Estimating Tax Deductions: The Cohan Rule

Travel and Entertainment Tax Deductions In The Absense of Records

The “Cohan rule” is derived from a Second Circuit’s 1930 decision, Cohan v. Commissioner, which allowed for the approximation of travel and entertainment expenses in the absence of records indicating an exact amount.[1] The rule has since flourished, with later noted exceptions, into use with taxpayers who either produce incomplete records or cannot produce any records at all regarding contested disallowed tax deductions.[2]

This holding can be attributed to the one and only, George M. Cohan. Mr. Cohan was perhaps the original Broadway pioneer. He has been credited with writing and publishing over 300 songs (including ‘You’re a Grand Old Flag’), over a dozen musicals, being a fabulous entertainer, networker, and generally credited with making Broadway into the global landmark it is today (see his statute and plaque in Manhattan’s famous Duffy Square).[3] His most memorable accomplishment, however, may be his memorialization in the tax code. After failing to keep atop his substantial Broadway expenditures, Mr. Cohan offered for the court’s approval his tax code debut. Despite grossly inadequate records, Mr. Cohan was allowed a deduction based on close approximations provided to the court.[4] The court then recognized that strict proof of otherwise deductible business expenses is not always available.[5] In the words of the Cohan court, “absolute certainty in such matters is usually impossible” and it is “not fatal that such results will inevitably be speculative; many important decisions must be such.” [6]

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