Just like many other interesting SEO problems I came across, I came across to this issue by chance.
As I was looking for a website to create a video for demonstrating our Bulk URL Checker tool and how it could help resolving 404 errors in Google Webmaster Tools, I reached out to someone I got connected through a Startup meet up group in Pittsburgh.
The first video below was the demo video I created, as you will see most of the 404 error URLs did not have any link juice. As it turned out the Sitemap for the site was created using Google Sitemap Generator, which on its website states that the tool would also include web server traffic and webserver logs.
As you will see in the second video below, I explain how Google Sitemap Generator has caused quite a bit of problem by adding many incorrect URLs. Bing has previously stated Sitemaps that contain more than 1% error would get devalued. Thus having the most up to date URLs with no errors in the Sitemaps would be the best practice.