Few cases get cited as often as Cohan. The author-composer of “Over There” and “Give My Regards to Broadway,” known for decades as “the man who owned Broadway,” gave rise to the great Learned Hand, D. J.’s  famous remark concerning deductions where the taxpayer produces insufficient records: “Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Com’r., 39 F.2d 540 (2d Cir. 1930), at pp. 543-544.

I’m sure all y’all have Judge Learned’s learned lingo in your memo of law files, ready to drag-and-drop.

Well, Neil Feinberg and Andrea E. Feinberg, 2017 T. C. Memo. 211, filed 10/23/17, with Kellie McDonald riding shotgun, are trying to graft Cohan onto their potted COGS.

Y’all remember Neil and Andrea and Kellie. What, ya don’t? Well, read my blogpost “They’ll Stone Ya When You’re Tryin’ to Make a Buck,” 3/25/15. There now.

Today’s fight is over unsubstantiated business expenses (utterly unsubstantiated, and propped up by a CPA’s conclusory jaunt through some local industry statistics, which gets thrown out via Daubert; a bad day for the pharmaceutical gang) and a claim for more COGS than IRS allowed.

Remember, COGS (Cost Of Goods Sold) is not a deduction. It’s an adjustment to gross receipts, to compute gross income from sales. Thus, it falls outside the Section 280E trafficking in controlled substances prohibition.

Neil and Andrea and Kellie were providing medicinal flora in CO, and their records for the years at issue were, putting it charitably, scanty.

Judge Kerrigan: “COGS is determined under section 471 and the accompanying regulations. See secs. 1.471-3(c), 1.471-11(c), Income Tax Regs.  Petitioners contend we should allow the COGS in [their Sub S]’s income tax returns under the Cohan rule.  See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).  Petitioners further contend that they should be able to subtract an amount for COGS based on industry standards for the medical marijuana industry during the tax years in issue.  Respondent allowed COGS that were substantiated and also recharacterized below-the-line expenses as COGS to the extent allowable under section 471.

“Petitioners produced no evidence to substantiate COGS higher than those which respondent allowed.

“The Court may estimate the amount of a deductible expense if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount.  This principle is often referred to as the Cohan rule.  The Cohan rule also applies to COGS.” 2017 T. C. Memo. 211, at pp. 11-12. (Citations omitted).

Neil and Andrea and Kellie had CO licenses to sell medicinal boo, but no proof as to what they did sell. And no proof they had greater COGS than IRS allowed.