Pellar v. Commissioner
United States Tax Court
25 T.C. 299 (1955)
The Pellars (plaintiffs) contracted for a $40,000 house, which grew to about $55,000 with upgrades and was ultimately worth roughly $70,000, but the contractor actually spent considerably more than $70,000 completing it due to rework and added labor costs, absorbing the loss deliberately to preserve his valuable existing and hoped-for future business relationship with Mrs. Pellar's father. The Commissioner (defendant) issued a tax deficiency notice treating the difference between what the Pellars paid and the house's true value as unreported income, and the Pellars petitioned for redetermination.
Whether a taxpayer who purchases property for less than its true value, because the seller absorbed a loss to preserve a valuable business relationship with a third party, owes income tax on that difference at the time of purchase rather than at a later sale or disposition.