Reinforcing Strict Substantiation: Limits of “Cohan” in Patitz v. Commissioner

Introduction

The Eleventh Circuit’s opinion in Lori Michelle Patitz & Andrew Robert Moody v. Commissioner of Internal Revenue (No. 23-12440, April 23, 2025) clarifies the rigorous record-keeping and substantiation requirements that taxpayers face when claiming deductions. Petitioners-appellants Lori Patitz and Andrew Moody, proceeding pro se, challenged a Tax Court decision disallowing their Schedule A (itemized) and Schedule C (self-employment) deductions for tax years 2015 and 2016, as well as associated accuracy-related penalties. The core issues included:

Whether Patitz’s unreimbursed mileage for her employer in 2016 was properly substantiated;
Whether the medical expenses claimed for 2016 met the statutory proof requirements;
Whether Schedule C deductions for her home-based insurance business could be “reconstructed” under the so-called “Cohan rule” despite lost records; and
Whether accuracy-related penalties under 26 U.S.C. § 6662(a) were properly imposed.

Summary of the Judgment

The Eleventh Circuit affirmed the Tax Court in full. It held that:

Patitz failed to substantiate unreimbursed business mileage for 2016 because her logs commingled employer and self-employment miles and lacked proof of non-reimbursement;
Her claimed medical deductions for 2016 exceeded the amount documented by payment records, and her bills lacked proof of full out-of-pocket payment and absence of insurance reimbursement;
Schedule C deductions for her insurance business could not be estimated under Cohan v. Commissioner—her records were too vague, undifferentiated and incomplete to permit a reliable reconstruction;
The Tax Court’s credibility findings and refusal to allow speculative estimates were not clearly erroneous; and
Accuracy-related penalties under § 6662(a) were properly assessed because the understatements of tax were substantial and unsupported by good-faith recordkeeping.

Analysis

Precedents Cited

Gatlin v. Commissioner, 754 F.2d 921 (11th Cir. 1985) – reaffirming the taxpayer’s burden to substantiate both entitlement and amount of deductions.
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) – authorizing courts to estimate expenses when records are lost, but only where enough evidence exists to form a reasonable basis.
Boyd v. Commissioner, 122 T.C. 305 (2004) – Treasury Regulation 1.274-5T(c)(5) codifies that, if casualty destroys records, “secondary evidence” and credible testimony may suffice, yet the court retains discretion to reject wholly uncorroborated claims.
Greenberg v. Commissioner, 10 F.4th 1136 (11th Cir. 2021) – emphasizing deference to Tax Court credibility findings under the “clear-error” standard.

Legal Reasoning

1. Burden of Proof & Substantiation
Under 26 U.S.C. § 6001, taxpayers must keep adequate records to support deductions. Sections 162(a), 213(a), 274(d) and 280A(c) set forth substantive deduction rules; Treasury Regulations elaborate the form and detail required. The Court reiterated that “a taxpayer is privy to the facts” and thus must establish both the right to and amount of any deduction.

2. Mileage Deductions
Treas. Reg. § 1.274-5T(d)(2)(i) demands contemporaneous logs listing total miles, business miles, and purpose. Although the Tax Court believed Patitz credible, the 2016 logs failed to segregate employer (Ricoh) vs. self-employment miles, and did not show which miles went unreimbursed. Absent that detail, no Schedule A deduction could stand.

3. Medical Expenses
To deduct medical outlays under 26 U.S.C. § 213, Treas. Reg. § 1.213-1(h) requires name/address of payee, date, and amount paid. Patitz’s large-ticket bills lacked payment evidence (insurance offsets, verification of cash vs. credit card). The Commissioner conceded only the $18,598.15 documented by proof of actual payment.

4. Cohan Reconstruction Limits
While Cohan permits estimation when records perish through no fault of the taxpayer, the regulations (Treas. Reg. § 1.274-5T(c)(5)) demand “reasonable reconstruction.” Here, Patitz’s hand-written notes, credit card fragments, and general ledger entries provided no reliable basis to allocate or quantify her home-office, travel, meals, or supplies expenses. The Tax Court’s refusal to supply a speculative allowance was neither arbitrary nor clearly erroneous.

5. Accuracy-Related Penalties
Under 26 U.S.C. § 6662(a), a penalty applies when a taxpayer understates tax by more than 10% unless there is reasonable cause and good faith. The court found no credible showing of good faith recordkeeping and thus upheld penalties for both years.

Impact

Reaffirms strict evidence requirements: taxpayers cannot rely on post-event reconstructions unless they supply sufficient data to permit a reasoned estimate.
Clarifies that credibility alone does not satisfy the statutory and regulatory proof thresholds.
Emphasizes separate treatment of Schedule A (employee expenses) vs. Schedule C (self-employment), and the need to segregate mixed-use expenses (e.g., home office, mileage).
Signals to practitioners and pro se filers the danger of inadequate record preservation—even natural disasters do not excuse all record-keeping obligations.

Complex Concepts Simplified

“Cohan Rule”: A judge-made doctrine allowing rough estimates of lost expenses—but only when the taxpayer first shows the records were destroyed through no fault and then provides enough secondary evidence to make an approximation.
Schedule A vs. Schedule C: Itemized deductions (A) cover employee unreimbursed expenses subject to the 2% floor under § 67; self-employed (C) expenses are fully deductible if ordinary and necessary under § 162(a).
Accuracy-Related Penalty (§ 6662): A 20% penalty on underpayments exceeding 10% of tax or $5,000, unless the taxpayer demonstrates reasonable cause and good faith.
Burden of Proof: In deficiency proceedings, the IRS’s determination is presumed correct; the taxpayer must “prove by a preponderance of the evidence” that they are entitled to each deduction.
Standards of Review: Tax Court’s factual and credibility findings reviewed for “clear error”; legal questions reviewed de novo.

Conclusion

Patitz v. Commissioner underscores that in the realm of tax litigation, mere assertions or broad statements of lost records will not suffice. Taxpayers remain bound by § 6001 and related statutes to maintain contemporaneous documentation. Even credible testimony cannot substitute for the rigorously detailed proof that both the Code and Treasury Regulations demand. The decision thus reinforces best practices in tax compliance—meticulous record-keeping, clear segregation of mixed-use expenses, and prompt substantiation of every deduction.