IRC 280E – Beyond Dispensaries

IRC 280E – Beyond Dispensaries

IRC 280E – Beyond Dispensaries –

As we read the Tax Court’s opinion in Alterman & Gibson[1] it became quite clear that IRC Sec. 280E was not the primary issue in the case. The primary issues were a combination of:

  • Inadequate, sloppy bookkeeping and record organization.
  • Failure to properly maintain inventory records and to substantiate of Cost of Goods Sold.
  • A lack of knowledge, skills and experience on the part of the business owners, the individuals responsible for the bookkeeping and tax return preparation, and counsel for the failure to properly develop technical aspects of the income tax issues.
  • The misguided and improper attempt to use the multiple business concept from CHAMP.

We highlighted our concerns that a failure to take corrective action lays the foundation for the Internal Revenue Service to assert the existence of pattern of repeated and potentially reckless and intentional disregard of the regulations and requirements. Such a pattern can result in the assertion of the “second tier” enhanced penalty under IRC Sec. 6694(b)(2). Such a penalty assertion could result in an additional sanction through a practitioner disciplinary referral to the Office of Professional Responsibility [“OPR”].

Professor Bryan Camp wrote an exceptionally insightful piece regarding the importance of proper tax accounting in connection with the calculation and maintenance of records that should be used in the computing Cost of Goods Sold in Lesson from The Tax Court: Into the Weeds on COGS

We have written extensively about our analysis and views in A Methodology for Cost and Expense Allocations for IRC Sec. 280E. We have learned several important points in working with a range of cannabis industry businesses. IRC Sec. 280E has the potential to apply in different ways to different types of cannabis businesses. Retailers [dispensaries], Distributors, Manufacturers [Extractors] and Cultivators are engaged in different aspects of the supply chain.  IRC Sec. 280E applies to all businesses in the chain, although it applies in a different fashion to each such a business.

The cannabis industry taxpayers that the IRS seems to have focused their attention on for examination have been retail dispensaries. We certainly notice that the majority of cases which have reached the Tax Court where IRC Sec. 280E issues have arisen have involved dispensaries almost to the complete exclusion of other types of cannabis businesses. The Californians Helping to Alleviate Medical Problems (“CHAMP”) v. C.I.R., 128 T.C. 173 (2007) case created a theory which is centered around two distinct trade or businesses being operated within a dispensary space, usually a cannabis business and another business involving caregiving services or similar health related services.

[1]  T.C. Memo 2018-83.