The Cohan Rule

Today TaxMama hears from Roberta who says. “Some time back, you wrote about a rule of providing most but not all proofs for deductions. I think it was called something like “Irving’s rule”. Please send the correct name and where I can read about it.”

Hi Roberta

Aah… the Cohan Rule, as in George M. Cohan, as in Give My Regards to Broadway. [Cohan v. Commissioner,39 F.2d 540, 543-544 (2d Cir. 1930).]

This is where you remember it from, an early article in the I-Laugh Digest: http://workinghumor.com/archives/issue02.shtml

And if you want legalese – you’ll find a case that references it. http://www.smbiz.com/sbw1112.html

George M. Cohan set a precedent because of an audit that disallowed all his business expenses because he didn’t have proper documentation. Cohan practically lived on the road, out of a trunk. Where was he going to store all those receipts and records? It was obvious to the Court that he must have paid for hotels, travel, roadies (though they weren’t call that then), make-up costumes, music, and a myriad of other things that are usual for actors.

In essence, the Tax Court ruled that if it’s obvious you have expenses, IRS must allow you to deduct expenses, even without receipts. Over the years, this has been refined to include two more concepts.

1) The idea that you also have to be able to provide some basis for the reasonable expenses – in other words, worksheets outlining your costs and some objective evidence on how the costs are arrived at.

2) You had to make an effort to recover available documents and evidence (like credit card statements, bank statements, records of accounts from vendors you use regularly, etc.)

You can’t just be lazy and say, I must have had expenses, so you have to accept them. Fred Daily has a pretty good explanation in his Nolo book, Stand Up to IRS
http://www.nolo.com/product.cfm/ObjectID/A47ACAE0-3C9A-485B-AC83EEC678B1891D/213/287/?img=17&kbid=1453

Handled properly, Cohan is a pretty powerful tool. What a legacy for a Yankee Doodle Dandy!

And remember, you’ll find answers to lots of questions, about winning audits, and other tax information, free. Where? At TaxMama.com

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