Taxable Talk

A California non-profit corporation tried to find a way around Section 280E of the Tax Code at Tax Court. Would they be successful or would yet another marijuana business fall victim to the difference between federal and state law?

In 1996 California approved medical marijuana. However, federal law make marijuana a Schedule I controlled substance under Section 280E of the Tax Code. The petitioner in the case is a non-profit corporation (technically, a California mutual benefit corporation that is not for profit). The IRS had disallowed business expenses because of Section 280E of the Tax Code. The petitioner timely filed a Tax Court petition.

The problem that the petitioner faces is basically that federal law trumps state law. The Federal Drug Enforcement Administration lists marijuana as a Schedule I controlled substance. In Olive v. Commissioner, the Ninth Circuit Court of Appeals stated,

[T]he only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ * * * If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.

The petitioner tried to argue that he was in multiple lines of businesses, so that some portion of the business expenses would be deductible. The Tax Court was having none of that:

Because of the parties’ stipulation, we find that the sale of medical marijuana was petitioner’s primary source of income and that the sale of any other item was an activity incident to its business of distributing medical marijuana. We find that petitioner was engaged in one business–the business of selling medical marijuana.

With Section 280E prohibiting deductions for business expenses, the IRS’s deficiencies were upheld. Medical marijuana might be legal under California law, and expenses are deductible on California tax returns. However, until Congress changes the law business expenses for marijuana dispensaries cannot be taken on federal tax returns.

Case: Canna Care, Inc. v. Commissioner, T.C. Memo 2015-206

Tags: marijuana

This entry was posted on Thursday, October 22nd, 2015 at 8:43 pm and is filed under IRS, Tax Court. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.