2015 Tax Ct. Memo LEXIS 215
Tax Ct.2015Background
- Canna Care, Inc., a California mutual‑benefit (nonprofit) corporation incorporated in 2005, operated a medical marijuana dispensary in Sacramento during 2006–2008 and was staffed by the Davies family and others.
- Under California law petitioner distributed marijuana to patients with physician recommendations and hosted community/advocacy activities; California law prohibited distributing marijuana for profit.
- Petitioner reported business expenses and claimed deductions on its federal income tax returns; the Commissioner issued a notice of deficiency disallowing deductions under I.R.C. § 280E, asserting deficiencies of $229,473 (2006), $304,090 (2007), and $339,604 (2008).
- The Commissioner conceded none of the facts that petition relied on; parties stipulated petitioner trafficked in marijuana and that marijuana was a Schedule I controlled substance under federal law.
- Petitioner argued marijuana should not be treated as Schedule I, that DOJ/FinCEN guidance and California legality precluded “trafficking,” and relied on CHAMP to claim deductible non‑trafficking caregiving/service activities.
- The Tax Court held petitioner trafficked in a federally controlled substance, was engaged in the single business of selling marijuana, and therefore § 280E barred the disallowed deductions; decision for respondent.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether marijuana was a Schedule I controlled substance | Davies: marijuana should not be treated as Schedule I for these taxpayers | Commissioner: DEA/CSA list controls; petitioner stipulated marijuana is Schedule I | Held: Marijuana was Schedule I during years at issue; petitioner’s policy arguments irrelevant to statutory status |
| Whether petitioner’s activities constituted "trafficking" under § 280E | Davies: sale of medical marijuana authorized by CA law and DOJ/FinCEN guidance, so not "trafficking" | Commissioner: sale of marijuana—even under state law—is trafficking for § 280E purposes | Held: Sales of marijuana constitute trafficking despite state authorization; DOJ/FinCEN memoranda do not alter § 280E application |
| Whether petitioner conducted a separate non‑trafficking trade or business (caregiving/services) like CHAMP | Davies: petitioner performed community/caregiving services so should deduct expenses allocable to services | Commissioner: petitioner’s primary and sole trade was selling marijuana; services incidental and not a separate business | Held: Unlike CHAMP, petitioner lacked a separate services business; it was engaged only in selling medical marijuana |
| Application of § 280E to deny deductions | Davies: § 280E inapplicable because of state law compliance and separate non‑trafficking activities | Commissioner: § 280E applies to any trade/business trafficking in Schedule I substances | Held: § 280E prohibits petitioner from deducting any expenses disallowed by respondent for the years at issue; decision for respondent |
Key Cases Cited
- Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015) (federal status of marijuana controls § 280E; courts may not reclassify controlled‑substance status)
- Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. 173 (2007) (Tax Court allowed deduction for expenses attributable to a distinct caregiving/services business separate from marijuana sales)
- Welch v. Helvering, 290 U.S. 111 (1933) (taxpayer bears burden of proving deficiency incorrect)