No Business Deduction for Legal Medical Marijuana Dispensary

  1. No Business Deduction for Legal Medical Marijuana Dispensary

    The taxpayer operated a medical marijuana dispensary (The Vapor Room) in San Francisco that purchased inventory from licensed medical marijuana suppliers and sold the product to customers. The customers could use the Vapor Room’s vaporizers on-site, sample inventory, and participate in other services. A deduction is denied for ordinary and necessary businesses incurred in a trade or business of trafficking controlled substances prohibited by Federal law or the law of any State in which the business is conducted (IRC Sec. 280E). Although the use and sale of medical marijuana (a controlled substance) are legal under California state law, it is prohibited under federal law. The Tax Court determined, and the Ninth Circuit recently affirmed, the ordinary and necessary businesses expenses associated with operating the Vapor Room were not deductible. [ Editor’s Note: IRC Sec. 280E disallows a deduction only for the expenses of a business and not for its costs of goods sold.] Martin Olive, 116 AFTR 2d 2015-XXXX (CA 9, 2015).

  2. Defined Contribution Plans Included in 10% Penalty Exception for Public Safety Workers

    Beginning in 2016, federal public safety officers can withdraw amounts from their government retirement plans after age 50, rather than 55, without being subject to the 10% penalty under IRC Sec. 72. Previously, this exception applied only to governmental defined benefit plans, but after 2015, governmental defined contribution plans also are included. This is part of the Trade Priorities and Accountability Act of 2015 (H.R. 2146) and applies to Federal and state law enforcement officers, firefighters, air traffic controllers, and emergency medical service providers who have separated from service with the employer maintaining the plan. The exception from the 10% penalty applies only to amounts distributed directly from a governmental plan. IRC Sec. 72(t)(10)(B).

  3. Exempt Status Revoked Due to Private Benefit

    The IRS revoked the tax-exempt status under IRC Sec. 501(c)(3) of a foundation that claimed to support the descendants of Hungarian immigrants in the performing arts. Based upon audit findings, the IRS determined the foundation awarded scholarships to direct descendents of the founder and was organized and operated exclusively for private benefit. Furthermore, the IRS determined that the revocation of exempt status should apply retroactively “because it omitted and misstated material facts in its application for exemption.” The foundation argued that it was organized for tax-exempt purposes, but failed to prove that it operated exclusively for this purpose. The District Court upheld the retroactive revocation determining that the foundation (1) operated in a manner inconsistent with the exempt purpose as stated in its application, and (2) had made material misrepresentations of fact in the application. Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. (DDC No. 1:11-cv-01573.)

  4. Exempt Status Revoked Due to Private Benefit

    The IRS revoked the tax-exempt status under IRC Sec. 501(c)(3) of a foundation that claimed to support the descendants of Hungarian immigrants in the performing arts. Based upon audit findings, the IRS determined the foundation awarded scholarships to direct descendents of the founder and was organized and operated exclusively for private benefit. Furthermore, the IRS determined that the revocation of exempt status should apply retroactively “because it omitted and misstated material facts in its application for exemption.” The foundation argued that it was organized for tax-exempt purposes, but failed to prove that it operated exclusively for this purpose. The District Court upheld the retroactive revocation determining that the foundation (1) operated in a manner inconsistent with the exempt purpose as stated in its application, and (2) had made material misrepresentations of fact in the application. Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc. (DDC No. 1:11-cv-01573.)