This person is going through an audit and he contacted me to ask if such a thing is possible:

In 2006 he purchased a building from which he used as his cabinet manufacturing place.  He did not take any depreciation during these years because he was barely breaking even and he did not want to do it.  He purchased the property for let's say 350k.  In 2016 he sold the building for 300k (a 50k loss) which was reported into the 4797 sales of business property.  This year he received an audit for 16, one of the things needing clarification being this issue.  The auditor calculated that instead of the 50k loss that he had on the tax return he actually has a capital gain of 134k.  When he asked the auditor how that is the auditor said that even though he did not take any depreciation it is consider as he did.  I've never heard of this thing in my life, anyone familiar? It can't be!

In the same audit the person paid a subcontractor with cash, about 40k (the sub signed each time the money was received) but the auditor said that since it was paid with cash it cannot be deducted.  That amount was included in a 1096/1099 form also but auditor requested all the checks paid to all subs.  Please help!