Riley and Joyce Pendergraph held title to their Gilroy, California, home in the NHuss Trust.
The trust sold the home and reported no taxable gain, on the strength of $286,070 in claimed improvements.
On audit, the IRS found only $56,284 of improvements. The court was more generous and allowed $82,039. That left $101,907 of taxable capital gain.
Notice what the court did: It did not hold the Pendergraphs to the $56,284 the IRS could document. Instead it estimated, which courts may do in select circumstances when a taxpayer clearly incurred costs but cannot prove the exact amounts. That estimating doctrine is nearly a century old, and it is a consolation prize, not a winner.
The estimate still cost the Pendergraphs tax on $101,907, and they had to go to court and litigate to that lower ... Log in to view full article.
