Client tells me in the fall of 2019 that he is loaning a developer $150,000 and that the developer will repay him as lost are sold: $50,000 each lot - 5 lots.
It turns out that the client is building a road for the developer that will cost about $150,000 and will receive payments on the road as the adjacent lots sell. The client is also a 50% owner in an S corporation that billed him for work the corporation did on the road. The developer is unrelated to the client. I should have used quotes with the word contract in the title of this post since there is no written agreement.
The client has never performed work on his own before. All of his prior year revenues came from the S corporation in the form of a W-2 or as a distribution of earnings.
Would like to even out profit on the job as payments from the developer arrive, but the road will be completed soon. Costs in 2019 were $100,000 and costs incurred in 2020 will be about $50,000. Client was paid $50,000 in 2019 as one lot did sell. A second lot has sold in 2020. No idea when remaining 3 lots sell.
So if the client is cash basis - and assigns the project to either an S corporation or an LLC with his wife as an 80% owner:
would either be a "step-in-the-shoes transaction (1.460-4(k)(3)) or would either be a constructive completion transaction(1.460-4(k)(2))? I am fairly certain that the S corporation route would be a step-n-the-shoes, but even here, with a lack of a "real" contract; I don't have full confidence of my conclusion.