What the IRS doesn’t want you to know about expense documentation…

The Cohan Rule

cover of Time magazine in 1933 featuring George M. Cohan

It is very common in federal tax audits that the IRS will assert the position that an undocumented expense cannot be deducted. This is generally untrue (with exception to expenses covered by IRC section 274(d)). The IRS must allow reasonable and ordinary expenses, and must consider corroborating evidence as support for a deduction, per ‘the Cohan rule.’

The case of Cohan v. Commissioner, settled in the 2nd Circuit US Court of Appeals on March 3, of 1930, is one of the top ten most cited tax cases in history. Among other matters of little long-term significance, the case addressed deductions for travel and entertainment expenses claimed by actor, songwriter, and playwright Mr. George M. Cohan (shown at right on the cover of Time magazine) between 1921 and 1923.

The IRS (or the ‘Board’ as it is referred to in the Court’s opinion) attempted to deny all of Cohan’s travel and entertainment expenses due to insufficient accounting and documentation, even though it conceded he had traveled due to the income earned in various cities across the country. The Court disagreed with the Board’s conclusions, and expounded in the following remarks (written by Circuit Judge Learned Hand, at left, who has been quoted more by the Supreme Court than any other lower court judge):

photo of George M. Cohan

“Absolute certainty in such matters is usually impossible, and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent.”

“It is not fatal that the result will inevitably be speculative; many important decisions must be such. We think that the Board was in error as to this and must reconsider the evidence.”

Since this case, there have been hundreds of spin-off cases where the Cohan rule has been applied to different circumstances. In one of the more recent cases, Doffin v. Commissioner, 1991, the tax court applied the Cohan rule to gambling loss deductions. In Doffin, the court considered statistical probability based on the gambler’s gaming style to estimate the deductible losses. Doffin has frequently been cited in other cases involving gambling loss deductions.

The IRS will always interpret the application of tax law in a manner adverse to the taxpayer. The burden of defending your rights is yours, and if you choose, ours.


Brian Murray

Brian has been in public accounting since 1997. Prior to that he was in finance at Kimberly-Clark Corp., audit at M&I Bank Corp., and accounting manager at Browning-Ferris Ind. Brian’s areas of specialty are estate and trust tax and business valuation.

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