Question

Explain the interrelationship of the Section 274(d) requirements and the “Cohen Rule”

Answer 1

In tax audits, IRS asserts the position that expenses that are undocumented cannot be deducted. This is usually untrue with exception to expenses covered by IRC section 274(d). The IRS must allow deduction of reasonable and ordinary expenses, and must also consider corroborating evidence as a support for a deduction basis ‘the Cohan rule.'

The IRS attempted to disallow all of Cohan’s travel and entertainment expenses beacaue of insufficient accounting and documentation , even though it conceded that he had traveled due to the income generated in various cities across the country. The Court disagreed with the Board’s conclusions, and expounded in the following remarks :

Quote:

“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.”

Unquote

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

The IRS will always interpret the application of tax law in a manner that is favorable to Revenue and adverse to the taxpayer. The burden of defending our rights is ours.