Legal Definitions - Cohan rule

The Cohan rule is a legal principle that allows taxpayers to estimate their tax deductions when they are unable to produce records of actual expenditures. This rule is based on the common law and was established in the United States by the Second Circuit in the case of Cohan v. Commissioner.

Under the Cohan rule, taxpayers can claim certain tax deductions based on reasonable estimates, as long as there is some factual basis for the estimate. For example, if a taxpayer cannot produce receipts for business expenses, they may estimate the amount spent based on their memory or other evidence.

However, the Cohan rule does not apply to all tax deductions. It does not apply to items that are listed in Section 274(d) of the Internal Revenue Code, which includes expenses such as entertainment and travel.

For instance, if a self-employed individual cannot produce receipts for their office supplies, they may estimate the amount spent based on their past purchases or industry standards. This estimation can be used to claim a tax deduction for the expenses.

Another example is if a taxpayer cannot produce receipts for charitable donations, they may estimate the amount donated based on their bank statements or other evidence. This estimation can be used to claim a tax deduction for the donations.