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Friday, August 3, 2012

Tax Court: § 280E Precludes Deductions (But Not Cost of Goods Sold) for Medical Marijuana Supplier Who Underreported Gross Receipts

Marijuana The Tax Court yesterday held that Martin Olive, who sold medical marijuana in California through the Vapor Room, underreported his gross receipts, that § 280E precluded his deduction of business related expenses, and that he was liable for accuracy-related penalties. But the court permitted him to deduct his cost of goods sold. Olive v. Commissioner, 139 T.C. No. 2 (Aug. 2, 2012).

A vaporizer is an expensive apparatus that extracts from marijuana its principal active component and allows the user to inhale vapor rather than smoke. Petitioner chose the name of his business to publicize that the Vapor Room had the requisite equipment to allow patrons to vaporize marijuana there. ...

Petitioner's testimony and the testimony of his other witnesses was rehearsed, insincere and unreliable. We do not rely on petitioner's testimony to support his positions in this case, except to the extent his testimony is corroborated by reliable documentary evidence. We also do not rely on the uncorroborated testimony of petitioner's other witnesses, three of whom are (or were) patrons of the Vapor Room and all of whom are closely and inextricably connected with the medical marijuana industry and with a desired furtherance of that movement. ...

We hold that the Vapor Room's gross receipts for the respective years were $1,967,956 and $3,301,898. ...

We conclude that the Vapor Room's COGS for each year at issue equals 75.16% of the Vapor Room's gross receipts for the year, as further adjusted to take into account our finding that petitioner gave away 6.5% of the Vapor Room's purchases. ...

The parties agree that § 280E disallows deductions only for the expenses of a business and not for its COGS. ... [We] reject petitioner's contention that § 280E does not apply because the Vapor Room was a legitimate operation under California law. We have previously held that a California medical marijuana dispensary's dispensing of medical marijuana pursuant to the CCUA was "trafficking" within the meaning of § 280E. [Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173 (2007).] That holding applies here with full force. ...

Respondent argues that petitioner is liable for the accuracy-related penalty to the extent he has understated the Vapor Room's gross receipts and failed to substantiate the Vapor Room's COGS and expenses. Petitioner's sole argument in brief is that the penalty does not apply because, he states, any inaccuracy underlying an understatement was "accidental, not substantial, and/or not negligent on the part of the taxpayer." Petitioner asserts that the Vapor Room was his first business and that he was not instructed on the proper way to keep the books and records of a business. We agree with respondent that the accuracy-related penalty applies in this case.

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Comments

I appreciate your analysis. This ruling is really being sensationalized in the press and only half of the facts are being reported. 280e in the context of medical marijuana is not well understood by professionals.This is only sources that explains the COGS component in relation to this ruling.

Posted by: James Campbell | Aug 4, 2012 2:33:37 PM