Mr. and Mrs. Pellar (plaintiffs) contracted for the construction of a new house for $40,000. During construction, they added upgrades, which increased their cost to about $55,000 but also increased the house’s value to about $70,000. The contractor spent considerably more than $70,000 to complete construction, because in addition to the cost of the upgrades, the contractor incurred significant rework and additional labor costs. The contractor was willing to absorb the loss, because he had extensive existing business ties and hoped for future business ties to Mrs. Pellar’s father, and wished to retain the father’s good will. The commissioner of the Internal Revenue Service (defendant) issued a deficiency notice against the Pellars for failing to report, as income, the difference between their purchase price and the cost of construction. The Pellars petitioned for a redetermination. As a preliminary matter, the tax court considered whether the deficiency, if any, was only the $15,000 difference between what the Pellars had paid and what the house was worth, rather than what the contractor spent on the construction.