to account for inflation for purposes of calculating the amount of his pension annuity subject to Federal income tax. Decision will be entered for respondent. DAVID C. HUTCHINSON, ET AL.,1 PETITIONERS v. RESPONDENT Docket Nos. 15912-98, 15958-98, 15959–98, 15960–98. Filed March 14, 2001. Held, under the alternative cost method of Rev. Proc. 9229, 1992-1 C.B. 748, a real estate developer may allocate to its bases in lots sold $3,707,662 in estimated construction costs relating to common improvements. Held, further, $5,861,595 in estimated future-period interest expense relating to common improvements does not qualify under the alternative cost method for allocation to the developer's bases in lots sold. Neil D. Kimmelfield, for petitioners. Gerald W. Douglas and Nhi T. Luu-Sanders, for respondent. OPINION SWIFT, Judge: These cases were consolidated for trial, briefing, and opinion. For 1994, respondent determined the following deficiencies in petitioners' Federal income tax: The issues for decision involve whether, under the alternative cost method of Rev. Proc. 92-29, 1992-1 C.B. 748 (Rev. Proc. 92-29), a real estate developer, in calculating gain on the sale of residential lots sold in 1994, may allocate to the developer's bases in the lots sold estimated construc 1 Cases of the following petitioners are consolidated herewith: Isaac M. Kalisvaart and Francien Kalisvaart-Valk, docket No. 15958-98; William T. Criswell and Sharon L. Criswell, docket No. 15959-98; and Robert S. Bobosky and Judeen M. Bobosky, docket No. 15960-98. tion costs relating to certain common improvements to the development and whether the developer may include, in the calculation of estimated construction costs, estimated futureperiod interest expense relating to the common improvements. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for 1994, and all Rule references are to the Tax Court Rules of Practice and Procedure. Background These cases were submitted fully stipulated under Rule 122, and the stipulated facts are so found. At the time the petitions were filed, petitioners resided in the following locations: Petitioners David Hutchinson Isaac Kalisvaart and Francien Kalisvaart-Valk Robert and Judeen Bobosky Location Ketchum, Idaho On June 21, 1993, petitioners formed Valley Ranch, Inc. (VRI), as an Idaho corporation, and petitioners elected to have VRI taxed pursuant to subchapter S of the Internal Revenue Code. Petitioners constitute all of the shareholders of VRI. On December 1, 1993, VRI entered into an option to purchase a 526-acre parcel of partially developed real estate near Sun Valley, Idaho (the property). Prior to December 1, 1993, the sellers of the property had begun development of the property as a golf course residential community. Also on December 1, 1993, VRI entered into an agreement with the sellers of the property for VRI to continue to develop the property as follows: Use 99 residential lots Hale Irwin designed golf course Roads and common areas Acreage 189 acres 162 acres 175 acres On May 5, 1994, the final plat was recorded for development of the property as a golf course residential community, and VRI exercised its option and entered into a binding agree ment with the sellers to purchase the property for a total purchase price of $5,715,345.2 Beginning in May of 1994 and thereafter through the time these cases were submitted to the Court for decision in February of 2000, VRI improved and sold residential building lots on the property and realized the sales proceeds therefrom. Also on May 5, 1994, VRI entered into a contract (the contract) with Valley Club, Inc. (VCI), a nonprofit Idaho membership corporation whose members would purchase memberships in the golf club. Under the contract, VRI reaffirmed its obligation to construct on the property an 18-hole golf course, a driving range, and two practice putting greens. Hereinafter, we refer to these nondepreciable improvements that VRI was obligated to construct on the property as "the Golf Course". Under the May 5, 1994, contract between VRI and VCI, VRI also obligated itself to construct on the property a golf clubhouse with a restaurant and bar facilities, a golf pro shop, golf course maintenance facilities, men's and women's locker rooms, an outdoor swimming pool, and four tennis courts. Hereinafter, we refer to these depreciable improvements that VRI was obligated to construct on the property as "the Clubhouse". Under the contract between VRI and VCI, ownership of the completed golf course and the clubhouse was to be transferred to VCI, and VCI was to establish and operate a golf membership club (the club) which would sell memberships in the club to homeowners within the golf course community and to members of the public. Under the contract, in consideration for the transfer to VCI of VRI's ownership interest in the golf course and in the clubhouse that were to be constructed by VRI, VCI, among other things, was obligated to pay to VRI the total fees that would be received by VCI upon the sale by VCI of memberships in the club. In order to secure the respective rights and obligations of VRI and VCI under the contract, during construction of the golf course and the clubhouse, the deed executed by VRI transferring the golf course and the clubhouse to VCI was to 2 The total purchase price reflected $2,941,000 paid in cash and a $2.5 million promissory note in favor of the sellers of the property. The $274,345 balance of the total purchase price reflected fees and closing costs associated with purchase of the property. be transferred into escrow, and the membership fees, upon receipt by VCI, were to be transferred by VCI into an escrow account. The deed to the golf course and the clubhouse was to be transferred out of escrow to VCI on the earlier of December 31, 2000, or when at least 25 charter memberships, 375 golf memberships, and 100 golf social memberships in the club were sold. The membership fees held in escrow were to be transferred out of escrow to VRI according to the following schedule: After completion of construction of the golf course and the clubhouse, fees received by VCI upon sale of additional memberships in the club would be transferred directly to VRI as further compensation to VRI for transfer to VCI of ownership of the golf course and the clubhouse. In 1994, VRI began construction of the golf course and the clubhouse, and VRI proceeded to sell the residential lots on the property. New owners of the residential lots, or their contractors, began building homes on the lots, and VCI proceeded to sell memberships in the club. Prior to construction, VRI estimated its total costs to construct the golf course and the clubhouse (not including VRI's $5,715,345 initial purchase price for the property) as follows: Estimated costs $13,390,624 Golf course Employee housing Finance costs Total estimated costs 1 The costs of employee housing are not in dispute. 3,707,662 1375,000 25,861,595 23,334,881 2 Total estimated finance costs relating to both the golf course and the clubhouse equaled $7,022,000. The $5,861,595 set forth above represents the difference between the $7,022,000 total estimated finance costs and the $1,160,405 actual finance costs incurred by VRI in 1994. VRI undertook substantial interest-bearing debt obligations in connection with the construction of the golf course and the clubhouse. On July 10, 1996, prior to completion of the golf course and the clubhouse, VRI executed in favor of VCI and transferred into escrow a deed with respect to ownership of the golf course and the clubhouse. In the summer of 1996, construction of the golf course and the clubhouse was completed by VRI. On July 19, 1996, the golf course and the clubhouse opened and play began. Also on July 19, 1996, upon completion of construction of the golf course and the clubhouse, apparently because VCI had not sold the required number of club memberships, the deed to the golf course and the clubhouse was not transferred out of escrow to VCI. Also because VCI had not sold the required number of memberships, pursuant to the contract, during the balance of 1996, 1997, 1998, and until April 21, 1999, VRI managed and operated the golf course and the clubhouse on behalf of VCI. We refer to this period of time (namely, the period of time after completion of the golf course and the clubhouse during which VRI continued to manage and operate the golf course and the clubhouse) as the "transition period". Under the contract, during the transition period, VRI realized the profits and losses relating to operation of the golf course and the clubhouse. The bylaws of VCI, however, limited the amount of annual dues (as distinguished from membership fees) that could be collected from club members to pay for operation of the golf course and the clubhouse, and cumulative losses of approximately $994,393 were realized by VRI during the transition period in connection with VRI's operation of the golf course and the clubhouse. The operational losses apparently were caused by the fact that the member base in the club was not yet large enough to generate sufficient dues and other revenue to cover the operating expenses. During the transition period, VCI, not VRI, was responsible for decisions and costs of any further improvements made to the golf course and to the clubhouse. Up until July 19, 1996, the day the golf course and the clubhouse opened, all property-related insurance relating to |