Internal Revenue Code - Medical Marijuana - Ninth Circuit Holds Medical Marijuana Dispensary Ineligible for Federal Tax Deductions

Harvard Law Review, March 2016 | Go to article overview

Internal Revenue Code - Medical Marijuana - Ninth Circuit Holds Medical Marijuana Dispensary Ineligible for Federal Tax Deductions


Internal Revenue Code--Medical Marijuana--Ninth Circuit Holds Medical Marijuana Dispensary Ineligible for Federal Tax Deductions.--Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015).

As of mid-2015, twenty-three states and the District of Columbia had legalized medical marijuana under varying restrictions and regulations. (1) For example, in 1996, California passed the Compassionate Use Act, (2) which legalized the use of medical marijuana in the state. By August 2006, over 200 dispensaries were providing medical marijuana to about 200,000 patients in California. (3) Perhaps surprisingly, federal criminal law (4) has not proven to be the most substantial hurdle for these dispensaries; instead "[t]he federal tax situation is the biggest threat to [state-sanctioned marijuana] businesses and could push the entire industry underground." (5) Under [section] 162 of the Internal Revenue Code (I.R.C.), "ordinary and necessary" business expenses are tax deductible. (6) However, I.R.C. [section] 280E specifically states that "[n]o deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business ... consists of trafficking in controlled substances ... which is prohibited by Federal law." (7) Thus, medical marijuana dispensaries, at least to the extent that they traffic marijuana, are excluded from the tax benefits of [section] 162.

Commentators have suggested various methods for dispensaries to plan around this additional tax burden. (8) One suggestion that has been implemented is bundling together the provision of caregiving services with the sale of medical marijuana. (9) Since the expenses associated with these caregiving services are tax deductible under I.R.C. [section] 162, the dispensary might reduce its tax liability by allocating as much of its shared expenses as it can toward the caregiving services. Recently, the Ninth Circuit addressed the tax treatment of this particular method. In Olive v. Commissioner, (10) the court held that the owner of a medical marijuana dispensary was not entitled to any business tax deductions--even for expenses associated with caregiving services provided alongside the sale of marijuana--because his business consisted solely of trafficking marijuana and thus fell under the exception listed in I.R.C. [section] 280E. (11)

Despite this outcome, Olive suggests that the Ninth Circuit might endorse a previous U.S. Tax Court case, Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner (12) (CHAMP). If the Ninth Circuit were to adopt CHAMP's framework, medical marijuana dispensaries would be able to deduct the business expenses associated with their caregiving services from their tax liability, as long as those caregiving services embody a "trade or business" that is separate from the sale of medical marijuana. While some unsettled questions would remain on the margins, Olive, together with CHAMP, would provide much guidance on what it means for caregiving services to constitute a separate "trade or business" in the medical marijuana dispensary context. The substance of this guidance, in turn, would discourage marijuana dispensaries from attempting to use caregiving services to circumvent their tax liability.

In 2004, Martin Olive opened a medical marijuana dispensary, the Vapor Room Herbal Center ("Vapor Room"), in San Francisco, California. (13) In addition to selling medical marijuana, the dispensary provided vaporizers, games, books, and art supplies for customers to use and also held regular activities--such as yoga classes, massages, and movie showings --all free of charge. (14) The Internal Revenue Service (IRS) audited Olive's 2004 and 2005 tax returns and issued a notice of deficiency, stating that Olive was not allowed to deduct either the reported cost of goods sold (COGS) or the reported business expenses, both due to lack of substantiation. (15) The IRS later conceded that Olive's reported business expenses were substantiated but argued that [section] 280E precluded these expenses from being deductible. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Internal Revenue Code - Medical Marijuana - Ninth Circuit Holds Medical Marijuana Dispensary Ineligible for Federal Tax Deductions
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.