Oliver Barr McClellan & Cecile Williams McClellan v. Commissioner
2014 T.C. Memo. 257
Tax Ct.2014Background
- Oliver and Cecile McClellan operated BCMC (call-center consulting) and Orchis Publications (petitioners combined both on Schedule C) and maintained a Gulfport, MS residence and a Messages, Inc.–rented NYC apartment while consulting across multiple Northeastern cities during 2006–2008.
- Messages, Inc. paid BCMC $10,000/month plus certain reimbursements; petitioners spent ~80% of each year working at consortium sites and ~20% in Gulfport, but retained their Gulfport home and paid associated expenses.
- Petitioners claimed large Schedule C deductions (utilities, rent, meals, car, depreciation, home office, etc.) and reported capital losses and other losses; amended returns altered many amounts but respondent did not process them.
- IRS examination disallowed almost all Schedule C deductions and the claimed 2006 capital loss; respondent allowed only limited amounts for certain items and assessed deficiencies and section 6662 accuracy-related penalties for 2006–2008.
- At trial petitioners relied on worksheets, bank statements, receipts, and handwritten logs; they claimed records were lost/destroyed in hurricanes but provided little corroboration or contemporaneous substantiation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Tax home / deductibility of lodging while away from home | Petitioners: Gulfport was their tax home; NYC apartment lodging deductible as away-from-home business expense | Commissioner: NYC was tax home; lodging not deductible | Held: Gulfport was tax home; allowed NYC lodging deductions limited to substantiated amounts ($13,464.62; $14,511.98; $14,614.34 for 2006–2008) |
| Meals & entertainment substantiation under §274(d) | Petitioners: bank records and receipts substantiate claimed meal/entertainment expenses | Commissioner: fails strict substantiation; many receipts illegible/vague; entertainment not shown to be business-related | Held: Most disallowed; limited meal deductions allowed ($103.05; $9,603.20; $4,708.07 pre-§274(n)) and entertainment deductions denied |
| Car, depreciation, travel, home office, and other Schedule C expenses | Petitioners: various expenses ordinary/necessary and deductible (including listed-property depreciation, car/truck, home office) | Commissioner: insufficient records, reimbursements by Messages, Inc., and concessions in amended returns; §274(d) not met | Held: Majority disallowed. Car/truck limited to amounts respondent allowed; depreciation and §179 disallowed; most travel, repairs, insurance, legal fees disallowed; limited office/postage deductions allowed; home office largely disallowed (some concession amounts upheld) |
| Capital loss and 7017 Corporation losses / NOLs claimed for 2006 | Petitioners: claimed large long-term capital loss, carryovers, Form 4797 ordinary losses, and $376,113.54 guaranty loss from 7017 bankruptcy | Commissioner: no corroboration; inconsistencies in dates/amounts; no evidence of petitioners’ personal liability or basis | Held: All claimed capital loss, carryovers, Form 4797 losses, and bankruptcy-guaranty losses disallowed |
| Accuracy-related penalty (§6662) | Petitioners: acted in good faith and attempted record reconstruction; reasonable cause | Commissioner: substantial understatement; burden of production met | Held: Penalty sustained for each year; petitioners failed to show reasonable cause and good faith |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (establishes taxpayer burden to prove deficiency wrong)
- New Colonial Ice Co. v. Helvering, 292 U.S. 435 (deductions are matter of legislative grace)
- Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) (Court may approximate deductible amounts when taxpayer proves expense but lacks precise records)
- Vanicek v. Commissioner, 85 T.C. 731 (Tax Ct. 1985) (requirements for approximation under Cohan)
- Peurifoy v. Commissioner, 358 U.S. 59 (temporary vs. indefinite employment and tax-home principles)
- Commissioner v. Flowers, 326 U.S. 465 (standards for travel-away-from-home deductions)
- Sanford v. Commissioner, 50 T.C. 823 (Tax Ct. 1968) (strict substantiation under §274)