558 F. App'x 374
5th Cir.2014Background
- McLauchlan appeals a tax court ruling sustaining IRS determinations of deficiencies and accuracy-related penalties for 2005–2007.
- IRS audited McLauchlan in 2008 and issued a notice of deficiency on April 23, 2009 disallowing Schedule C deductions and penalties.
- McLauchlan, as a partner in AR, claimed expenses on Schedule C; IRS later argues these would not be deductible on Schedule E as unreimbursed partnership expenses.
- IRS amended its answer in July 2010, increasing deficiencies for 2005 and 2006 after discovering McLauchlan’s AR partnership status, while concessions limited issues at trial.
- Tax court concluded that the disputed expenses were not unreimbursed partnership expenses or properly substantiated; depreciation and charitable deductions were treated as flow-through items; penalties were assessed.
- McLauchlan timely appealed and the court affirmed, with remand for recomputation to reflect overlooked deductions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the burden of proof shifts to the Commissioner on new matters in an amended answer. | McLauchlan argues the burden should be on the Commissioner for new matters. | The tax court properly treated burden allocation as moot due to predominant weight of evidence. | No reversible error; burden not dispositive given weight of evidence. |
| Whether McLauchlan may deduct unreimbursed partnership expenses on Schedule E. | McLauchlan contends AR required him to incur certain expenses without reimbursement and thus deductible. | Expenses must be borne by partners out of their own funds or be unreimbursed per partnership policy to be deductible. | Affirmed; unreimbursed expenses not established or properly substantiated; deductions denied. |
| Whether the automobile expenses failed substantiation under IRC § 274. | McLauchlan argues any valid indirect expenses should be deductible. | Automobile deductions require detailed substantiation; records were not kept. | Affirmed; failure to meet substantiation requirements bars deduction. |
| Whether McLauchlan is liable for accuracy-related penalties. | McLauchlan contends reasonable cause/good faith negate penalties. | Penalty appropriate due to substantial understatements and lack of reasonable cause. | Affirmed; penalties upheld; remanded for recomputation to credit overlooked deductions. |
Key Cases Cited
- Whitehouse Hotel Ltd. P’ship v. Comm’r, 615 F.3d 321 (5th Cir. 2010) (burden-shifting and standard of proof in amended returns)
- Branum v. Comm’r, 17 F.3d 805 (5th Cir. 1994) (standard for reviewing Tax Court decisions; de novo conclusions of law; clear error findings)
- Wallendal v. Comm’r, 31 T.C. 1249 (Tax Court 1959) (deduction when expenses are borne by partners from their own funds)
- Klein v. Comm’r, 25 T.C. 1045 (Tax Court 1956) (partnership deduction only when expenses are required to be paid by partner’s own funds)
- Orvis v. Comm’r, 788 F.2d 1406 (9th Cir. 1986) (deduction not allowed when partner fails to seek reimbursement for deductible partnership expenses)
- Srivistava v. Comm’r, 220 F.3d 353 (5th Cir. 2000) (reasonable cause and good faith in substantial understatements; burden on Commissioner for penalties)
- Cropland Chem. Corp. v. Comm’r, 75 T.C. 288 (Tax Court 1980) (general rule: partnership expenses not deductible by partner on individual return)