Section 280E of the tax code prohibits taking tax deductions for business expenses related to marijuana because of its status as a Schedule I controlled substance. Legal cannabis firms can deduct cost of goods sold, but not being able to deduct operating expenses is a major problem—these firms could actually pay more in taxes than they make in profit. There has been some hope that Section 280E would be found unconstitutional, but a new case is not good news in that regard.

New case: A medical cannabis dispensary in Denver has lost an appellate court battle to prevent the IRS from obtaining business records from state regulators. The IRS is auditing the firm to see whether it took improper business deductions. The U.S. Court of Appeals for the 10th Circuit ruled that the IRS auditor did not act in a way that was overbroad or violated the rights of the company owners. The court also said that, despite the dissent in another case (Northern California Business Associates), Section 280E does not violate the 16th Amendment, stating: “The dissent opined that Congress had exceeded its Sixteenth Amendment authority in enacting §280E.… We are unpersuaded by this dissent. We agree with the majority, which ruled that §280E falls within Congress’s authority under the Sixteenth Amendment to establish deductions.” The case is Standing Akimbo, LLC et al. v. United States of America, which can be accessed if you click here.

We thank Ron Seigneur (Seigneur Gustafson LLP) for alerting us to this case. Seigneur is co-author of “Cannabis and Hemp Valuations: A Market Analysis” (a BVR Briefing) and The Cannabis Industry Appraisal and Accounting Guide.