I really would like to know if you have ever had to litigate the issue or know of a case, you're relying on for your understanding of how the law would be applied?

Personally, as a matter of practicality, since they are allowable expenses I THINK the only issue the irs could take is just that its reported wrong, and you'd just apply it the way they want.

The code enforcement officer said he mentioned these issues to the sellers and the sellers' agent.

So legally, you can say 'no' to many of the issues that are brought up during an inspection.

Does anyone see any issues with doing it this way?

Overall, he did a good job, but there are issues that will show up on an inspection that aren't necessarily liabilities.  

The issue you are going to run into if your lender hasn't told you already having the 3.5% is only part of the equation.  

Technical professional working full-time ready to return to real estate investing.

It unlikely calls for a closing/sale without substantial completion, and the bank shouldn't have an issue with funding with a typical "punch list",  perhaps holding back a few grand.  

IF you could inbox me your credit score and credit issues it would be helpful.