Metropolitan News-Enterprise


Friday, July 10, 2015


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Court: Medical Marijuana Dispensary Cannot Take Tax Deduction




A medical marijuana dispensary cannot deduct its ordinary and necessary business expenses for federal income tax purposes, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

Affirming the U.S. Tax Court, the panel said that a dispensary, even if operating within the bounds of state and local law, is a “trade or business…consisti[ing] of trafficking in controlled substances…prohibited by Federal law” under 26 U.S.C. §280E, which prohibits such businesses from taking the deduction.

The taxpayer in the case, Martin Olive, has operated the Vapor Room in San Francisco since 2004.

Pressure From U.S. Attorney

The San Francisco Chronicle reported on its website yesterday that the business operated as a marijuana-inhaling shop and social club in the city’s Lower Haight neighborhood until July 2012, when it shut down under pressure from U.S. Attorney Melinda Haag, who said she would seek its eviction for being too close to Duboce Park.

Federal law increases penalties against marijuana dispensaries that are less than 1,000 feet from a school or playground, and the Vapor Room was 597 feet from a playground.

The business has continued as a delivery service, the website said, and Olive recently announced plans to reopen at a new location.

Olive had claimed $650,000 in business expenses and less than $100,000 in net income on the club’s 2004 and 2005 federal income tax returns, but the IRS disallowed the expenses under §280E.

Tax Court Judge Diane Kroupa sided with the agency, and upheld deficiency assessments for those years.

Judge Susan P. Graber, writing for the Ninth Circuit, said Kroupa’s interpretation of the statute was correct.

‘Trade or Business’

While the Vapor Room provided free snacks, movies, yoga, massage therapy, and occasional counseling and education on responsible use of medical marijuana, Graber said, its only commercial product was marijuana. Selling the drug, therefore, was the only activity it engaged in with the “intent of realizing a profit” and was thus its “trade or business” within the meaning of the Internal Revenue Code, Graber said.

San Francisco lawyer Henry Wykowski, who represented Olive, argued that the provision of other services meant that the business did not “consist of” marijuana sales and that §280E did not apply. He also contended that Congress intended the statute—enacted as part of a comprehensive reform of federal drug laws in the 1980s—to apply to street-level dealers, rather than businesses operated in conformance with, and regulated by, state law.

Graber disagreed.

“If Congress now thinks that the policy embodied in §280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute,” she wrote. “We may not.”

Case Distinguished

With respect to the technical definition of “consists of,” the judge distinguished Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner 128 T.C. 173 (2007), in which Wykowski was one of the taxpayer’s attorneys.

The court held in that case, known as CHAMP, that the dispensary could not deduct expenses related to marijuana sales, but could deduct those incurred in connection with “counseling and caregiving services.”

But in this case, Graber said, the dispensary could not deduct any such expenses because it did not charge for those services.

Judge Alex Kozinski and visiting Senior District Judge Dee V. Benson of the District of Utah concurred in Graber’s opinion.

Wykowski told that the Ninth Circuit’s confirmation of CHAMP was a bright spot in the decision.

“The decision will benefit dispensaries that sell variety of products including those that are not cannabis,” Wykowski said. “I don’t think it’s a blow to the industry at all.”

He said he would advise Olive, when he reopens the Vapor Room, to put some additional products on sale.

The case is Olive v. Commissioner of Internal Revenue, 13-70510.


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