In Brief

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If a taxpayer lacks documentation to support items on a tax return, preparers may use estimates, following an approach long known as the “Cohan rule.” Although the rule remains useful for tax preparers, it is limited, and its application varies by the taxpayer’s circumstances. This article provides an overview of approximation in tax matters and notes where it has been limited by statute, regulations, and court decisions.


During filing season, tax preparers will inevitably confront the question of how to report items for which a taxpayer lacks sufficient (or even any) documentation. Taxpayers are, of course, statutorily required to maintain adequate records to support the items reported on their returns (see IRC section 6001). But this obligation is more often honored in the breach. Consequently, CPAs are often forced to prepare returns based on estimates. This is not necessarily improper; in the absence of specific statutory documentation requirements, taxpayers and preparers are generally allowed to rely on estimates (e.g., Statement on Standards for Tax Services 4, Use of Estimates).

One of the first cases to allow estimates in federal tax matters was Cohan v. Comm’r [39 F.2d 540 (2d Cir. 1930)]. Preparers are often—perhaps vaguely—familiar with the “Cohan rule,” and often rely on this rule to justify estimation. As discussed below, the court in Cohan permitted estimates of deductions even though the taxpayer had no documentation of his claimed expenses. One might reasonably expect that Cohan is of decreasing importance in light of the ever-increasing use of debit and credit cards, digital currencies, and other forms of electronic payment, the use of which typically creates documentation of some sort. Indeed, it might be a rare taxpayer who, like the taxpayer in Cohan, is wholly unable to document the existence and the amount of a disputed item. But records and documents are still occasionally lost, destroyed, purged, or otherwise difficult for the taxpayer to find or access. Moreover, there are still numerous cash transactions in the U.S. economy; in these circumstances, the Cohan rule continues to be important. Finally, even outside its original context (i.e., inadequately documented business deductions), Cohan continues to be important because courts have relied on it to permit estimates in a variety of other circumstances. For these reasons, CPAs will benefit from a clearer understanding of the Cohan rule, its requirements, its proper application in various circumstances, and its limitations.

Approximation in Federal Tax Matters

Numerous circumstances call for approximation in tax matters, and almost all arise because the relevant documentary evidence never existed, is incomplete, or has been destroyed or lost. Perhaps the most common circumstance in which approximations are made is when the taxpayer is unable to substantiate the exact amount of a business deduction. Of course, the tax code provides taxpayer with numerous potential deductions; federal income tax deductions, however, are a matter of “legislative grace” [Indopco, Inc. v. Comm’r,503 U.S. 79, 84 (1992), noting the “familiar rule” that “an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer”]. To be entitled to a deduction, a taxpayer must find a rule that allows the deduction and establish that he has satisfied all the rule’s requirements. In the business deduction context, the taxpayer’s threshold burden is evidentiary. The taxpayer must provide sufficient evidence (documentary, testimonial, or other) showing that the taxpayer actually incurred an expense. [Taxpayers have a general burden of proof to sustain their claimed deduction, but some provisions (e.g., IRC section 274 dealing with a variety of expenses such as travel, meals, and gifts) impose specific documentation requirements.] Without such evidence, a taxpayer is generally not allowed a deduction (IRC section 162[a]; Furman v. Comm’r, T.C. Memo 2011-236 [citing Comm’r v. Heininger, 320 U.S. 467, 475 (1943) and Deputy v. du Pont, 308 U.S. 488, 495 (1940)]). As we discuss in greater detail below, the Cohan rule cannot help a taxpayer who is unable to meet this threshold burden.

Outside of the business deduction context, approximations are also often necessary for other tax items. For example, taxpayers may need to determine their basis in property, value their property, or make allocations (e.g., between business and personal use of property). In all these circumstances, it is the taxpayer’s burden to prove the item’s existence and amount; conceptually at least, the failure to do so could wholly preclude the claimed tax benefit (i.e., deduction, basis, valuation). Nevertheless, and fortunately for taxpayers, courts have long recognized the potential injustice of completely disallowing an item (the existence of which they have been convinced) simply because the taxpayer lacks proof of the item’s exact amount.


The taxpayer in Cohan was Broadway legend George M. Cohan, the celebrated composer of the World War I era. On his returns for the years in question, Cohan deducted signifi-cant expenses related to his entertainment business activities ($55,000 in total for two years [Cohan, 11 BTA 743 (1928), remanded]). Interestingly, these expenses were nearly all travel and entertainment expenses, which today would be either limited or wholly disallowed by IRC section 274, without regard to documentation. (See below for how IRC section 274 supersedes Cohan.) On audit, Cohan was unable to substantiate these expenses with documentary evidence, and the IRS disallowed the deductions in full. The Board of Tax Appeals (BTA) agreed with the IRS. Based on Cohan’s testimony, the BTA was apparently persuaded that 1) he had actually incurred expenses and 2) some, at least, of those expenses were related to his business activities. But the BTA, unable to tell exactly how much Cohan had spent (because of the total lack of documentation) concluded that Cohan had failed to satisfy his burden of proof and denied the deductions.

On appeal, the Second Circuit reversed the disallowance [Cohan, 39 F.2d 540 (1930)]. The appellate court’s opinion is less than a model of clarity, yet it appears that the court was most influenced by the BTA’s factual findings (i.e., the existence of some business-related expenses): “The question is how far this refusal [to allow any deduction] is justified, in view of the finding that [Cohan] had spent much and that the sums were allowable expenses” (Cohan, 39 F.2d, at 543). In other words, the appellate court held that the BTA, having been convinced by the taxpayer’s testimony of the existence of deductible expenses, ought to have estimated the proper amount thereof. Rejecting the IRS’s objections, the court stated 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” (Cohan, 39 F.2d, at 544). The case was remanded to the BTA to make the estimation, which it apparently did to the parties’ satisfaction.

Estimating Deductions Using Cohan

Taxpayers have relied on the Cohan rule for decades, most often to justify estimates of allowable business deductions. The classic Cohan situation is the taxpayer who says, “I know I spent some money. I know it was related to my business. But I just don’t have the documentation to prove it.”

The rule only applies to help a court determine the amount of the taxpayer’s allowable deduction, not the existence of the underlying expense.

Taxpayers in this position face a two-pronged hurdle: First, the taxpayer must demonstrate the existence or fact of the claimed expense. Second, the taxpayer must demonstrate the amount of the claimed deduction. The Cohan rule is only helpful with respect to the latter requirement. It only applies when a taxpayer can demonstrate (to a court’s satisfaction, if not the IRS’s) that he incurred an expense but is unable to adequately document the amount thereof. In this circumstance, courts relying on Cohan have generally allowed the taxpayer a deduction in an amount the court deems reasonable based on the taxpayer’s limited documentation or their unsubstantiated testimony, albeit often less than the taxpayer originally claimed.

It is important for preparers to understand that the Cohan rule is of only limited utility: First, and perhaps most importantly, it is discretionary and not binding on a court. Cohan, and its progeny, are permissive—a court may, but need not, estimate based on Cohan, and its failure or refusal to do so would not, by itself, be grounds for appeal. [See Buelow v. Comm’r, 970 F.2d 412, 415 (7th Cir. 1992), stating that rule of Cohan is “a court may make estimations when some evidence is offered”; Norgaard v. Comm’r, 939 F.2d 874, 879 (9th Cir. 1991), stating “Cohan would allow the tax court to estimate the losses”; Portillo v. Comm’r, 932 F.2d 1128, 1134 (5th Cir. 1991), stating Cohan “provides the court with discretion to estimate”]. A corollary is that the IRS is under no obligation to estimate—or accept a taxpayer’s estimate—under Cohan. The IRS can, and often does, disallow deductions based on the taxpayer’s failure to properly document or substantiate the deduction in non–IRC section 274 circumstances. If the IRS chooses to allow some of the taxpayer’s claimed deduction in the face of incomplete or unconvincing evidence thereof, a court is unlikely to allow the taxpayer more than the IRS.

Second, it is not a license for taxpayers to simply guess or “make up” expenses (and therefore deductions), nor does it excuse sloppy recordkeeping. It only allows a court (not the taxpayer) to determine a “reasonable” deduction. Third, the rule only applies to help a court determine the amount of the taxpayer’s allowable deduction, not the existence of the underlying expense. The taxpayer’s threshold burden is to prove she actually incurred expenses, to provide the court with some basis for making an allocation or estimate. “The basic requirement is that there be sufficient evidence to satisfy the trier that at least the amount allowed in the estimate was in fact spent or incurred for the stated purpose. Until the trier has that assurance from the record, relief to the taxpayer would be unguided largesse” [Williams v. United States, 245 F.2d 559, 561 (5th Cir. 1957) (emphasis in original)]. Failure to do so leaves a court with no basis upon which to estimate a reasonable allowance, resulting in complete loss of the desired tax benefit: “When a petitioner proves that some part of an expenditure was made for deductible purposes and when the record contains sufficient evidence for us to make a reasonable allocation, we will do so” [Epp v. Comm’r, 78 TC 801, 807 (1982)].

Finally, Cohan is of no use to the taxpayer when recordkeeping requirements are statutorily or regulatorily imposed, such as in IRC Section 274 (establishing specific substantiation requirements with respect to a variety of expenses such as travel, meals, and gifts) and IRC section 170 (allowing a charitable contribution deduction).

Limitations on Cohan

It is also important for CPAs to remember that the taxpayer may not rely on the Cohan rule where statutory or regulatory provisions specifically establish substantiation requirements. In these cases, the documentation itself is a requirement for the taxpayer’s entitlement to the item. The absence of the required documentation is generally a complete bar to any benefit under the applicable statute or regulation, and no estimates are permitted. Two of the most common examples of such provisions are highlighted below.

Business travel and entertainment expenses.

Perhaps the most common example of documentation requirements specifically established by statute is IRC section 274, which disallows or limits certain travel, meals, and entertainment expenses incurred in a taxpayer’s business. Although a detailed discussion of section 274 is beyond the scope of this article, the important point relevant to this discussion is that section 274(d) imposes specific documentation standards that trump the Cohan rule. Congress perceived that business travel and entertainment expenses had been an area of abuse over the years and attempted to curb this abuse by enacting section 274. IRC section 274(d) requires taxpayers to substantiate certain deductions with adequate records or sufficient evidence to document the amount of the expense or item, the time and place of the travel or the date and description of the gift, the business purpose of the expense or item, and the business relationship to the taxpayer of the person receiving the benefit. Temporary Treasury Regulations section 1.274-5T(a) specifically states that section 274(d) supersedes the Cohan rule. The regulations further expand on the statutory requirements, explicitly stating that approximations or estimates are not permitted. It is important to note that the regulations do not allow for a re-creation of the expense log without sufficient supporting evidence. Substantial documentation includes “an account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use” [Temporary Treasury Regulations section 1.274-5T(c)(2)(ii)].

A taxpayer may not rely on the Cohan rule where statutory or regulatory provisions specifically establish substantiation requirements.

Taxpayers routinely litigate disputed section 274 business expenses in Tax Court, and the court has firmly refused to extend the Cohan rule in this context [e.g., Sanford v. Comm’r, 50 T.C. 823, 827-828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969); Noz v. Comm’r, T.C. Memo 2012-272; Rogers v. Comm’r, T.C. Memo 2019-90]. For example, this past year a taxpayer’s travel expense deductions were disallowed because her records did not permit the court to distinguish personal and business expenses (Franklin v. Comm’r, T.C. Memo 2020-127). The court was not persuaded to use the travel records the taxpayer created only after IRS notification of examination, holding “while a contemporaneous log is not required to substantiate the deduction, a taxpayer’s subsequent reconstruction of his or her expenses does require corroborative evidence with a high degree of probative value to support such a reconstruction, in order to elevate that reconstruction to the same level of credibility as a contemporaneous record” (Franklin, at 13-14). The case demonstrates the court’s reluctance to use testimony as an exclusive corroboration to substantiate an expense under IRC section 274.

Charitable contributions.

Fairly stringent statutory documentation requirements are also imposed on charitable contributions. IRC section 170 contains elaborate documentation requirements that vary based on the type and amount of property contributed, and failure to comply with them generally precludes any deduction for the contribution. [See, e.g., IRC Section 170(f)(8)(A): “No deduction shall be allowed under [Code section 170] subsection (a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that meets the requirements of subparagraph (B).”] The taxpayer must establish a verifiable contribution, as outlined in the regulations [IRC section 170(a) (1)]. The receiving organization must supply a receipt or written communication from the donee organization showing its name, plus the date and amount of the contribution [IRC section 170(f)(17)]. For donations of $250 or more, a contemporaneous written acknowledgement is required from the donee or its agent; a cancelled check alone is not sufficient [IRC Section 170(f)(8)(A); Treasury Regulations section 1.170A-13(f)(1)]. Noncash gifts over $500 require additional details on Form 8283. Gifts over $5,000 require a qualified appraisal. Gifts over $500,000 require an appraisal, a contemporaneous written acknowledgement and Form 8283 [IRC Section 170(f)(11)]. For cash donations (including gifts by check or other monetary gifts), the taxpayer must retain either a cancelled check, receipt, or other reliable evidence [Treasury Regulations section 1.170A-13(a)(1)]. Noncash property donations additionally require a receipt from the receiving organization showing the donee’s name and a description of the gifted property [Treasury Regulations section 1.170A-13(b)(1)].

As discussed above, courts (and certainly the IRS) appear to view the section 274 documentation requirements as strictly mandatory and not amenable to Cohan rule estimation (indeed, the regulations clearly demonstrate an intent to prevent such estimation). In contrast, the Tax Court had historically demonstrated some limited leniency in the area of charitable donations, allowing estimates or allocations justified, explicitly or implicitly, by Cohan [see, e.g., Fontanilla v. Comm’r, T.C. Memo. 1999-156; Drake v. Comm’r, T.C. Memo. 1997-487; Cavalaris v. Comm’r, T.C. Memo. 1996-308; Bernardeau v. Comm’r, T.C. Memo. 1981-584; Olken v. Comm’r, T.C. Memo. 1981-176]. For example, in Bond v. Comm’r, the court held the reporting requirements of the regulations under section 170 are “directory and not mandatory,” and substantial compliance with the regulations was sufficient to sustain a claimed charitable contribution deduction [100 T.C. 32, 41 (1993)]. However, ever since Congress enacted statutory amendments in 2006, a taxpayer’s failure to satisfy section 170’s “strict” documentation requirements precludes any deduction [see, e.g., Stewart T. Oatman, et ux., TC Memo 2017-17]. Thus, for taxpayers claiming a charitable contribution deduction, the only practicable way to ensure a permissible deduction is to strictly follow the substantiation requirements outlined in the Treasury Regulations; Cohan rule estimations apparently will not be allowed.

The cases cited above conclusively demonstrate that taxpayers must establish some reasonable grounds for estimation or allocation if they are to prevail.

No Substitute for Good Recordkeeping

As the above discussion demonstrates, the Cohan rule can be a useful tool for taxpayers in a variety of circumstances; CPAs, however, should remember the rule’s proper application and its limitations. Most importantly, preparers should bear in mind that Cohan—where it is not altogether precluded by statutory documentation rules—requires that taxpayers convince the IRS (or a court, should the matter be litigated) that they actually incurred an expense. First, the taxpayer must prove the existence of the expense by credible evidence; failure to do so naturally precludes any estimate of its amount. Second, having established that they actually incurred an expense, taxpayers must also demonstrate that the item (or at least some portion of it) was deductible (e.g., was properly allocable to a business activity). Finally, the taxpayer must provide some basis upon which the IRS or a court can estimate the amount of the item. Courts will not guess, nor will they approve or sanction the taxpayer’s guess. The cases cited above conclusively demonstrate that taxpayers must establish some reasonable grounds for estimation or allocation if they are to prevail.

All things considered, tax professionals are best advised to view Cohan as a last-ditch defense, not a substitute for adequate recordkeeping.

John K. Cook, JD, LLM is an associate professor of accountancy at Wright State University, Dayton, Ohio.
Sarah Webber, JD, LLM, CPA is an associate professor at the School of Business Administration, University of Dayton, Dayton, Ohio.