Paul L. Caron

Friday, June 22, 2007

Soled on The Boundaries of the Cohan Rule

Jay A. Soled (Rutgers Business School) has published Exploring and (Re)Defining the Boundaries of the Cohan Rule, 79 Temp. L. Rev. 939 (2006).  Here is the Conclusion:

Fame usually results from having a special talent or trait, and George M. Cohan rightfully earned fame due to his entertainment talents. Cohan also became famous in tax circles, which is ironic because his fame there stems from exhibiting the rather ordinary and widespread trait of poor recordkeeping. This trait is directly at odds with the behavioral mandate set forth in the Code requiring taxpayers to keep accurate books and records.

Although Congress enacted § 274(d) to set limitations on estimations, the end result was a tacit endorsement of less-than-perfect recordkeeping: § 274(d) specifically notes that substantiation is necessary for travel and entertainment expenses, business gifts, and so-called listed property; but it stops there. By doing so, § 274(d) implicitly allows estimations in other spheres of tax compliance. The best that can be said is that Congress does not want to saddle taxpayers with burdensome recordkeeping requirements.

The tension thus runs deep between the government's need to verify the accuracy of taxpayers' reporting positions and the countervailing disdain taxpayers harbor toward recordkeeping. This Article proposes several compromise reforms that simultaneously address the government's and taxpayers' respective positions. Adoption of the proposed reforms would help foster better tax compliance and renew confidence in the tax system.

Courts adjudicating tax disputes will inevitably have to resort to estimates-- taxpayers are imperfect and so, too, is the evidence they inevitably offer to support their tax-reporting positions. Courts should engage in a limited number of estimation processes, however, because estimations generally undermine confidence in the tax system and squander precious taxpayer, IRS, and judicial resources. Simply put, there is no need for the show to go on--where possible, the curtain should fall on the Cohan rule.

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