894 F.3d 1187
10th Cir.2018Background
- Alpenglow Botanicals, a Colorado medical-marijuana pass-through business, paid additional federal income tax after the IRS audited its 2010–2012 returns and disallowed business deductions under 26 U.S.C. § 280E.
- The IRS issued a Notice of Deficiency concluding Alpenglow trafficked in a Schedule I substance and denied deductions (rent, labor, officer compensation, advertising, taxes/licenses, depreciation, wages/salaries); owners paid the assessed tax under protest and sought refunds.
- Alpenglow sued in federal district court asserting (inter alia) that the IRS lacked authority to apply § 280E absent a criminal conviction, § 280E violates the Sixteenth Amendment by converting deductions into gross income, and § 280E is an excessive fine under the Eighth Amendment.
- The district court granted the government’s Rule 12(b)(6) motion and denied Alpenglow’s Rule 59(e) motion to amend; Alpenglow appealed both rulings to the Tenth Circuit.
- The Tenth Circuit reviewed de novo the 12(b)(6) dismissal and for abuse of discretion the Rule 59(e) denial, addressing (1) IRS authority to apply § 280E and sufficiency of evidence, (2) Sixteenth Amendment challenges (including costs of goods sold vs. deductions), and (3) the Eighth Amendment challenge to § 280E.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IRS may apply § 280E absent criminal conviction | Alpenglow: IRS cannot deny deductions under § 280E unless a criminal conviction establishes trafficking | Govt: IRS has statutory authority under the Tax Code (e.g., § 6201) to determine and assess taxes; no statutory requirement of a criminal conviction | Held: IRS may make civil tax determinations under § 280E without a criminal conviction; no constitutional bar |
| Whether IRS acted arbitrarily by lacking evidence of trafficking | Alpenglow: IRS produced no evidence showing trafficking, so denials were arbitrary; burden should shift under § 7491 | Govt: Taxpayer bears burden to prove error/entitlement to refund; Alpenglow failed to plead or introduce credible evidence to shift burden | Held: Dismissed—Alpenglow failed to allege or present credible evidence; burden remained with taxpayer |
| Whether § 280E violates the Sixteenth Amendment (gross income v. deductions; COGS) | Alpenglow: Ordinary and necessary expenses are constitutionally excluded from gross income; denying them converts tax to gross-receipts tax; IRS improperly disallowed costs of goods sold | Govt: Congress may condition or deny § 162 deductions; cost of goods sold is the singular mandatory exclusion from gross income; § 280E properly disallows deductions (not COGS) for trafficking businesses | Held: § 280E does not violate the Sixteenth Amendment; ordinary and necessary business expenses are statutory deductions (legislative grace) and Congress validly denied them; Alpenglow did not plausibly allege COGS was wrongly disallowed |
| Whether § 280E is an unconstitutional penalty (Eighth Amendment) | Alpenglow: Denial of deductions functions as an excessive fine or penalty | Govt: Denial of deductions is not a punitive exaction but a regulatory/tax choice by Congress | Held: § 280E is not a penalty; Eighth Amendment challenge fails |
Key Cases Cited
- Green Solution Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir.) (holds IRS may apply § 280E and that § 280E is not a penalty)
- Olive v. Commissioner, 792 F.3d 1146 (9th Cir.) (upheld denial of deductions under § 280E for marijuana businesses)
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (definitional foundation of "income" under the Sixteenth Amendment)
- Leary v. United States, 395 U.S. 6 (addresses Fifth Amendment concerns in IRS reporting requirements for illegal activity)
- Marchetti v. United States, 390 U.S. 39 (same; limits on compelled tax reporting where substantial risk of self-incrimination exists)
- Commissioner v. Sullivan, 356 U.S. 27 (noting that Congress, not courts, should decide to tax illegal businesses on gross receipts)
- Helvering v. Independent Life Ins. Co. (New Colonial Ice Co. v. Helvering), 292 U.S. 435 (Congress may tax income broadly and condition deductions)
- Tellier v. Commissioner, 383 U.S. 687 (recognizes deductions are statutory and may be disallowed by Congress)