Issue
The issue in Cohan v. Commissioner of IRS is the plaintiff, Cohan, petitioned the US
Circuit Court of Appeal for the Second Court to review the decision of the Board of Tax
Appeals, which fixed the taxpayer of disallowable travel and entertainment expenses as
business expenses on the grounds of absence of receipts or detailed records, making it
impossible to know actual expense amounts. This case is an appeal to a prior decision and
takes place in the U.S. Court of Appeals, Second Circuit. Plainly, Cohan argued that the
prior decision of making expenses disallowable simply because he did not have any
documentation for them is invalid.
Facts
Plaintiff / Petitioner– Cohan
Defendant / Respondent– Commissioner of the IRS
Cohan managed a theatrical company with Harris. The partnership dissolved, but before
that, Cohan lent Harris money to cover Harris’s moving/living expenses. Cohan reduced
his salary by the amount of this loan and wrote it off as expendable as either a business
expense or being amortized annually. Cohan also wrote off traveling for business, and
these amounts were substantial. He kept no receipts or detailed records for these expenses.
He had rough estimates of substantial amounts.
Law
Common law rule was used, which is now called the ‘Cohan Rule.” Taxpayers who cannot
produce receipts or records of expenses may rely on reasonable estimates as long as there
is factual basis for those estimates.
