1 It is generally held that a deduction will not be allowed if there is not adequate substantiation (proof) supporting the deduction. In a case appealed to the Second Circuit Court of Appeals, there evolved what is commonly known as the "Cohan rule."
•Discuss the tax significance of the "Cohan rule" in general; .
•Is it pro-taxpayer or pro-Government rule?.
•To what types of expenses does the "Cohan rule" apply?.
•To what types of expenses will the "Cohan rule" never apply? Why?.
2Taxpayer X, who is single, had adjusted gross income of $20,000 for 2010. During the year, X contributed cash of $1,000 and Microsoft Corporation stock worth $10,000 to his church (which qualifies as a public charity). X inherited the stock during 2008 when it was valued at $8,000. Based only on this information, complete the following:
a. Calculate X's total contribution deduction for 2010.
b. How must any excess contribution be treated? What is the excess, if any?
c. If X does not anticipate being able to itemize his deductions (thus availing himself of a charitable deduction) in any future years, what might he do in 2010 to increase his current contribution deduction?
Whether a bad debt is characterized as "business" or "nonbusiness" will have a significant impact on the tax treatment of any potential deduction.
•Describe what is meant by the term "business" bad debt;.
•Describe what is meant by the term "nonbusiness" bad debt;.
•Discuss how the tax treatment of each differs from the other;.
•Assuming your client had all of the "right" facts, what types of documentation would be most persuasive in securing the desired outcome during an IRS examination? .