In Shami v. Commissioner, 741 F.3d 560 (5th Cir. 2014), here, the Fifth Circuit affirmed the Tax Court's denial R&D credits claimed by the taxpayer. One of the taxpayer's arguments was that the Tax Court should have applied the Cohan rule, named for named for Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), here, to allow some credits. In rejecting the argument, the Fifth Circuit explained the "venerable" Cohan rule and its limitations, including the discretion allowed the trier of fact (bold facing supplied by JAT]:
Petitioners next assert that "[t]he use by [FSI] of [estimates of the amount of time Shami and McCall spent performing qualified services] was indisputably permissible" and that the type of documentation provided was adequately supportive. We disagree.
First, Petitioners' claim is waived. In their initial brief, the extent of Petitioners' argument is the sentence quoted above and a citation to this court's precedent in United States v. McFerrin [570 F.3d 672 (5th Cir. 2009)], which, following the venerable Second Circuit case Cohan v. Commissioner, held that "[i]f the taxpayer can establish that qualified expenses occurred . . . , then the court should estimate the allowable tax credit." Aside from a parenthetical to the citation, Petitioners make no effort to explain the Cohan rule or how it would apply to their case. Petitioners make only the bare assertion that their use of estimates was appropriate. Petitioners therefore have waived this issue by failing to brief it adequately.
In the alternative, Petitioners' claim fails on the merits. A line of case law—beginning with the Second Circuit's decision in Cohan—holds that if a taxpayer proves that he is entitled to a tax benefit but does not substantiate the amount of the tax benefit, the court "should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." The underlying logic of the rule is that allowing no benefit at all "appears . . . inconsistent with [the finding] that something was spent." In McFerrin, this court held that the Cohan rule applies in the context of the § 41 credit.
Cohan did not compel the Tax Court to make an estimate in this case. As the preceding discussion makes clear, the Cohan rule is not implicated unless the taxpayer proves that he is entitled to some amount of tax benefit. In the context of the § 41 credit, a taxpayer would do so by proving that its employee performed some qualified services. In this case, a careful reading of the Tax Court's opinion reveals that the Tax Court made no such finding.
Even if the Tax Court had determined that Petitioners proved that Shami and McCall performed some amount of qualified services, Cohan and McFerrin are not the only case law on this issue. As the Tax Court observed, another decision of this court issued between those two cases explains that the Tax Court has discretion to make an estimate under Cohan. In Williams v. United States [245 F.2d 559 (5th Cir. 1957)], this court made clear that, even though the Tax Court "might have considerable latitude in making estimates of amounts probably spent," the Cohan rule "certainly does not require that such latitude be employed." Our decision in Williams explicitly held that the Tax Court "may not be compelled to estimate even though such an estimate, if made, might have been affirmed." This was so because "the basic requirement is that there be sufficient evidence to satisfy the trier that at least the amount allowed in the estimate was in fact spent or incurred for the stated purpose," and "[u]ntil the trier has that assurance from the record, relief to the taxpayer would be unguided largesse."
