Tax Court Rules in IRS's Favor on Pot Dispensary's Deficiencies

DESERT ORGANIC SOLUTIONS,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

Filed February 22, 2021

Katherine L. Allen, Matthew A. Williams, and Henry G. Wykowski, for petitioner.

Patsy A. Clarke, Alicia H. Eyler, Gregory M. Hahn, and Melissa D. Lang, for respondent.

MEMORANDUM OPINION

HOLMES, Judge: Desert Organic Solutions is a California corporation that sells marijuana. Its business is legal under California law; it is illegal under federal law. During the tax years at issue, 2010-12, Desert Organic sold very little [*2] other than marijuana — rolling paper, pipes, and a few other things — but these were a tiny part of its overall sales. (Desert Organic didn't even break them out in its revenue statements, but the cost of purchasing them for resale was consistently less than 0.5% of overall purchases during the years before us.)

We've been here before. In Patients Mutual Assistance Collective Corp. v. Commissioner, 151 T.C. 176 (2018), appeal filed, No. 19-73078 (9th Cir. Dec. 3, 2019), we extensively analyzed the taxation of this still relatively new industry. Patients Mutual is currently on appeal to the Ninth Circuit. We'd suggested to the parties that it might be sensible to wait to see what happens to that appeal before taking this case to decision, but the Commissioner disagreed. The parties stipulated the facts and submitted the case for decision under Rule 122, Tax Court Rules of Practice and Procedure.

The stipulation shows that Desert Organic's business “consists of trafficking in controlled substances,” as we interpreted that phrase in Patients Mutual, 151 T.C. at 196-97, even though it also sells a few nonmarijuana items. It also allows us to find, as again we did in Patients Mutual, that the company has only one trade or business when so little money comes in from anything other than sales of marijuana. See id. at 204.

[*3] As Desert Organic conceded in its reply brief: “Petitioner acknowledges that the two issues raised in Petitioner's opening brief have been resolved as a matter of law via [Patients Mutual].” The Commissioner has in turn conceded the penalties that he determined, so

Decision will be entered for respondent as to the deficiencies and for petitioner as to the penalties.