Taxpayer's Assertion that Car Used 100% for Business Does Not Change Requirements for Documentation

The “anti-Cohan” rule found in IRC §274(d) cost the taxpayer a deduction for expenses related to use of an Aston Martin in the case of Roy v. Commissioner, TC Summary Opinion 2016-77.

The “Cohan” referred to above is the case of vaudeville producer George M. Cohan, in which the Second Circuit Court allowed deductions to the producer even though he lacked documentation.  As the Tax Court explains the rule:

When a taxpayer establishes that he or she paid or incurred a deductible expense but fails to establish the amount of the deduction, the Court normally may estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is often referred to as the Cohan rule. See, e.g., Estate of Reinke v. Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff'g T.C. Memo. 1993-197. The taxpayer must introduce sufficient evidence to permit us to conclude that the taxpayer paid or incurred a deductible expense in at least the amount allowed. See Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. at 742-743. In estimating the amount allowable, we bear heavily upon the taxpayer who failed to maintain the required records and to substantiate deductions as the Code requires. See Cohan v. Commissioner, 39 F.2d at 544.

Congress later passed a provision found at IRC §274(d), that overrides the Cohan rule in certain cases.  As the Court continues:

Certain expenses specified in section 274 are subject to strict substantiation rules that supersede the Cohan rule. Boyd v. Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). These include expenses for "listed property" defined under section 280F(d)(4). Listed property includes passenger automobiles and other property used for transportation. Sec. 280F(d)(4)(A)(i) and (ii).

Specifically, if a taxpayer wishes to claim a deduction for auto related expenses, the following is required:

To meet these strict substantiation rules with respect to passenger automobiles, a taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer's own statement (1) the amount of the expense, (2) the time and place of the travel or use, and (3) the business purpose of the expense. Sec. 274(d) (flush language). To substantiate by adequate records, the taxpayer must provide (1) an account book, a log, or a similar record and (2) documentary evidence that together are sufficient to establish each element of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence includes receipts, paid bills, or similar evidence. Sec. 1.274-5(c)(2)(iii), Income Tax Regs. To substantiate by sufficient evidence corroborating the taxpayer's own statement, the taxpayer must establish each element by his or her own statement and by other corroborative evidence sufficient to establish such element. Sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). While a contemporaneous log is not required, 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. Id. subpara. (1), 50 Fed. Reg. 46016.

In this case the taxpayer claimed expenses related to an Aston Martin he claimed he used 100% for business.  The taxpayer believed that the regulations imposed different standards for documentation for a car used 100% for business than one used partially for business with the remainder of the use personal.  He believed that in the case of a car used 100% for business he only needed to document his daily activities.

So, as the Court continues:

Petitioner's “vehicle log” is a sheet of paper showing mileage at the beginning of the year and mileage at the end of the year for a vehicle described as “EMEDIA-2”. The paper simply states that the vehicle's “Business use” was “100%” and reports “Total Business mileage” of 8,900. Contrary to petitioner’s belief, the Code requires strict substantiation for vehicles used 100% for business and vehicles used less than 100% for business. Furthermore, petitioner must adequately show, through direct evidence or otherwise, that he used his vehicle for business purposes for the amount of time that he claims. Petitioner's one-page summary is not adequate substantiation of the level of business use and purpose required under section 274(d). See Lysford v. Commissioner, T.C. Memo. 2012-41. Furthermore, petitioner's summary fails to meet the criteria set out in section 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985), for properly substantiating expenses relating to passenger automobiles. Specifically, petitioner did not record the amount, the time, or the business purpose of each business use of his vehicle. Because petitioner failed to substantiate his claimed car and truck expenses as required by the Code under the standard mileage rate or otherwise, the deduction must be disallowed.