The Typical Bay Area Home, the Typical Audit — What Seddiqui (2024) Teaches About Proving Basis
Call to Action:
If you have sold a California home and cannot find decades of improvement receipts, I can help you reconstruct your basis and defend it before the FTB. Contact me to start building your documentation strategy before an audit becomes a dispute.
Case link: Seddiqui, 2024-OTA-280P (Precedential)
Background of the Case
The Seddiqui case involved a husband and wife from the Bay Area who sold their longtime primary residence. Like many California homeowners, they had owned the property for decades and made substantial improvements over the years such as a new roof, remodeling, flooring, and landscaping.
When they sold the home, they reported a reduced gain based on an adjusted basis that included these improvements. But during audit, the Franchise Tax Board (FTB) disallowed most of the claimed costs, asserting that the Seddiquis had not adequately documented the improvements. The missing documentation meant a much higher taxable gain and a substantial tax bill.
The taxpayers appealed to the Office of Tax Appeals (OTA), relying on the Cohan rule, which allows taxpayers to make reasonable estimates when exact records are missing, provided there is credible evidence that the expenses were actually incurred.
OTA’s Findings and Decision
The OTA sided partly with the taxpayers and partly with the FTB, creating a precedential opinion that now guides every California basis dispute.
The OTA made three key findings:
The Cohan rule applies in California basis cases.
Taxpayers may use reasonable estimates when the evidence shows that capital improvements were made, even if receipts are incomplete.Credibility and corroboration are essential.
The Seddiquis testified credibly about the work they had done, and some documents (contracts, photos, and other partial records) supported their claims. The OTA allowed basis increases for those items, but denied others that lacked corroboration.The burden of proof remains with the taxpayer.
The OTA stressed that the Cohan rule does not shift the burden to the FTB. The taxpayer must present enough credible, specific evidence to allow a reasonable estimate. Unsupported assertions are not enough.
The decision gave the Seddiquis some relief but not all they had sought. And because the opinion was designated precedential, its reasoning now applies to all future FTB audits and OTA appeals involving adjusted basis and incomplete records.
Why This Case Matters
The Seddiqui case is significant precisely because it is so ordinary.
The couple’s situation mirrors that of many Californians who have owned homes for decades, made improvements, and later sold for large gains. The exclusion for the gain on the sale of a primary residence is $500,000 (married filing jointly). IRS Tax Topic 701 FTB- Income from the sale of your home This amount has not kept up with the pace of California home values, thus many taxpayers will owe capital gains in the near future.
Most homeowners do not save every invoice, check stub, or contractor receipt from 20 or 30 years ago. When the FTB audits a home sale, that missing documentation can lead to an inflated gain and a surprise tax bill.
The OTA’s ruling gives taxpayers a path forward. The Cohan rule remains alive in California, but it must be used properly. The rule is not a shortcut; it is a standard. Taxpayers must still produce credible, specific evidence that improvements occurred, even if the exact dollar amounts cannot be proven.
How This Affects Typical Homeowners
This case affects far more than just the Seddiquis:
Every longtime homeowner who has improved their property and later sells it at a gain.
Trusts and estates that inherit and sell homes without access to decades of prior documentation.
Retirees downsizing or relocating who discover that FTB challenges their basis and gain calculation.
With California home values frequently increasing, even small basis disallowances can translate to tens of thousands in extra tax.
What I Tell Clients
If you have lived in your home for years, start reconstructing your basis now even before you sell.
Gather anything that supports the improvements: closing statements, appraisals, permits, photos, or contractor names.
Make a simple timeline of major work done and when.
Do not discard old digital records; even partial invoices or bank statements can be valuable.
In Seddiqui (2024-OTA-280P), the Franchise Tax Board used the Marshall & Swift CoreLogic SwiftEstimator to estimate the home’s improvement costs, and the Office of Tax Appeals accepted that approach as reasonable evidence (see p. 3 of the decision). This demonstrates that professionally developed construction cost estimates are an accepted method for approximating improvement costs when records are incomplete. However, original receipts and documentation remain the strongest and preferred evidence for establishing adjusted basis.
When the FTB calls, the evidence you saved today may determine how much tax you pay tomorrow.
Practical Takeaway
Seddiqui (2024) gives taxpayers a fair chance, but not a free pass.
If the work was real, it can often be substantiated through secondary evidence. But if the evidence isn’t credible or specific, the FTB’s number will stand.
In a state where typical homes can easily trigger six-figure gains, this case is a reminder: basis documentation is not optional. It’s your best defense.
If you are preparing to sell a California property or already dealing with an FTB gain-on-sale audit, contact me. I will help you apply the Seddiqui standard to reconstruct your basis and protect your equity from unnecessary tax.
Referenced Law and Cases
Cal. Code Regs. Tit. 18, § 30219 - Application of Burden of Proof
Sec. 1001 Determination of amount of and recognition of gain or loss
Cohan v. Commissioner of Internal Revenue, 39 F.2d 540 (2d Cir. 1930)
