## Facts

- George M. Cohan, a theatrical manager and producer, earned income through the partnership “Cohan & Harris” and later through his own productions.
- After his father’s death in 1917, Cohan told his mother she would remain “interested” in the business and thereafter paid her about half of his net profits, continuing this practice after his 1920 separation from Harris.
- The Commissioner determined income tax deficiencies for 1918–1920, treating all receipts from Cohan’s ventures as his taxable income and disallowing substantial claimed deductions for business travel and entertainment due to lack of itemized records.
- The Board of Tax Appeals largely sustained the Commissioner, rejecting (a) Cohan’s claim that his mother was a partner and (b) his expense deductions because exact amounts were not substantiated.
- Cohan sought appellate review.

## Issues

1. Whether amounts paid to Cohan’s mother could be excluded from his taxable income because she was a partner or co-owner in the business.
2. Whether deductible business expenses must be denied in full when the taxpayer shows the expenses were incurred but cannot prove exact amounts with detailed records.

## Decision

- The Second Circuit affirmed the Board’s determination that Cohan was taxable on the full amount of profits he received from the business and could not deduct payments to his mother as partnership distributions.
- The court held the Board erred by disallowing all travel and entertainment deductions solely for lack of precise substantiation when it was clear some business expenses were incurred.
- The case was remanded for the Board to approximate allowable deductions, with discretion to discount the estimate because the uncertainty resulted from Cohan’s poor recordkeeping.

## Legal Principles

- Income is taxed to the person who earns it; informal family arrangements to share profits do not shift tax liability absent a genuine business relationship.
- A partnership for tax purposes requires a real intent to carry on a business jointly and share profits and losses; labeling a recipient a “partner” is insufficient without meaningful participation or risk.
- When a taxpayer establishes that deductible business expenses were incurred but cannot prove the exact amounts, the fact-finder must make a reasonable approximation rather than deny the deduction in full.
- In estimating, the tribunal may “bear heavily” against the taxpayer whose inexactitude is self-inflicted.

## Conclusion

The court upheld taxation of Cohan’s full business profits despite his payments to his mother, but rejected an all-or-nothing approach to deductions, requiring a reasonable estimate of business expenses when the evidence shows that some deductible spending occurred.


Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930)