Saturday, July 11, 2015
The Ninth Circuit on Thursday affirmed the Tax Court (139 T.C. 19 (2012)) and held that § 280E prevents a San Francisco medical marijuana dispensary from deducting ordinary or necessary business expenses because its Vapor Room is a "trade or business . . . consist[ing] of trafficking in controlled substances . . . prohibited by Federal law." Olive v. Commissioner, No. 13-70510 (July 9, 2015). See Tony Nitti (Forbes), Ninth Circuit: Legal Or Not, Marijuana Facility Cannot Deduct Its Expenses:
What’s the lesson? The relevant case history provides the precedent that a recreational or medicinal marijuana facility can have multiple lines of business, with only the business engaged in selling marijuana subject to the harsh disallowance provisions of Section 280E. The taxpayer in Olive, however, shows a facility exactly what not to do if it wants to successfully argue that more than one business exists. While offering services and products to customers for free is perhaps good business practice and undoubtedly a nice gesture, one cannot argue that it is a separate “line of business,” because by forgoing a fee, it is clear that there is no intention to make a profit, which is the primary trait of any true business.
It’s a strange dichotomy of authority the marijuana industry finds itself governed by — blessed by state law, but persecuted by the IRS. The industry’s only saving grace is that it is so insanely profitable, it appears that it is able to survive a draconian tax regime under which its members are taxed on 100% of their gross profits.
Prior TaxProf Blog coverage: