In the recent case of Stroff v. Commissioner, T.C. Memo. 2011-80, the taxpayer was granted a partial deduction for expenses. Section 162(a) of the Internal Revenue Code allows a deduction for all the ordinary and necessary expenses paid or incurred by the taxpayer during the taxable year in carrying on any trade or business. The taxpayer has the burden to maintain records sufficient to substantiate the amounts and purposes of deductions claimed.
The Court allowed the partial deduction based on the Cohan rule. The Court stated: "Under the Cohan rule, in the event that a taxpayer establishes that he or she has incurred a deductible expense but is unable to substantiate the precise amount, the Court may approximate the amount of the expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court must have sufficient evidence upon which to make a reasonable estimate to apply the Cohan rule."
We are seeing more and more cases where deductions are being disallowed because the taxpayer does not have the substantiation required by Section 274(d) of the Internal Revenue Code.