This post was originally published on Forbes Oct 24, 2015
According to this story in the Sacramento Bee, Bryan Davies thought that Satan had planted the idea of opening a medical marijuana dispensary in his mind . After praying about it though, he determined that it was a message from God. So at his Canna Care dispensary even though you had to pay for your medical marijuana, the bibles were free. There were also regular prayer services. Unfortunately, God has not yet spoken to the IRS on the matter. Even though medical marijuana is legal in California, it is still a schedule I controlled substance under federal law and Internal Revenue Code Section 280E - Expenditures in connection with the illegal sale of drugs - holds:
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
Whether petitioner was operated in accordance with California law's restrictions on profiting from the distribution of marijuana is not an issue before us, and it does not affect our finding that petitioner was engaged in the business of distributing marijuana for purposes of section 280E. There is no doubt that Mr. Davies incorporated petitioner to produce income. In fact, it was clear from Mr. Davies' testimony that he entered into the medical marijuana business in order to cure his family's financial difficulties. Mr. Davies and the other shareholders received wages well in excess of those paid to petitioner's other employees, and the payment of such wages would not have been possible if petitioner had not had income.
We have previously held the sale of medical marijuana pursuant to California law constitutes trafficking within the meaning of section 280E. Olive v. Commissioner, 139 T.C. at 38 (”[A] California medical marijuana dispensary's dispensing of medical marijuana pursuant to the *** [CUA] was `trafficking' within the meaning of section 280E.”); CHAMP, 128 T.C. at 182. DOJ memoranda and FinCEN guidance released after the years at issue that represent exercises of prosecutorial discretion do not change the result in this case. Petitioner regularly bought and sold marijuana. This activity constitutes trafficking within the meaning of section 280E even when permitted by State law.
There is a sharply defined public policy against drug dealing to allow drug dealers the benefit of business expense deductions at the same time that the U.S. and its citizens are losing billions of dollars per year to such persons is not compelled by the fact that such deductions are allowed to other, legal, enterprises. Such deductions must be disallowed on public policy grounds.
This one is definitely is an "is what it is". Congress made a list and marijuana is on it.
Petitioner advances numerous arguments as to why marijuana should no longer be considered a schedule I controlled substance. We reject these arguments. Marijuana was a schedule I controlled substance during the years at issue. As recently stated by the Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie: "[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.”
Don’t use the tax law to do anything other than measure income and collect taxes. Special carve-outs, whether punitive or beneficial, linger long after the moral panic surrounding their enactment passes.
Well, after nearly forty-nine (count ‘em, forty-nine) years during which I’ve practiced law in a highly-urban environment, I thought I’d heard it all, but Tax Court is an endless “medley of extemporanea.”