) is a spinoff from General Growth, and the terms of the spinoff dictate the latter assumes responsibility for taxes. As expected, General Growth also chose to remain silent on the matter.