CRS Summarizes Tax Treatment of Marijuana

¹This report uses the more widely accepted spelling of “marijuana” instead of the spelling generally used in the Controlled Substances Act (CSA), 21 U.S.C. Sections 801-904, “marihuana.” For the purposes of this report, the term “marijuana” is used as it is defined in Section 802(16) of the CSA. Hemp and marijuana are both varieties of the single plant genus, Cannabis sativa L. Hemp is defined as “the plant Cannabis sativa L. and any part of that plant . . . with a delta-9 tetrahydrocannabinol [(THC)] concentration of not more than 0.3 percent on a dry weight basis,” and is not a controlled substance. 7 U.S.C. § 1639o. The non-psychoactive cannabinoid cannabidiol (CBD) may be derived either from marijuana or from hemp. CBD containing less than 0.3% THC is not treated as a controlled substance. See 21 U.S.C. § 802(16)(B)(i). For a discussion of the different strains of the single plant genus Cannabis sativa L. and their classifications under federal law, see CRS Legal Sidebar LSB10482, State Marijuana “Legalization” and Federal Drug Law: A Brief Overview for Congress, by Joanna R. Lampe; CRS Report R44742, Defining Hemp: A Fact Sheet, by Renée Johnson.

²DEP'T OF TREAS., TREASURY INSPECTOR GENERAL FOR TAX ADMIN., 2020-30-017, THE GROWTH OF THE MARIJUANA INDUSTRY WARRANTS INCREASED TAX COMPLIANCE EFFORTS AND ADDITIONAL GUIDANCE 1-2 (2020) [hereinafter GROWTH OF THE MARIJUANA INDUSTRY]; see CRS Report R44782, The Marijuana Policy Gap and the Path Forward, coordinated by Lisa N. Sacco.

³GROWTH OF THE MARIJUANA INDUSTRY 7.

⁴21 U.S.C. § 812(c).

⁵Id. §§ 841-865; see CRS Report R45948, The Controlled Substances Act (CSA): A Legal Overview for the 117th Congress, by Joanna R. Lampe.

⁶26 U.S.C. § 280E.

⁷GROWTH OF THE MARIJUANA INDUSTRY 3, 13. Following the TIGTA report, the IRS issued unpublished sub-regulatory guidance directed at the marijuana industry, in the form of a short list of frequently asked questions. I.R.S., Marijuana Industry Frequently Asked Questions (Nov. 19, 2020), https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions.

⁸GROWTH OF THE MARIJUANA INDUSTRY 10.

⁹Id.

¹⁰Id. at 13.

¹¹See U.S. CONST. amend. XVI; 26 U.S.C. § 61(a); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1199 (10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019).

¹²U.S. CONST. amend. XVI (“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”); 26. U.S.C. § 61(a) (“Except as otherwise provided in this subtitle, gross income means all income from whatever source derived. . . .”); United States v. Sullivan, 274 U.S. 259, 263 (1927) (ruling that there was no “reason why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.”); Wood v. United States, 863 F.2d 417, 419 (5th Cir. 1989) (ruling proceeds from illegal activities are taxable even when they are forfeited to the government); see James v. United States, 366 U.S. 213, 218 (1961) (“It had been a well-established principle . . . that unlawful, as well as lawful, gains are comprehended within the term 'gross income.' Section II B of the Income Tax Act of 1913 provided that 'the net income of a taxable person shall include gains, profits, and income . . . from . . . the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . .' When the statute was amended in 1916, the one word 'lawful' was omitted. This revealed, we think, the obvious intent of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune.” (citations omitted)); Comm'r v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955) (“Here we have instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients.”); see generally Boris I. Bittker, Taxing Income from Unlawful Activities, 25 CASE W. RES. L. REV. 130 (1974).

¹³26 U.S.C. § 261 (“In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.”); Alternative Health Care Advocates v. Comm'r, 151 T.C. 225, 236 (2018) (“ '[T]his part' includes section 280E, Expenditures in Connection With the Illegal Sale of Drugs.” (quoting Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r, 128 T.C. 173, 180 (2007)).

¹⁴INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84 (1992) (“[T]his Court has noted the 'familiar rule' that 'an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer.' ” (quoting Interstate Transit Lines v. Comm'r, 319 U.S. 590, 593 (1943)); Lewyt Corp. v. Comm'r, 349 U.S. 237, 250 (1955) (“[D]eductions and credits are matters of legislative grace and the taxpayer must bring himself clearly within the relief he claims.”); Commodore Mining Co. v. Comm'r, 111 F.2d 131, 133 (10th Cir. 1940)) (“The authority of Congress to discontinue the right to such deductions is not open to doubt. Congress has unquestioned power to condition, limit, or deny deductions from gross income in arriving at the net which is to be taxed.” (citing Helvering v. Indep. Life Ins. Co., 292 U.S. 371 (1934)).

¹⁵26 U.S.C. § 162(a) (“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. . . .”); Welch v. Helvering, 290 U.S. 111, 113-14 (1933) (explaining an expense is “necessary” if it is “appropriate and helpful” for the development of the taxpayer's trade or business and “ordinary” if it is “common and accepted” in the taxpayer's line of trade or business); Alpenglow Botanicals, 894 F.3d at 1200 (“The Supreme Court has defined 'ordinary and necessary expenses' as those expenses that are 'appropriate and helpful to the development of the (taxpayer's) business,' and 'normal[ ] in the particular business.' ” (citations omitted)).

¹⁶Packard v. Comm'r, 746 F.3d 1219, 1222 (11th Cir. 2014) (per curiam); Feigh v. Comm'r, 152 T.C. 267, 276 (2019); see Schumacher v. United States, 931 F.2d 650, 652 (10th Cir. 1991).

¹⁷26 U.S.C. § 280E (“No 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 (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”). Businesses trafficking in Schedule II controlled substances in violation of federal or state law are also subject to Section 280E. Id. For further discussion of the different CSA schedules, the various controlled substances listed on those schedules, and their treatment under federal law, see CRS Report R45948, The Controlled Substances Act (CSA): A Legal Overview for the 117th Congress, by Joanna R. Lampe.

¹⁸21 U.S.C. § 812(c); id. §§ 841-865.

¹⁹26 U.S.C. § 280E; S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050; Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r, 128 T.C. 173, 182 (2007) (“Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances.”).

²⁰Alternative Health Care Advocates v. Comm'r, 151 T.C. 225, 236-37 (2018) (“In [Californians Helping to Alleviate Medical Problems], 128 T.C. at 182, we defined “trafficking” as the act of engaging in a commercial activity — that is, to buy and sell regularly. In Olive v. Commissioner, 139 T.C. at 38, we held that 'dispensing . . . medical marijuana pursuant to . . . [California law] was 'trafficking' within the meaning of section 280E.'” (second, third, and fourth alterations in original)); see also Alpenglow Botanicals, LLC v. United States, No. 16-CV-00258, 2016 WL 7856477, at *3 (D. Colo. Dec. 1, 2016) (citing Californians Helping to Alleviate Med. Problems, 128 T.C. at 182), aff'd, 894 F.3d 1187 (10th Cir. 2018); High Desert Relief, Inc. v. United States, No. 16-CV-469, 2017 WL 1740467, at *5 (D.N.M. Mar. 31, 2017) (citing Alpenglow Botanicals, 2016 WL 7856477, at *3-4), aff'd, 917 F.3d 1170 (10th Cir. 2019).

²¹26 U.S.C. §§ 161, 162(a), 164, 165, 167, 170, 261, 280E; see, e.g., San Jose Wellness v. Comm'r, 156 T.C. No. 4, 2021 WL 614063, at *4-10 (2021) (applying Section 280E to deny depreciation deductions under IRC Section 167(a)(1) and deductions for charitable contributions under IRC Section 170); N. Cal. Small Bus. Assistants Inc. v. Comm'r, 153 T.C. 65, 72-73 (2019) (applying Section 280E to deny deductions for taxes under IRC Section 164 and depreciation deductions under IRC Section 167); Beck v. Comm'r, T.C. Memo. 2015-149, 110 T.C.M. (CCH) 141 (2015), 2015 WL 4720041, at *6 (applying Section 280E to deny an IRC Section 165 loss deduction for marijuana seized by the Justice Department's Drug Enforcement Administration); Californians Helping to Alleviate Med. Problems, 128 T.C. at 173-74, 180-81 (applying Section 280 to deny deductions for ordinary and necessary business expenses under IRC Section 162(a)); but see I.R.S. Chief Couns. Adv. 201531016 (June 9, 2015), 2015 WL 4591378 (permitting a taxpayer to offset gross sales by the state excise tax because the state excise tax was a reduction in amount realized on the sale of property, not a deduction or credit under Section 280E (citing IRC Section 164(a) flush language)); see also Welch v. Helvering, 290 U.S. 111, 113-14 (1933) (explaining an expense is “necessary” if it is “appropriate and helpful” for the development of the taxpayer's trade or business and explaining an expense is “ordinary” if it is “common and accepted” in the taxpayer's line of trade or business); Alpenglow Botanicals, 894 F.3d at 1200 (“The Supreme Court has defined 'ordinary and necessary expenses' as those expenses that are ' “appropriate and helpful” to “the development of the (taxpayer's) business,” ' and 'normal[ ] in the particular business.' ” (citations omitted)).

²²San Jose Wellness, 2021 WL 614063, at *16-22.

²³See, e.g., San Jose Wellness, 2021 WL 614063, at *16-17; Alternative Health Care Advocates, 151 T.C. at 233-42; Californians Helping to Alleviate Med. Problems, 128 T.C. at 178-86; Loughman v. Comm'r, T.C. Memo 2018-85, 115. T.C.M. (CCH) 1472 (2018), 2018 WL 3039824, at *2-4.

²⁴See, e.g., Californians Helping to Alleviate Med. Problems, 128 T.C. at 183-86; see also Alternative Health Care Advocates, 151 T.C. at 239.

²⁵Comm'r v. Groetzinger, 480 U.S. 23, 35 (1987); see Alternative Health Care Advocates, 151 T.C. at 239; see also 26 C.F.R. § 1.183-1(d)(1).

²⁶Californians Helping to Alleviate Med. Problems, 128 T.C. at 183-86.

²⁷Id. at 185. In Californians Helping to Alleviate Medical Problems, the taxpayer charged each member: (i) a membership fee that covered caregiving services; and (ii) the cost of each member's set amount of medical marijuana. Id. at 176. In Canna Care, Inc. v. Commissioner, the Tax Court ruled a taxpayer was only engaged in the trade or business of selling marijuana where the taxpayer also sold books, T-shirts, and other items. T.C. Memo 2015-206, 110 T.C.M. (CCH) 408 (2015), 2015 WL 6389130, at *5, aff'd, 694 F. App'x 570 (9th Cir. 2017). The Tax Court could not determine what percentage of the taxpayer's income was from sale of items other than marijuana based on the evidence presented. Id.

²⁸Olive v. Comm'r, 139 T.C. 19, 41 (2012), aff'd, 792 F.3d 1146 (9th Cir. 2015); see Alternative Health Care Advocates, 151 T.C. at 239 (“[T]he activities of separate entities can be treated as a single trade or business if they are part of a 'unified business enterprise' with a single profit motive.”); Alterman v. Comm'r, T.C. Memo 2018-83, 115 T.C.M. (CCH) 1452 (2018), 2018 WL 2980049, at *9 (“Whether selling non-marijuana merchandise was a separate business from selling marijuana merchandise is an issue of fact that depends on, among other things, the degree of economic interrelationship between the two activities.”).

²⁹Olive, 139 T.C. at 41-42.

³⁰Id. at 42.

³¹Alternative Health Care Advocates, 151 T.C. at 240; see, e.g., Patients Mut. Assistance Collective Corp. v. Comm'r, 151. T.C. 176, 208-10 (2018) (“Harborside dedicated the lion's share of its resources to selling marijuana and marijuana products. Those sales accounted for over 99.5% of its revenue. Its other activities were neither economically separate nor substantially different. We therefore hold that Harborside had a single trade or business — the sale of marijuana.”), appeal docketed, No. 19-73078 (9th Cir. Dec. 4, 2019); Beck v. Comm'r, T.C. Memo. 2015-149, 110 T.C.M. (CCH) 141 (2015), 2015 WL 4720041, at *5 (“The sole purpose of the [taxpayer's] dispensaries was to provide customers with medical marijuana and instruct those customers on how to use it. Unlike the taxpayer in [Californians Helping to Alleviate Medical Problems], petitioner has provided no evidence that he had any business activity unrelated to the sale or distribution of marijuana.”); see also Desert Organic Solutions v. Comm'r, T.C. Memo. 2021-22, T.C.M. (RIA) 2021-22, 2021 WL 673016, at *2.

³²See, e.g., Alterman, 2018 WL 2980049, at *11; Beck, 2015 WL 4720041, at *6 (“COGS is an offset to gross receipts in determining business income.”); see also I.R.S., Marijuana Industry Frequently Asked Questions (Nov. 19, 2020), https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions (“[A] marijuana dispensary may not deduct, for example, advertising or selling expenses. It may, however, reduce its gross receipts by its cost of goods sold, as calculated pursuant to Internal Revenue Code section 471.”).

³³Reading v. Comm'r, 70 T.C. 730, 733 (1978), aff'd, 614 F.2d 159 (8th Cir. 1980).

³⁴Alterman, 2018 WL 2980049, at *11 (“Properly computed, cost of goods sold equals[:] the cost of merchandise on hand at the beginning of the taxable year ('beginning inventory'), [26 C.F.R. §] 1.471-3(a)[;] plus the cost of merchandise purchased since the beginning of the taxable year ('purchase costs'), [26 C.F.R. § 1.471-3](b)[;] plus the direct and indirect cost of producing merchandise ('production costs'), [26 C.F.R. §§ 1.471-3](c), 1.471-11[;] minus the cost of inventory on hand at the end of the tax year ('ending inventory'), [26 C.F.R. §] 1.471-1. Inventories must be recorded in a legible manner, properly computed and summarized, and these inventory records must be preserved by the taxpayer. [26 C.F.R. §] 1.471-2(e).”); see 26 U.S.C. §§ 168(k), 179, 263A, 471; I.R.S., Marijuana Industry Frequently Asked Questions (Nov. 19, 2020), https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry-frequently-asked-questions (“The Internal Revenue Service takes the position that section 280E-affected taxpayers must calculate their cost of goods sold pursuant to Internal Revenue Code section 471 and the associated Treasury Regulations. Generally, this means taxpayers who sell marijuana may reduce their gross receipts by the cost of acquiring or producing marijuana that they sell, and those costs will depend on the nature of the business.” (citing I.R.S. Chief Couns. Adv. 201504011 (Jan. 23, 2015))); see also Alterman, 2018 WL 2980049, at *11 n.21 (“In certain situations, farmers may use the cash method of accounting as an alternative to the inventory method.”); GROWTH OF THE MARIJUANA INDUSTRY 14-15 (“The Tax Cuts and Jobs Act contained a new provision, I.R.C. § 471(c), which is applicable to taxable years after December 31, 2017, and will have the effect of reducing the burden for tracking inventory for small businesses with less than $25 million in gross receipts. These qualified businesses would not be subject to the general rule for determining inventory. Instead, they may elect to use internal financial statements or accounting procedures to account for costs in lieu of keeping inventories in the manner otherwise required by I.R.C. § 471(a). Under this new provision, marijuana businesses could argue they are entitled to use a method of accounting that includes all expenses in cost of goods sold to potentially avoid the impact of I.R.C. § 280E.”) (footnotes omitted).

³⁵26 U.S.C. §§ 61 (defining gross income), 63 (defining taxable income); see Alpenglow Botanicals, LLC. v. United States, 894 F.3d 1187, 1200 (10th Cir. 2018) (“The cost of goods sold is a well-recognized exclusion from the calculation of gross income, while ordinary and necessary business expenses are deductions.”); see, e.g., Alterman, 2018 WL 2980049, at *11 (“Taxable income is equal to gross income minus deductions. Cost of goods sold is a reduction made in the course of computing gross income. It is not a deduction.” (citations omitted)).

³⁶26 U.S.C. § 63(a) (“[T]he term 'taxable income' means gross income minus the deductions allowed by this chapter (other than the standard deduction).” (emphasis added)); 26 C.F.R. §§ 1.61-3(a) (“In a manufacturing, merchandising, or mining business, 'gross income' means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.”), 1.162-1(a) (“The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income.”).

³⁷See, e.g., Richmond Patients Grp. v. Comm'r, T.C. Memo. 2020-52, 119 T.C.M. (CCH) 1342 (2020), 2020 WL 2114334, at *5-6; Alterman, 2018 WL 2980049, at *11-13; Beck, 2015 WL 4720041, at *6.

³⁸Alterman, 2018 WL 2980049, at *11; Beck, 2015 WL 4720041, at *6 (citing Wright v. Comm'r, T.C. Memo 1993-27, 65 T.C.M. (CCH) 1792 (1993), 1993 WL 17590); see 26 U.S.C. § 6001 (“Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.”); 26 C.F.R. § 1.6001-1.

³⁹See Ryan v. Comm'r, T.C. Memo 1989-297, 57 T.C.M. (CCH) 747 (1989), 1989 WL 64617.

⁴⁰S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050 (“All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.”); see Alpenglow Botanicals, 894 F.3d at 1199 (“To ensure taxation of income rather than sales, the 'cost of goods sold' is a mandatory exclusion from the calculation of a taxpayer's gross income.”).

⁴¹N. Cal. Small Bus. Assistants, Inc. v. Comm'r, 153 T.C. 65, 82-84 (2019) (Gustafson, J., concurring in part and dissenting in part); see Erik M. Jensen, The Taxing Power, the Sixteenth Amendment, and the Meaning of “Incomes,” 33 ARIZ. ST. L.J. 1057, 1149-54 (2001); but see Alpenglow Botanicals, 894 F.3d at 1201-02 (“Alpenglow also argues that, by refusing to allow deductions for unavoidable business expenses, Congress is permitting the IRS to tax its gross receipts rather than its income. But, 'it is [not] a violation of due process to impose a tax on gross receipts regardless of the fact that expenditures exceed the receipts. . . . The mere fact of intake being less than outgo does not relieve the taxpayer of an otherwise lawfully imposed tax.' ” (alterations in original) (quoting Penn Mut. Indem. Co. v. Comm'r, 277. F.2d 16, 20 (3d Cir. 1960))).

⁴²S. REP. NO. 97-494, at 309; see Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r, 128 T.C. 173, 181-82 (2007); see also Alpenglow Botanicals, 894 F.3d at 1201.

⁴³See, e.g., Wood v. United States, 863 F.2d 417, 421 (5th Cir. 1989); Holmes Enters., Inc. v. Comm'r, 69 T.C. 114, 116 (1977); Holt v. Comm'r, 69 T.C. 75, 80 (1977); Mack v. Comm'r, T.C. Memo 1989-490, 58 T.C.M. (CCH) 89 (1989), 1989 WL 101869.

⁴⁴Tank Truck Rentals, Inc. v. Comm'r, 356 U.S. 30, 33-34 (1958); see Comm'r v. Sullivan, 356 U.S. 27, 29 (1958).

⁴⁵Comm'r v. Tellier, 383 U.S. 687, 693-94 (1966) (“Deduction of expenses falling within the general definition of § 162(a) may, to be sure, be disallowed by specific legislation, since deductions 'are a matter of grace and Congress can, of course, disallow them as it chooses.'. . . But where Congress has been wholly silent, it is only in extremely limited circumstances that the Court has countenanced exceptions to th[is] general principle. . . . Only where the allowance of a deduction would 'frustrate sharply defined national or state policies proscribing particular types of conduct' have we upheld its disallowance. Further, the 'policies frustrated must be national or state policies evidenced by some governmental declaration of them.' ” (emphases added) (citation omitted)); see Alpenglow Botanicals, 894 F.3d at 1206; see also S. REP. NO. 91-552, at 273-74 (1969), as reprinted in 1969 U.S.C.C.A.N. 2027, 2310-11 (“At the present time there is no statutory provision setting forth a general 'public policy' basis for denying deductions which are 'ordinary and necessary' business deductions. Nevertheless, a number of business expenses have been disallowed on the ground that the allowance of these deductions would be contrary to Federal or State 'public policy.' This has been true, for example, in the case of fines. . . . From the standpoint of tax policy, there generally has been a reluctance to deny business expenses on the ground that this departs from the concept of a tax imposed on actual net business income. There still remains, however, the question as to what is an ordinary and necessary business expense. The Supreme Court in [Tank Truck Rentals], for example, in holding that the payment of fines could not be considered as ordinary and necessary, stated: 'A finding of “necessity” cannot be made however, if allowance of the deduction would frustrate sharply defined national or State policies proscribing the particular types of conduct evidenced by some governmental declaration thereof.' On the same grounds, it appears appropriate to deny deductions for bribes, illegal kickbacks, and the penalty portion of antitrust treble damage payments.”).

⁴⁶Tax Reform Act of 1969, Pub. L. No. 91-172, § 902, 83 Stat. 487, 710 (1969); S. REP. NO. 91-552, at 274-75.

⁴⁷26 U.S.C. § 162(c) (“Illegal bribes, kickbacks, and other payments”), (f) (“Fines, penalties, and other amounts”), (g) (“Treble damage payments under the antitrust laws”); see also Tellier, 383 U.S. at 693 n.10. Although Congress has enacted several laws to preempt the frustration of public policy doctrine, including Section 280E, the courts and IRS continue to apply the frustration of public policy doctrine when there is a gap in legislation. Hackworth v. Comm'r, 155 F. App'x 627, 630-32 (4th Cir. 2005) (per curiam); Rev. Rul. 82-74, 1982-1 CB 110; Rev. Rul. 81-24, 1981-1 CB 79; Rev. Rul. 77-126, 1977-1 CB 47; I.R.S. Chief Couns. Adv. 201346009 (Aug. 1, 2013); see also Nacchio v. United States, 824 F.3d 1370, 1377 (Fed. Cir. 2016).

⁴⁸Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 351, 96 Stat. 324, 640 (1982).

⁴⁹Edmondson v. Comm'r, T.C. Memo 1981-623, 42 T.C.M. (CCH) 1533 (1981), 1981 Tax Ct. Memo LEXIS 118, superseded by statute, Tax Equity and Fiscal Responsibility Act of 1982 § 351.

⁵⁰1981 Tax Ct. Memo LEXIS 118, *4-9.

⁵¹Id. at *3.

⁵²Id. at *9.

⁵³See S. REP. NO. 97-494, at 309 (1982), as reprinted in 1982 U.S.C.C.A.N. 781, 1050; Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r, 128 T.C. 173, 181-82 (2007); see also Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1201 (10th Cir. 2018).

⁵⁴S. REP. NO. 97-494, at 309.

⁵⁵26 U.S.C. § 280E (“No 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 or the law of any State in which such trade or business is conducted.” (emphasis added)); Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1158 (10th Cir. 2020) (“Congress's use of 'or' extends the statute to situations in which federal law prohibits the conduct even if state law allows it.”), petition for cert. filed, No. 20-645 (U.S. Nov. 6, 2020).

⁵⁶Standing Akimbo, 955 F.3d at 1158 (“So, despite legally operating under [state] law, 'the Taxpayers are subject to greater federal tax liability' because of their federally unlawful activities, and any 'remedy [for this] must come from Congressional change to § 280E or 21 U.S.C. § 812(c) (Schedule I) rather than from the courts.”' (citing Feinberg v. Comm'r, 916 F.3d 1330, 1338 n.3 (10th Cir. 2019))); Alternative Health Care Advocates v. Comm'r, 151 T.C. 225, 238. (2018) (“In response to the taxpayer's arguments related to congressional intent and public policy, the court concluded that '[i]f Congress now thinks that the policy embodied in . . . [section] 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.' ” (alterations in original) (quoting Olive v. Comm'r, 792 F.3d 1146, 1150 (9th Cir. 2015))); Olive v. Comm'r, 139 T.C. 19, 39 (2012); see CRS Legal Sidebar LSB10482, State Marijuana “Legalization” and Federal Drug Law: A Brief Overview for Congress, by Joanna R. Lampe.

⁵⁷Alternative Health Care Advocates, 151 T.C. at 236 (“Marijuana is a schedule I controlled substance in the context of section 280E even when the marijuana is medical marijuana recommended by a physician.”); Californians Helping to Alleviate Med. Problems, 128 T.C. at 181 (“In the context of section 280E, marijuana is a schedule I controlled substance. Such is so even when the marijuana is medical marijuana recommended by a physician as appropriate to benefit the health of the user.” (citation omitted)); see United States v. Oakland Cannabis Buyers' Co-op., 532 U.S. 483 (2001) (holding there is no implied medical necessity exception to the CSA).

⁵⁸Due to what it described as limited investigative and prosecutorial resources, the Department of Justice issued several memoranda during the Obama Administration indicating that it would not prioritize enforcement against individuals engaging in medical marijuana activities compliant with state law, and it would rely on United States Attorneys to exercise discretion in pursuing federal enforcement actions against businesses in their districts engaging in state-sanctioned medical marijuana activities. See, e.g., Memorandum from David W. Ogden, Deputy Att'y Gen., U.S. Dep't of Justice, on Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana to selected United States Attorneys (Oct. 19, 2009), https://www.justice.gov/sites/default/files/opa/legacy/2009/10/19/medical-marijuana.pdf; Memorandum from James M. Cole, Deputy Att'y Gen., U.S. Dep't of Justice, on Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use to United States Attorneys (June 29, 2011), https://www.justice.gov/sites/default/files/oip/legacy/2014/07/23/dag-guidance-2011-for-medical-marijuana-use.pdf; Memorandum from James M. Cole, Deputy Att'y Gen., U.S. Dep't of Justice, on Guidance Regarding Marijuana Enforcement to all United States Attorneys (Aug. 29, 2013), https://www.justice.gov/iso/opa/resources/ 3052013829132756857467.pdf [hereinafter Cole Memo]. On January 4, 2018, following the change in presidential administrations, the Department of Justice rescinded prior guidance and reaffirmed the authority of the federal government to exercise prosecutorial discretion to enforce federal marijuana offenses “in accordance with all applicable laws, regulations, and appropriations.” Memorandum from Jefferson B. Sessions, Att'y Gen., U.S. Dep't of Justice, on Marijuana Enforcement to all United States Attorneys (Jan. 4, 2018), https://www.justice.gov/opa/press-release/file/1022196/download. For information about appropriations riders limiting the Department of Justice's ability to prosecute state-sanctioned medical marijuana activities, see CRS Legal Sidebar LSB10482, State Marijuana “Legalization” and Federal Drug Law: A Brief Overview for Congress, by Joanna R. Lampe.

⁵⁹High Desert Relief, Inc. v. United States, 917 F.3d 1170, 1198 (10th Cir. 2019).

⁶⁰Id. at 1196 n.13 (“26 U.S.C. § 162(c)(2) . . . prevents deductions for bribes that are made illegal by state law 'only if such State law is generally enforced.' This unique statutory provision then does not support a more generalized 'dead letter rule' based on non-enforcement — particularly with respect to § 280E, which has no analogous language that makes its application turn on whether the federal Executive Branch generally enforces the CSA.” (citations omitted)).

⁶¹Id. at 1186-89; Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1197 (10th Cir. 2018) (“In summary, it is within the IRS's statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances. Thus, the IRS did not exceed its authority in denying Alpenglow's business deductions under § 280E.”); Green Sol. Retail, Inc. v. United States, 855 F.3d 1111, 1121 (10th Cir. 2017) (“But § 280E has no requirement that the Department of Justice conduct a criminal investigation or obtain a conviction before § 280E applies.”).

⁶²153 T.C. 65, 68-72 (2019). Marijuana businesses have not succeeded in challenging Section 280E on constitutional grounds. See, e.g., Speidell v. United States, 978 F.3d 731, 743-44 (10th Cir. 2020) (holding the IRS's attempt to collect and audit information about marijuana-related business practices from third parties to enforce Section 280E did not violate any Fourth Amendment right to privacy (citing Standing Akimbo, LLC v United States, 955 F.3d 1146, 1164-65 (10th Cir. 2020), petition for cert. filed, No. 20-645 (U.S. Nov. 6, 2020))); Feinberg v. Comm'r, 916 F.3d 1330, 1333 (10th Cir. 2019) (“[W]e reject the Taxpayers' argument that placing the burden of proof on them to disprove their business is engaged in the trafficking of a controlled substance violates their Fifth Amendment right against self-incrimination.”), cert. denied, 140 S. Ct. 49 (2019); High Desert Relief, 917 F.3d at 1188 (rejecting petitioner's Fifth Amendment challenge to Section 280E because the taxpayer was a corporation with “no Fifth Amendment privilege that it c[ould] properly invoke.”); Alpenglow Botanicals, 894 F.3d at 1198-1203 (holding Section 280E does not violate the Eighth and Sixteenth Amendments); Patients Mut. Assistance Collective Corp. v. Comm'r, 151 T.C. 176, 208-10 (2018) (rejecting petitioner's argument that limiting COGS to “only the actual cost used to purchase inventory” violates the Sixteenth Amendment”), appeal docketed, No. 19-73078 (9th Cir. Dec. 4, 2019).

⁶³U.S. CONST. amend. VIII.

⁶⁴Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 260 (1989).

⁶⁵Id. at 265.

⁶⁶Cooper Indus. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 434 (2001) (quoting United States v. Bajakajian, 524 U.S. 321, 334 (1998)); Bajakajian, 524 U.S. 321 (considering the amount of the fine, the particular facts of the case, the character of the defendant, and the harm caused by the offense in determining whether an asset forfeiture imposed as part of a criminal sentence violated the Eighth Amendment's Excessive Fines Clause).

⁶⁷See Bryan Camp, Lesson From The Tax Court: § 280E Does Not Violate The Eighth Amendment (Oct. 28, 2019), https://taxprof.typepad.com/taxprof_blog/2019/10/lesson-from-the-tax-court-280e-does-not-violate-eighth-amendment.html.

⁶⁸N. Cal. Small Bus. Assistants, Inc. v. Comm'r, 153 T.C. 65 (2019).

⁶⁹Id. at 66.

⁷⁰Id.

⁷¹Id. at 66-67.

⁷²Id. at 66, 68-72.

⁷³Id. at 67-72, 74.

⁷⁴Id. at 69-72, 74-76 (Lauber, J., concurring), 76 (Morrison, J., concurring), 77-90 (Gustafson, J., concurring in part and dissenting in part), 90-94 (Copeland, J., concurring in part and dissenting in part).

⁷⁵Id. at 71-72, 74; see id. at 75 (Lauber, J., concurring) (adding that a tax provision imposed to discourage activity does not make the provision “in the nature of a penalty,” even where the disfavored activity is illegal).

⁷⁶Id. at 76 (Morrison, J., concurring).

⁷⁷Id. at 77-90 (Gustafson, J., concurring in part and dissenting in part); id. at 90-94 (Copeland, J., concurring in part and dissenting in part). Judge Gustafson's concurrence notes the court would also need to address “whether the protections of the Eighth Amendment extend to corporate taxpayers.” Id. at 90 (Gustafson, J., concurring in part and dissenting in part). Since the majority in Northern California Small Business Assistants held Section 280E was not a penalty, it did not address whether the Eighth Amendment protects corporations from excessive fines. Id. at 68 n.4 (citing Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 276 n.22 (1989) (declining to address whether the Eighth Amendment applies to corporations)).

⁷⁸See, e.g., H.R. 365, 117th Cong. § 2 (2021); H.R. 3884, 116th Cong. § 3 (as passed by House, Dec. 4, 2020); H.R. 4323, 116th Cong. § 1 (2019); H.R. 4322, 116th Cong. § 3 (2019); S. 2400, 116th Cong. § 3 (2019); S. 2227, 116th Cong. § 2 (2019); H.R. 3884, 116th Cong. § 2 (2019); H.R. 3544, 116th Cong. § 2 (2019); H.R. 3540, 116th Cong. § 2 (2019); S. 1552, 116th Cong. § 2 (2019); H.R. 2843, 116th Cong. § 2 (2019); H.R. 1893, 116th Cong. § 202 (2019); S. 697, 116th Cong. § 202 (2019); H.R. 1588, 116th Cong. § 3 (2019); S. 597, 116th Cong. § 2 (2019); H.R. 1456, 116th Cong. § 2 (2019); H.R. 1120, 116th Cong. § 201 (2019); H.R. 420, 116th Cong. § 201 (2019); S. 420, 116th Cong. § 201 (2019); see also CRS Legal Sidebar LSB10556, The MORE Act: House Plans Historic Vote on Federal Marijuana Legalization, by Joanna R. Lampe.

⁷⁹See, e.g., S. 422, 116th Cong. § 2 (2019); H.R. 1119, 116th Cong. § 201 (2019); H.R. 1118, 116th Cong. § 2 (2019); S. 421, 116th Cong. § 201 (2019). The Strengthening the Tenth Amendment Through Entrusting States Act (STATES Act) is analogous to the legislative proposals carving out exceptions to Section 280E. S. 1028, 116th Cong. (2019); H.R. 2093, 116th Cong. (2019). The STATES Act re-characterizes certain state-sanctioned marijuana conduct as not “unlawful” and as conduct that does “not constitute trafficking in a controlled substance under section 401 of the Controlled Substances Act (21 U.S.C. 841) or any other provision of law.” S. 1028, 116th Cong. § 6 (2019); H.R. 2093, 116th Cong. § 6 (2019).

⁸⁰See, e.g., H.R. 3884, 116th Cong. § 5 (as passed by House, Dec. 4, 2020); S. 2227, 116th Cong. § 4 (2019); H.R. 3884, 116th Cong. § 4 (2019); see also CRS Report R43785, Federal Proposals to Tax Marijuana: An Economic Analysis, by Jane G. Gravelle and Sean Lowry.

⁸¹S. 420, 116th Cong. § 101 (2019) (“Any person engaged in business as a producer or an export warehouse proprietor shall pay a tax of $1,000 per year (referred to in this subchapter as an 'occupational tax') in respect of each premises at which such business is carried on.”); H.R. 1120, 116th Cong. § 101 (2019) (identical to S. 420, 116th Cong. § 101 (2019)); see also H.R. 3884, 116th Cong. § 5 (as passed by House, Dec. 4, 2020) (imposing an occupational tax).

⁸²H.R. 3884, 116th Cong. §§ 5-6 (as passed by House, Dec. 4, 2020).

⁸³See, e.g., H.R. 6800, 116th Cong. § 110606 (2020) (as passed by House, May 15, 2020) (addressing marijuana, CBD and hemp business access to banking issues); S. 1200, 116th Cong. §§ 2-4 (2019); H.R. 1595, 116th Cong. §§ 2-4 (2019); H.R. 1119, 116th Cong. § 204 (2019); S. 421, 116th Cong. § 204 (2019); see also H.R. 1595, 116th Cong. §§ 11-12 (2019) (addressing CBD and hemp businesses access to banking issues).

⁸⁴GROWTH OF THE MARIJUANA INDUSTRY 4-6; see CRS In Focus IF11373, Financial Services for Marijuana Businesses, by David H. Carpenter.

⁸⁵GROWTH OF THE MARIJUANA INDUSTRY 5; see also Memorandum from Maria T. Vullo, N.Y. State Superintendent of Fin. Servs., to CEOs or Equivalents of N.Y. State-Chartered Banks & Credit Unions, re: Guidance on Provision of Financial Services to Medical Marijuana & Industrial Hemp-Related Businesses in New York State, N.Y. DEP'T OF FIN. SERVS. 2 (July 3, 2018), https://www.dfs.ny.gov/system/files/documents/2020/03/il180703.pdf (“Because marijuana currently is still listed on Schedule I under the Federal Controlled Substances Act, medical marijuana and industrial hemp-related businesses operating in accordance with New York State laws and regulations continue to have difficulty establishing banking relationships at regulated financial institutions. The ability to establish a banking relationship is an urgent issue today for the legal cannabis industry. So long as it remains difficult to open and maintain bank accounts, the industry will largely rely on cash to conduct business and operate.”).

⁸⁶Dep't of the Treas. Budget Request for FY 2021 Hearing Before the Subcomm. on Fin. Servs. & Gen. Gov't of H. Comm. on Appropriations, 116th Cong. (2020).

⁸⁷Id.