Posted by: Steven Toscher | August 2, 2017


In Canna Care, Inc. v. Commissioner, No. 16-70265 (9th Cir. July 25, 2017), the Ninth Circuit Court of Appeals  affirmed the Tax Court’s decision that a marijuana dispensary was not entitled to the deduct its operating expenses because it was in the business of trafficking in a “controlled substance.”  Yes, under Federal law, marijuana is still a “controlled substance”  and Section 280E of the Internal Revenue Code precludes the deduction of what would otherwise be ordinary and necessary business expenses.  Appellate counsel for the dispensary raised some  novel arguments on appeal, including  (1) whether Section 280E as applied violates the excessive fines clause of the Eighth Amendment to the Constitution; (2) whether Section 280E precludes  state and local tax deductions; and (3) whether Section 280E precludes appellant’s net operating loss carryover deduction from  a prior year.

Unfortunately the Circuit Court  decided not address these issues because none of the  novel arguments were  raised in the Tax Court and not preserved on appeal.  The Ninth Circuit noted that “absent exceptional circumstances, this court will not consider an argument that was not first raised in the Tax Court.”

The undersigned saw the oral argument (one can go to the Ninth Circuit’s website and still see it) and appellate counsel  did a great  job with these  very difficult  arguments, but the Ninth Circuit judges were not biting.  The argument was premised on the fact “things have changed.”  That is, most states now have legalized marijuana for medical purposes and more and more states are enacting laws legalizing recreational use.

The states’ interest in these local laws is not only  medical and compassion for  people who  benefited from marijuana, but also the ever increasing need for tax revenue.  California also recently went the way of Colorado, and other states, legalizing the recreational use of marijuana and it is anticipated that the sales will generate significant a tax revenue for the state.

There are ongoing lobbying efforts to repeal Section 280E in light of the “changes” which have happened, but the statute is clear and marijuana is still a controlled substance within the meaning of the statute.

The point to be made here though is that the current state of affairs is a mess regarding tax policy.  Marijuana dispensaries which operate legally under state law are unable to bank like any other business and  in most cases are required to deal in cash.  Not only does this present risks to all involved,  cash businesses tend to be less compliant than non-cash businesses and  that may  be a bit of an understatement.

Equally important, a state law compliant marijuana dispensary is unable to deduct it to ordinary and necessary expenses substantially raising the effective marginal tax rate. That also is a temptation for the less than compliant taxpayer.

With the disallowance of expenses, the question raised in the Ninth Circuit was whether the income tax on the dispensary was in fact not a tax, but a “penalty” subject to restrictions and limitations imposed by the Eight Amendment to the Constitution.  While this argument has gained traction regarding the FBAR penalty (which is not a tax),[i] the Circuit Court recognized that Congress has plenary authority to impose a very high tax rate so the excessive fines clause argument went nowhere.  It was a nice try though.

We need a rational system of taxation for businesses which are allowed to legally operate in the states.  The irrationality of the current system will not help tax compliance.

STEVEN TOSCHER – For more information please contact Steven Toscher –  Mr. Toscher is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at

[i]  See United States v Bussell, 117 A.F.T.R. 2d 2016-439. 2015 WL 9957826, (C.D Calif. 2015)  See also,  Toscher and Lubin “When Penalties Are Excessive—The Excess Fines Clause as a Limitation of the Imposition of the Willful FBAR Penalty, Journal of Tax Practice and Procedure, December-2009- January 2010.










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