Even IRS agents can make simple mistakes in business, such as violating the old adage to “put it in writing.” Even so, the Tax Court in a recent case believed the IRS agent’s testimony regarding an oral contract she had with her mother-in-law.

Pamela Brooks, an IRS tax compliance officer, agreed with her mother-in-law, Beulah Bias, to put $34,000 of improvements into Bias’s house in Los Angeles. At the time, Brooks lived in the house, but moved out shortly after the improvements were complete.

The $34,000 was given in exchange under an oral agreement that she would share in the proceeds when the property was sold,

Bias died in 1991, but the property wasn’t sold until 2,000. Brooks sued the estate and finally settled for $17,000. On her 2005, 2006 and 2007 returns, Brooks reported capital losses of $3,000. But her employer, the IRS, disallowed the claimed capital loss deductions in full, contending that she failed to show either that she owned or had an enforceable property interest in the property, or that she made the improvements to the property with the intent to make a profit.

The Tax Court held for Brooks. Section 165 of the Tax Code does not require an enforceable property interest, merely an economic interest in the property. It found Brooks’s testimony regarding her oral agreement with Bias to be credible. Under the agreement, the court said, Brooks acquired an equitable interest in the property, in that she was promised a share of the proceeds if and when the property was sold.

Moreover, the $34,000 was invested in the property with the intent to make a profit, according to the court, since it was unlikely that she “would have expended such a large sum of money to renovate a house that she did not own purely for her own personal comfort.”

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