We are creeping up to the centennial of the Cohan rule. Learned Hand’s opinion for the Second Circuit in Cohan v. Commissioner came out on March 3, 1930 . I love this rule so much that I've made it the Prime Directive in my own book, Reilly’s Laws of Tax Planning: “If you don’t have documentation, at least have a plausible story.”
However, subsequent legislation, changes in societal expectations, and the passage of time have eroded the usefulness of the Cohan rule for taxpayers. In recent years, there have been more instances of courts refusing to apply it than allowing its use. That’s why in Reilly’s Sixteenth Law of Tax Planning, I advise people to “being right without substantiation can be as bad as being wrong.”
