916 F.3d 1330
10th Cir.2019Background
- Taxpayers (Neil & Andrea Feinberg and Kellie McDonald) were shareholders in Total Health Concepts, LLC (THC), an S-corp licensed in Colorado to operate medical marijuana dispensaries; THC’s income/losses flowed through to the taxpayers’ individual returns.
- The IRS audited the returns, concluded THC’s trade consisted of trafficking in a Schedule I controlled substance, and disallowed business expense deductions under 26 U.S.C. § 280E; IRS also reclassified and adjusted some items as COGS.
- The Tax Court affirmed the deficiency, but based its ruling on the Taxpayers’ alleged failure to substantiate business expense deductions — a theory not stated in the IRS notice of deficiency.
- Both parties and this Court agreed the Tax Court erred by treating substantiation as a new basis (a new matter) when the notice relied solely on § 280E. The procedural question became which party bore the burden for the § 280E issue.
- The Commissioner sought affirmance on the alternative ground that the Taxpayers failed to carry their burden to prove § 280E did not apply; the Taxpayers argued assigning them that burden violated their Fifth Amendment privilege against self-incrimination.
- The Tenth Circuit rejected the Fifth Amendment challenge, held the taxpayers bore the burden to show § 280E was inapplicable, found the taxpayers offered no evidence to meet that burden, and affirmed the deficiency on the § 280E ground.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Tax Court could deny deductions based on taxpayers’ failure to substantiate when IRS notice relied solely on § 280E | Taxpayers: tax court erred; substantiation was a new matter not in the notice so burden rests on IRS | IRS: (implicit below) court may consider substantiation at trial | Court: Tax Court erred — substantiation was a new matter and burden as to that issue is on IRS |
| Whether taxpayers bear the burden to prove § 280E is inapplicable | Taxpayers: assigning that burden forces self-incriminating disclosure and violates Fifth Amendment | Commissioner: taxpayers normally bear burden to show IRS erred; burden does not violate Fifth Amendment | Court: Burden on taxpayers does not violate Fifth Amendment (Rylander controls) |
| Whether taxpayers met their burden to prove § 280E inapplicable (i.e., that THC was not unlawfully trafficking) | Taxpayers: record lacks proof that THC sold marijuana; absence of proof undermines § 280E finding | Commissioner: burden is on taxpayers to prove error; lack of taxpayer evidence supports affirmance | Court: Taxpayers introduced no evidence to disprove trafficking; they failed to meet burden; § 280E applies |
| Whether appellate court may affirm on alternative ground | Taxpayers: object to Fifth Amendment implications but do not oppose deciding de novo | Commissioner: asks for affirmance on alternative § 280E ground | Court: Exercising discretion to affirm on alternative § 280E ground because record and briefing suffice |
Key Cases Cited
- Feinberg v. Commissioner, 808 F.3d 813 (10th Cir. 2015) (addressing discovery, burden in Tax Court, and Fifth Amendment issues in this matter)
- Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018) (discussing gross income, COGS exclusion, and taxpayer burden to show IRS error on trafficking)
- United States v. Rylander, 460 U.S. 752 (1983) (Fifth Amendment does not permit shifting burdens of proof to avoid production consequences; privilege is not a substitute for evidence)
- Green Solution Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017) (noting marijuana remains a schedule I controlled substance under federal law)
- Leary v. United States, 395 U.S. 6 (1969) (Fifth Amendment decisions concerning statutes that compel incriminating disclosures)
- Haynes v. United States, 390 U.S. 85 (1968) (Fifth Amendment protection where statutory compliance would be self-incriminating)
- Marchetti v. United States, 390 U.S. 39 (1968) (statutory registration requirements cannot be used to criminally punish those asserting the Fifth Amendment)
- Shea v. Commissioner, 112 T.C. 183 (1999) (new matters at trial shift burden to respondent when they alter the original deficiency or require different evidence)
- Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930) (permitting estimation of deductible expenses where taxpayer proves the existence but cannot substantiate amount)
- Elkins v. Comfort, 392 F.3d 1159 (10th Cir. 2004) (appellate discretion to affirm on any adequately supported ground)