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SOAH DOCKET NO. 304-22-0794.13
CPA HEARING NO. 117,954
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2014 THROUGH December 31, 2014
SOAH DOCKET NO. 304-22-0795.13
CPA HEARING NO. 117,955
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2015 THROUGH December 31, 2015
SOAH DOCKET NO. 304-22-0796.13
CPA HEARING NO. 117,956
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2016 THROUGH December 31, 2016
Franchise Tax/RFD
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
JOHN BOSTICK
Representing Respondent
**************
Representing Claimant
COMPTROLLER’S DECISION
This decision is considered final on May 31, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Trevor Moore of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ recommended that the Comptroller adopt the PFD as written.
After review and consideration, IT IS ORDERED that the PFD is adopted as written.
The results from this Decision are Attachments A. The ALJ’s letter to the Comptroller is Attachment B. The PFD as written is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachments A reflect zero amounts due.
SIGNED on this 3rd day of May 2022.
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachments A, Texas Notifications of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Proposal for Decision as written
ATTACHMENT B
State Office of Administrative Hearings
Kristofer S. Monson
Chief Administrative Law Judge
April 25, 2022
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-22-0794.13, 304-22-0795.13 and
304-22-0796.13; TCPA Hearing No.: 117,954, 117,955 and 117,956;
Taxpayer No.: **************; ************** v. Texas Comptroller of Public Accounts
Dear Comptroller Hegar:
Please be advised that Claimant filed exceptions to the Proposal for Decision (PFD) in this matter on March 22, 2022. Staff filed a response on March 30, 2022. Claimant specifically excepts to Findings of Fact 4, 6, 9 and 14 and Conclusions of Law 10, 14, 15 and 16 and the related analysis in the PFD. The Administrative Law Judge (ALJ) reviewed the exceptions and the response and recommends that the exceptions be rejected.
At the heart of Claimant’s exceptions is its contention that the Internal Revenue Service (IRS) instructions regarding the correct method of federal income tax returns are not law and should not be considered. The ALJ disagrees with Claimant’s proposal. While not codified in statute or rule, IRS instructions inform a determination of compliance with the federal tax law and, therefore, are an important component of any analysis under Tex. Tax Code § 171.1011(b); 34 Tex. Admin. Code § 3.587(c)(2).
Having reviewed the filings of the parties and finding no errors in the findings of fact or conclusions of law, I recommend that the PFD be adopted as written. Because SOAH has concluded its involvement in the matter, the case is being remanded to the Texas Comptroller of Public Accounts. See Tex. Gov’t Code § 2003.051(a).
Sincerely,
Trevor Moore
Administrative Law Judge
ATTACHMENT C
SOAH DOCKET NO. 304-22-0794.13
TCPA DOCKET NO. 117,954
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-22-0795.13
TCPA DOCKET NO. 117,955
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-22-0796.13
TCPA DOCKET NO. 117,956
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
PROPOSAL FOR DECISION
************** (Claimant) filed amended Texas franchise tax returns for report years 2014, 2015, and 2016 and requested a refund of franchise tax remitted for each year. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) denied the claims, and Claimant requested a refund hearing for each report year. In this Proposal for Decision, the Administrative Law Judge (ALJ) finds Claimant’s evidence is insufficient to support the refund claims and, therefore, the refund denials should be upheld.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
Staff referred the above-referenced cases to the State Office of Administrative Hearings (SOAH) and, on November 18, 2021, issued a Notice of Hearing by Written Submission in each case. On December 2, 2021, ALJ Trevor Moore issued Order No. 1, which combined the cases and set out the evidentiary filing deadlines as well as the record closing date. ************** of COMPANY represented Claimant. John Bostick represented Staff. The record closed on February 16, 2022.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence Presented
Staff offered the following exhibits for each hearing:
1. Refund Request;
2. Refund Denial;
3. Refund Audit Plan;
4. Independent Audit Review Report;
5. 26 C.F.R. § 1.460-4 (Treasury Regulation or TR § 1.460-4);
6. 26 C.F.R. § 1.993-6;
7. Instructions for 2013 Form 1120;
8. Instructions for 2014 Form 1120; and
9. Instructions for 2015 Form 1120.
Claimant offered the following exhibits for each hearing:
1. 26 U.S.C. § 460 (Internal Revenue Code or IRC § 460);
2. TR § 1.460-4;
3. Claimant’s 2010 Internal Revenue Service (IRS) Form 4549;
4. Claimant’s 2010 IRS Form 4564;
5. Claimant’s 2011 and 2012 IRS Form 4549-B and 2011 IRS Form 4564;
6. Trescott v Comm’r, 104 T.C.M. 586 (2012);
7. Mueth v. U.S., Case No. 2008 WL 2625909 (S.D. Ill. Jun. 27, 2008);
8. Comptroller’s Decision No. 41,114 (2002);
9. Comptroller’s Decision No. 107,457 (2014);
10. Comptroller’s Decision No. 115,880 (2020);
11. State Tax Automated Research (STAR) Document No. 9504890L (April 28, 1995);
12. Comptroller’s Decision No. 107,916 (2013); and
13. Claimant’s IRS Form 1120, page 1 (2004-2015).
The parties’ exhibits were admitted without objection.
B. Agreements
Staff did not agree to a refund of franchise tax for any of the report years at issue.
C. Material Facts
Claimant is a construction company providing contracting services for the electric and gas utility, communications, pipeline, and energy industries. Claimant filed Texas franchise tax returns for report years 2014, 2015, and 2016, based on trial balance accounts. In those returns, Claimant reported gross receipts or sales[2] as part of its total revenue and applied its costs-of-goods-sold (COGS) to reduce its total revenue in calculating its taxable margin for each report year.[3] In the federal income tax returns (FITRs) for the tax years corresponding to the franchise tax report years at issue,[4] Claimant reported $0 gross receipts or sales (Line 1a of IRS Form 1120) and $0 COGS (Line 2 of IRS Form 1120). However, it reported its net revenue (receipts less associated costs) from long‑term contracts on Line 10 (Other Income) of its Form 1120 for each year.[5]
In July 2018, Claimant amended its franchise tax returns for report years 2014-2016 to conform with the FITRs for the corresponding tax years. Therefore, the amended franchise tax returns included $0 in gross receipts or sales and $0 COGS. However, the net revenue amount from Line 10 of the FITR, over $1 billion for each report year, was entered on the amended franchise tax returns as “other income” (franchise tax return Line 7). This amendment resulted in a reduction in Claimant’s total revenue which in turn resulted in a reduction of the taxable margin for each report year.[6] Claimant filed refund claims for franchise tax, citing the reduced taxable margin reflected in the amended returns.
In reviewing the amended returns and associated refund claims, Staff considered Claimant’s reporting on its FITRs for the corresponding years and the instructions for Form 1120, IRC § 460, and TR § 1.460-4. Staff determined Claimant’s receipts from long-term contracts should have been entered on Line 1a of Form 1120, with costs reported on Line 2. Staff also determined there was no support for a conclusion that the receipts from long-term contracts must be entered on Line 10 of Form 1120. Therefore, Staff maintained the FITRs did not comply with federal tax law and, as a result, the amended franchise tax returns based on the FITRs represented an incorrect calculation of the taxable margin for each report year.
After discussing Staff’s position regarding the refund claims with the auditor that performed the refund verification, Claimant requested an Independent Audit Review (IAR) conference. The conference was conducted and the IAR report was issued in December 2019. In that report, the IAR officer concluded Claimant’s federal income tax reporting of revenue related to long-term contracts was not shown to be correct and, therefore, the amended franchise tax returns did not support a refund claim. On March 20, 2020, Staff issued letters denying each of the refund claims at issue. Claimant subsequently requested a refund hearing for each report year.
Claimant contends its method of reporting income from long-term contracts as “other income” on Line 10 of Form 1120 on the FITRs at issue is not prohibited under IRC § 460, TR § 1.460-4, or the instructions for Form 1120, and its amended franchise tax returns based on that reporting method should be accepted by the Comptroller. In support of its argument, Claimant cites its amended Form 1120 for tax year 2010 and its proposed self-adjustments for tax years 2011 and 2012, each of which was examined by the IRS. As a result of those examinations, the IRS authorized several changes to the calculation of the line-item amounts included in the returns. Through that process, Claimant argues, the IRS did not address the need for a change to its reporting method with regard to “other income” reported on Line 10 and, for the 2010 return, addressed specific adjustments to the calculation of its income derived from long-term contracts that were included on Line 10. Therefore, Claimant maintains its reporting method for these prior years should be presumed to comply with federal tax law. It follows, Claimant contends, that the amended franchise tax returns that are based on that reporting method should be accepted by the Comptroller and the refunds granted.
Staff maintains Claimant has not demonstrated its method of reporting in the FITRs for the years at issue complies with federal income tax law and, therefore, has not established the correctness of the amended franchise tax returns that are the basis for the refund claims.
D. Analysis and Recommendation
If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104(a). When a taxpayer requests a refund, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. See, e.g., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e).
Franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001. A taxable entity’s franchise tax liability is determined by calculating the entity’s taxable margin, which first includes determining the entity’s revenue. Id. § 171.1011(c). Total revenue is computed by adding the amounts entered as reportable income on the FITR “to the extent the amount entered complies with federal income tax law.” Id. § 171.1011(b); 34 Tex. Admin. Code § 3.587(c)(2). Because the total revenue claimed in the amended franchise tax returns is based on Claimant’s FITRs, the issue in this joined hearing concerns whether the Claimant’s method of reporting its income on its FITRs complied with federal income tax law.
As set out in the instructions for Line 1a of Form 1120, Line 1a of the FITR is to include “gross receipts or sales from all business operations, except for amounts that must be reported on lines 4 through 10.” Therefore, as the amounts received by Claimant from long-term construction contracts were gross receipts or sales from its business operations, they were properly reported on Line 1a of the FITRs at issue unless they were amounts that must be reported on lines 4 through 10.[7] None of the Form 1120 instructions for each of the other lines that include revenue (Lines 4 through 10) refer to a requirement of including income from long-term contracts or otherwise address such contracts. The instructions for Line 10 “other income” direct a taxpayer to “enter any other taxable income not reported on lines 1 through 9,” citing examples of specific income items, but making no reference to income derived from long-term contracts.[8] Moreover, the instructions for Line 1 direct corporations reporting income from long-term contracts to “see section 460” (IRC § 460, Special Rules for Long Term Contracts).[9] The ALJ concludes the instructions for Line 1 of Form 1120 indicate that income from long-term contracts is to be reported on Line 1, and nothing in the instructions dictates that such income must be reported on Lines 4 through 10 of Form 1120.
Claimant maintains that, regardless of these specific instructions for Line 1, the provisions of IRC § 460 provide no specific direction regarding where the income from long‑term contracts, once calculated, must be included on Form 1120, and there are no specific provisions that prohibit including such income from being included on Line 10 rather than Line 1.
IRC § 460 section addresses calculating income derived from long-term contracts. Under that section, the percentage‑of‑completion method (PCM) of accounting is required for large contractors with contracts meeting the definition of long-term, such as those at issue. TR § 1.460-4, Methods of Accounting for Long-Term Contracts, reiterates the use of the PCM set out in IRC § 460 for calculating the amount of long-term contract income to report and provides examples of that calculation.[10] While these sections address the calculation of the revenue, they do not, as pointed out by Claimant, dictate where the revenue must be reported once calculated. The ALJ concludes that neither IRC § 460 nor TR § 1.460‑4 establish that the income derived from long‑term contracts must be reported on Lines 4 through 10 of Form 1120.
In sum, the ALJ finds the instructions for Line 1 of Form 1120 support a conclusion that income derived from long-term contracts is to be calculated in accordance with IRC § 460 and TR § 1.460-4 and reported on Line 1a of Form 1120.
In the argument presented for the hearing, Clamant emphasized that its FITR method of reporting income from long-term contracts has been consistent since 2004 and was examined by the IRS in tax years 2010, 2011, and 2012 without any correction to its reporting method. Therefore, Claimant contends, the reporting on prior FITRs should be considered sufficient evidence that Claimant’s method of reporting on the FITRs at issue complies with federal income tax law. The ALJ disagrees.
The fact that Claimant included income derived from long-term contracts on Line 10 of Form 1120 of the FITRs for tax years 2010-2012 is not in dispute. Nevertheless, the specific content of those returns is not relevant to consideration of the returns at issue (tax years 2013‑2015) and the corresponding amended franchise tax returns. In addition, the evidence regarding the scope of the IRS review of Claimant’s returns is scant, represented only by the Explanation of Self-Adjustments issued by Claimant to the IRS, the Form 1120X Statement for tax year 2010 (used to amend the 2010 Form 1120), and the Income Tax Examination Changes Forms 4549 listing the changes made to the FITRs. These documents concern the calculation of various entries in the Form 1120 for each tax year. However, there is nothing in the documents to indicate an inquiry, consideration, or an approval by the IRS regarding Claimant’s income reporting on Line 10 or otherwise instructing Claimant that income derived from long-term contracts is required to be reported on Line 10. The ALJ concludes the evidence of the prior IRS examinations for tax years 2010‑2012 is insufficient to support Claimant’s contention that its reporting of its income from long-term contracts on Line 10 of its Form 1120 for tax years 2013-2015 complied with federal tax law.
Claimant failed to demonstrate that its reporting of income from long-term contracts in its FITRs for the tax years at issue complied with federal tax law and, therefore, failed to prove the total revenue included in the amended franchise tax returns for each report year (and the resulting amended taxable margin) was properly calculated. The denials of the refund claims based on Claimant’s amended franchise tax returns for report years 2014, 2015, and 2016 should be affirmed.
III. FINDINGS OF FACT
1. ************** (Claimant) is a construction company providing contracting services and infrastructure solutions for the electric and gas utility, communications, pipeline, and energy industries.
2. Claimant filed franchise tax returns for report years 2014, 2015, and 2016, based on trial balance accounts.
3. In the original franchise tax returns for report years 2014-2016, Claimant reported gross receipts or sales as a portion of its total revenue and applied its costs of goods sold (COGS) to reduce its total revenue in calculating its taxable margin for each report year.
4. Claimant’s income derived from long-term construction contracts during the periods at issue were gross receipts or sales from its business operations.
5. In the federal income tax returns (FITRs) for the tax years corresponding to the franchise tax report years at issue, 2013, 2014, and 2015, Claimant reported $0 gross receipts or sales (Line 1 of IRS Form 1120) and $0 COGS (Line 2 of IRS Form 1120).
6. Claimant reported its net revenue (receipts less associated costs) from long-term contracts on Line 10 (Other Income) of its Form 1120 for each tax year at issue.
7. Claimant’s FITR reporting method has been consistent since tax year 2004.
8. The Internal Revenue Service (IRS) performed examinations of Claimant’s FITRs for tax years 2010, 2011, and 2012, authorizing changes to the calculations in each return.
9. The IRS did not inquire, consider, or approve Claimant’s reporting of long-term contract net revenue on Line 10 or otherwise instruct Claimant that income derived from long-term contracts is required to be reported on Line 10.
10. In July 2018, Claimant amended its franchise tax returns for report years 2014-2016. Those returns included $0 in gross receipts of sales (franchise tax return Line 1) and $0 COGS.
11. The amended returns included the amount from Line 10 of the FITR as “other income” on franchise tax return Line 7.
12. The reduction in Claimant’s total revenue in the amended franchise tax returns resulted in a reduction of the taxable margin for each report year.
13. Claimant filed franchise tax refund claims for report years 2014-2016, citing the reduced taxable margin reflected in the amended returns.
14. In reviewing the amended returns and associated refund claims, the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) considered Claimant’s reporting on its FITRs for the corresponding years as well as the instructions for Form 1120, 26 U.S.C. § 460 (Internal Revenue Code or IRC § 460), and 26 C.F.R. § 1.460-4 (Treasury Regulation or TR § 1.460-4).
15. Staff concluded Claimant’s gross receipts or sales derived from long-term contracts were not required to be reported on Form 1120 Lines 4 through 10 but should be entered on Line 1a of Form 1120, with associated costs reported on Line 2.
16. Staff determined Claimant’s reporting of income on the FITRs for tax years 2013-2015 did not comply with federal tax law and, as a result, the amended franchise tax returns for report years 2014-2016 based on those FITRs included incorrect calculations of the taxable margin for each report year.
17. The refund claims were denied.
18. Claimant timely requested refund hearings to contest the denials.
19. Staff referred the contested cases to the State Office of Administrative Hearings (SOAH), and, on November 18, 2021, issued Notices of Hearing by Written Submission to Claimant.
20. Each notice contained a statement of the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
21. On December 2, 2021, after concluding the cases shared common issues of fact and law, Administrative Law Judge Trevor Moore issued Order No. 1, which joined the cases and set out the pre‑hearing requirements.
22. The record closed on February 16, 2022.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this hearing. See Tex. Tax Code ch. 111.
2. SOAH has jurisdiction over this hearing, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.
3. The Comptroller provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.105.
4. If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104.
5. When a taxpayer requests a refund, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. See, e.g., Comptroller’s Decision No. 109,787 (2015); 34 Tex. Admin. Code § 1.26(e).
6. Franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001.
7. A taxable entity’s franchise tax liability is determined by calculating the entity’s taxable margin, which first includes determining the entity’s total revenue. Tex. Tax Code § 171.1011(c).
8. Total revenue is computed by adding the amounts entered as reportable income on the FITR “to the extent the amount entered complies with federal income tax law.” Tex. Tax Code § 171.1011(b); 34 Tex. Admin. Code § 3.587(c)(2).
9. For a taxable entity filing as a corporation for federal tax purposes, such as Claimant, the amount entered on Line 1c of the FITR (gross receipts or sales in Line 1a less any allowances in Line 1b) is the amount to be entered on Line 1 (gross receipts or sales) of the Texas franchise tax return. See Texas Franchise Tax Report Information and Instructions.
10. Line 1a of the FITR is to include “gross receipts or sales from all business operations, except for amounts that must be reported on lines 4 through 10.” See Instructions for Form 1120.
11. Regarding reporting on Line 1a of Form 1120, corporations reporting income from long‑term contracts are to “see section 460” (IRC§ 460). See Instructions for Form 1120.
12. IRC § 460, Special Rules for Long Term Contracts, sets out the method of calculation of a corporation’s income derived from long-term contracts. See IRC § 460.
13. TR § 1.460-4, Methods of Accounting for Long-Term Contracts, addresses the method to be used in calculating the amount of long-term contract income to report on FITR Form 1120. See TR § 1.460‑4.
14. None of the Form 1120 instructions for Lines 4 through 10 refer to income from long‑term contracts or to IRC § 460. See Instructions for Form 1120.
15. Income derived from long-term contracts is to be calculated in accordance with IRC § 460 and TR § 1.460-4 and reported on Line 1a of Form 1120.
16. Claimant failed to demonstrate that its reporting of income from long-term contracts for the tax years at issue complied with federal tax law and, therefore, failed to prove the total revenue included in the amended franchise tax returns for each report year (and the resulting amended taxable margin) was properly calculated.
17. The denials of the refund claims based on Claimant’s amended franchise tax returns for report years 2014, 2015, and 2016 should be affirmed.
SIGNED March 7, 2022.
TREVOR MOORE
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf
[2] For a taxable entity filing as a corporation for federal tax purposes, such as Claimant, the amount entered on Line 1c of the FITR (gross receipts or sales in Line 1a less any allowances in Line 1b) is the amount to be entered on Line 1 (gross receipts or sales) of the Texas franchise tax return. See Texas Franchise Tax Report Information and Instructions.
[3] Claimant’s returns included Line 1 Gross Receipts or Sales of more than $5 billion and Line 14 COGS of more than $4 billion for each report year at issue.
[4] The corresponding underlying accounting periods for FITR purposes are calendar years 2013, 2014, and 2015.
[5] The term “long-term contract” means any contract for the manufacture, building, installation, or construction of property if such contract is not completed within the taxable year in which such contract is entered into. See 26 U.S.C. § 460 (f)(1).
[6] In its amended returns, Claimant did not claim any COGS, instead calculating its taxable margin as 70% of revenue.
[7] Lines 4 through 10 of Form 1120 represent, respectively: Dividends; Interest; Gross Rents; Gross Royalties; Capital Gain Net Income; Net Gain or Loss from Form 4797, Part II, line 17; and Other Income.
[8] The instructions for Form 1120 list the following “other income” reportable on Line 10: bad debts deducted in prior years; biofuel producer credits; refunds of taxes deducted in prior years; ordinary income from trade or business activities of a partnership; LIFO recapture amounts; any net positive Section 481(a) adjustment; part or all of the proceeds received from certain corporate owned life insurance contracts issued after August 17, 2006; income from cancellation of debt for the repurchase of a debt instrument for less than its adjusted issue price; and the corporation’s share of income from Form 8621.
[9] See Instructions for Form 1120 for each of the report years at issue; Staff’s Exhibits 7, 8, and 9.
[10] The PCM is a method of allocating the income generated from a contract based on how much of the work has been completed. This is calculated by multiplying the income to be generated by the contract by the percentage of contract completion (total costs incurred to date over the total estimated costs).