Ask The California Employment Tax And Payroll Tax Attorney – Marijuana Dispensary Denied Most Deductions-It’s All Consitutional

By Robert S. Schriebman
2021

Introduction

Those in the marijuana business should know by now that fighting the IRS in the Tax Court is a losing proposition. There are several articles on this website that have discussed this topic. However, none of them have discussed the constitutionality of the denial of ordinary everyday business deductions. Is it constitutional to allow business deductions for the tobacco and medical industries, but deny those same deductions to legal marijuana business? It does seem to discriminate.

The reason why ordinary and necessary reasonable business expense deductions are denied to legal marijuana business is based on IRC § 280E. Until recently no one challenged the constitutionality of this provision. On August 2, 2021 the U.S. Tax Court decided the Today’s Health Care case. This is the first case to do so.

This article will discuss IRC § 280E in light of this new case. Today’s Health Care II LLC V. Commissioner., U.S. Tax Court, CCH Dec. 61,909 (M), T.C. Memo. 2021-096, T.C.M., (Aug. 2, 2021)

IRC § 280E

This section is short but to the point. No deductions or credits are to be allowed for determining taxable income for an illegal trade of business. The marijuana trade is one such business even though it is legal in the state in which it is operating.

The Today’s Health Care Case (Today’s)

Today’s owned and operated a retail dispensary licensed and authorized to cultivate, manufacture, distribute, and sell medical marijuana products in Colorado. It deducted its cost of goods sold (COGS) and other business expenses on its 2014 and 2015 corporate income tax returns. The IRS allowed its COGS expenses but did not allow any other business related expense. The U.S. Tax Court agreed with the IRS.

What is unique about the Today’s case is that the taxpayer raised constitutional issues that will be discussed in the next section.

The Eighth and Sixteenth Amendments

Today’s argued that IRC § 280E violated the Eighth Amendment that prohibits excessive fines and the Sixteenth Amendment that authorizes taxes on income and concluded that there no constitutional violations. See N.Cal. Small Bus. Assistants Inc. V. Commissioner, 153 T.C. 65 (2019)

Conclusion

Anyone in the legal marijuana business is going to have a very difficult time turning a meaningful profit when we continue to see cases like the Today’s case. The federal government needs to address this terrible and unfair injustice. The time has come to amend the Tax Code to adapt to today’s reality.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.  Mr. Schriebman is in private practice.  He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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