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Tax Court Reminds Taxpayers That All Income Should Be Reported and Reinforces the Continued Validity of the Cohan Rule by JONATHAN KALINSKI and LUKE RYAN

In two recently issued decisions, the U.S. Tax Court reaffirmed the validity of the so-called “Cohan Rule” that allows the Court to estimate the amount of a taxpayer’s deductible expenses so long as the taxpayer clearly shows that he or she incurred the expenses and the Court has a reasonable basis for making such an estimate. On December 28, 2023, and January 3, 2024, the Tax Court issued Villa v. Commissioner, T.C. Memo 2023-155, and Alvarado v. Commissioner, T.C. Memo 2024-1, both of which explained that, while the Cohan Rule may not be invoked to estimate expenses covered by the strict substantiation requirements of I.R.C. § 274(d), the Rule does allow the Court to estimate otherwise unsubstantiated costs of goods sold. The burden of proof, however, remains upon the taxpayer, and any inexactitude in the amount of unsubstantiated deductions will be held against the taxpayer.

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