Cohan rule is a that has roots in the common law. Under the Cohan rule taxpayers, when unable to produce records of actual expenditures, may rely on reasonable estimates provided there is some factual basis for it. The rule allows taxpayers to claim certain tax deductions on the basis of such estimates. The rule was adopted and laid down in the US by the Second Circuit in the case titled Cohan v. Commissioner, hence the name of the rule. The Second Circuit in the Cohan case held that "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."
It must be noted that the Cohan rule does not have a universal applicability.For example, the Cohan rule does not apply to items that are listed in Section 274(d) of the Internal Revenue Code.
[Last updated in January of 2022 by the Wex Definitions Team]
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Now, let's delve into the concepts embedded in the provided article:
1. Cohan Rule:
- The Cohan rule is a legal principle rooted in common law that allows taxpayers to make reasonable estimates of their expenditures when they are unable to produce records of actual expenses.
- This rule originated from the case of Cohan v. Commissioner, a landmark decision by the Second Circuit in the United States.
2. Basis of the Cohan Rule:
- Under the Cohan rule, taxpayers can claim certain tax deductions based on reasonable estimates, provided there is a factual basis for these estimates.
- The Second Circuit, in the Cohan case, emphasized that absolute certainty in financial matters is often impossible, and the tax authorities should make a close approximation, especially when the taxpayer's lack of precision is of their own making.
3. Origin and Adoption of the Cohan Rule:
- The Cohan rule was adopted and established in the United States by the Second Circuit in the case of Cohan v. Commissioner. The rule is named after this case.
4. Limitations of the Cohan Rule:
- The Cohan rule does not have universal applicability. It does not extend to items listed in Section 274(d) of the Internal Revenue Code.
5. Second Circuit's Perspective on Certainty:
- The Second Circuit, in the Cohan case, held that absolute certainty in financial matters is usually impossible and unnecessary. The tax authorities should strive to make as close an approximation as possible, with a focus on the taxpayer's responsibility for any inexactitude.
6. Exclusion under Section 274(d):
- The Cohan rule is not applicable to items listed in Section 274(d) of the Internal Revenue Code, highlighting a specific limitation on its scope.
In conclusion, the Cohan rule stands as a pragmatic approach in tax law, allowing taxpayers to reasonably estimate their expenses when unable to produce precise records. However, its application is not universal, and certain items are explicitly excluded under Section 274(d) of the Internal Revenue Code. This understanding is crucial for taxpayers navigating the complexities of tax regulations and for tax authorities in making informed and equitable determinations.
