United States Tax Court T.C. Memo. 2026-20 JEFFREY PESARIK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Procedural posture
Petition filed in Tax Court following IRS notice of deficiency for tax year 2020; case tried in Boston, Massachusetts.
Disposition
Partial relief granted on Wakefield Property basis via Cohan estimate; §121 exclusion denied for Hull Property; accuracy-related penalty issue present but disposition not fully resolved in excerpt.
In plain English
The Tax Court allowed only a fraction of the renovation costs Pesarik claimed for his Wakefield property and denied the entire §121 exclusion on his Hull property sale, resulting in combined taxable gains far exceeding what he reported or didn't report at all. On the Wakefield side, the court applied the Cohan rule but penalized him heavily for failing to tie expenditures to a specific property, awarding just 25% of his Home Depot and Lowe's spending as an estimate. On the Hull side, his failure to establish Massachusetts residency - no state tax filings, no Massachusetts driver's license, an Arizona license presented at closing, and a New Hampshire mailing address throughout - doomed the §121 claim entirely. Practitioners should document capital improvement expenditures by property at the time of purchase, track receipts and contractor invoices with property-specific notation, and retain contemporaneous evidence of residency (utility bills, driver's license, state returns) for any property where a §121 exclusion may eventually apply.
Practice pointers
Case context: Partial relief granted on Wakefield Property basis via Cohan estimate; §121 exclusion denied for Hull Property; accuracy-related penalty issue present but disposition not fully resolved in excerpt.
- Track capital improvement expenditures by property address from the date of acquisition; use job-cost coding in bookkeeping software so each receipt is attributed to a specific property at the time of purchase, not reconstructed years later.
- Retain contractor invoices, lien waivers, and checks with property-specific memo notations for every capital project; credit card statements with broad category descriptions (e.g., 'paint hardware lumber') are insufficient to establish the nature or allocation of expenditures.
- When owning multiple properties simultaneously, reconcile improvement spending to each property monthly so that any later allocation can be tied to contemporaneous records rather than a post-hoc spreadsheet.
- Document principal residence status with objective, third-party evidence - obtain a driver's license in the state where the property is located, file state income tax returns as a resident, and establish utility accounts in your name at the property address - well before any planned sale where a §121 exclusion will be claimed.
- Retain closing disclosures (HUD-1 or CD) for every acquisition and disposition; these are stipulable and form the uncontested foundation of purchase price and closing cost basis components.
- Brief every issue in Tax Court proceedings; failure to address a basis component on brief is treated as a concession, as occurred here with the Hull Property improvement expenditures.
Issue analysis
Whether Pesarik established the correct purchase price (cost basis) of the Wakefield Property under §1012.
Taxpayer position: Pesarik claimed a purchase price of $31,000 as part of his adjusted basis calculation.
IRS position: The stipulated quitclaim deed stated consideration of $30,000; the IRS did not accept the higher figure.
Court holding: Court held the purchase price was $30,000, consistent with the stipulated deed.
Court reasoning: The quitclaim deed, which the parties stipulated, stated consideration of $30,000. Pesarik presented no persuasive evidence to support the $31,000 figure he claimed.
Practitioner takeaway: Basis begins at closing. Retain the settlement statement and deed; do not rely on memory for purchase price figures that will be scrutinized years later.
Whether Pesarik's Wakefield Property closing costs of $17,843 were allowable capital expenditures increasing adjusted basis.
Taxpayer position: Pesarik claimed $17,843 in closing costs incurred on the sale of the Wakefield Property as basis-increasing capital expenditures.
IRS position: The IRS did not address this issue at trial or on brief.
Court holding: Court allowed the full $17,843 in closing costs as capital expenditures under Treas. Reg. §1.263(a)-1(e).
Court reasoning: The parties stipulated a settlement statement reflecting $17,843 in closing costs. The Commissioner offered no opposition, and the court found these amounts were incurred to sell the property and thus constituted capital expenses.
Practitioner takeaway: Closing costs on sale are capital expenditures that reduce gain. Retain the HUD-1 or closing disclosure for every transaction; they are stipulable and largely uncontested when documented.
Whether Pesarik sufficiently substantiated the amount of capital improvement expenditures for the Wakefield Property, or whether the Cohan rule applied.
Taxpayer position: Pesarik claimed $82,358 in capital improvement expenditures supported by credit card and bank statements plus a trial spreadsheet allocating costs between properties.
IRS position: The IRS conceded improvements were made but argued the evidence neither substantiated the precise amount claimed nor provided a sufficient basis for a Cohan estimate.
Court holding: Court rejected the claimed $82,358 but applied Cohan to estimate allowable capital improvement expenditures at $20,959 ($6,156 in specifically identified checks plus 25% of $59,213 in Home Depot and Lowe's credit card spending).
Court reasoning: Credit card statements lacked property-specific attribution and used broad category descriptions. The trial spreadsheet conflicted with underlying statements—allocating costs before properties were purchased or after they were sold—and Pesarik could not explain his allocation methodology. Because Pesarik owned four properties simultaneously and made improvements to multiple properties, the court applied the Cohan admonition to bear heavily on the taxpayer and awarded only 25% of identified home improvement store spending.
Practitioner takeaway: When a client owns multiple properties simultaneously, property-specific cost tracking is not optional; it is the difference between full basis recognition and a court-imposed 25-cent-on-the-dollar estimate. Implement job-cost tracking by property address from day one.
Whether Pesarik's trial spreadsheet purporting to allocate improvement expenditures between the Wakefield and Hull properties was reliable evidence of basis.
Taxpayer position: Pesarik introduced a spreadsheet at trial allocating credit card and bank statement charges between the two properties as evidence of capital improvement expenditures.
IRS position: The IRS challenged the reliability and accuracy of the spreadsheet allocation.
Court holding: Court rejected the spreadsheet as unreliable and gave it no weight in determining the precise amount of capital improvements.
Court reasoning: The spreadsheet allocated expenditures to properties before they were purchased or after they were sold, failed to reconcile purchases and credits (returns) on the monthly statements, and Pesarik could not credibly explain his allocation methodology.
Practitioner takeaway: A spreadsheet prepared after the fact and inconsistent with the underlying source documents is worse than no spreadsheet. It affirmatively undermines credibility. Contemporaneous records, reconciled to source statements, are the only reliable foundation.
Whether Pesarik established the amount of capital improvement expenditures for the Hull Property to increase his adjusted basis.
Taxpayer position: Pesarik apparently incurred improvement expenditures on the Hull Property but made no argument on brief regarding capital improvements for that property.
IRS position: IRS position was that Pesarik failed to substantiate any basis-increasing improvements for the Hull Property.
Court holding: Court treated any capital improvement argument for the Hull Property as conceded and computed gain solely from purchase price ($394,750) and stipulated closing costs ($24,967).
Court reasoning: Pesarik failed to make any argument on brief regarding capital improvement expenditures for the Hull Property; the court treated the issue as abandoned.
Practitioner takeaway: Failure to brief an issue is a concession. Ensure every basis component: purchase price, improvements, and closing costs is argued and supported for each property sold in the same year.
Whether the gain from the sale of the Hull Property qualified for the §121 principal residence exclusion.
Taxpayer position: Pesarik contended he used the Hull Property as his principal residence for more than two years within the five-year period preceding the October 2020 sale, entitling him to exclude up to $250,000 of gain under §121.
IRS position: The IRS argued Pesarik failed to demonstrate the Hull Property was his principal residence for the required two-year period.
Court holding: Court denied the §121 exclusion; Pesarik failed to demonstrate the Hull Property qualified as his principal residence.
Court reasoning: The evidence weighed against Hull being Pesarik's principal residence: he never filed Massachusetts state income tax returns during the ownership period, never obtained a Massachusetts driver's license, listed a New Hampshire post office box as his home address on his 2020 return, and presented an Arizona driver's license at closing. His mailing address shifted to Hull only in February 2020, shortly before the October 2020 sale. The court applied the rule that exclusions from income must be construed narrowly and that taxpayers must clearly establish they fall within the exclusion's scope.
Practitioner takeaway: The §121 exclusion requires contemporaneous proof of principal residence, not after-the-fact assertion. Clients should establish and document domicile—driver's license, state tax filings, utility accounts, voter registration in the state where the property is located well before a planned sale.
Whether Pesarik is liable for an accuracy-related penalty under §6662 for underpayment attributable to the unreported property sale gains.
Taxpayer position: Not addressed in the provided excerpt; Pesarik's position on the penalty is not stated in the available text.
IRS position: The IRS determined an accuracy-related penalty of $54,355 (20% of the $271,774 deficiency computed in the notice of deficiency).
Court holding: Not resolved in the provided excerpt; the penalty issue is noted but the court's final holding on it is not included in the available text.
Court reasoning: The notice of deficiency included the penalty; the court's analysis of the penalty is not present in the excerpt provided.
Practitioner takeaway: Accuracy-related penalties under §6662 apply to substantial understatements and negligence. Failing to report gain from two property sales (neither of which appeared on the return) creates significant penalty exposure regardless of basis disputes.