Members of Californians Helping to Alleviate Medical Problems Inc. paid an annual fee to receive benefits that included food, counseling, personal hygiene products and a limited amount of medical marijuana. Forty-seven percent of the members suffered from AIDS; the remainder had cancer, multiple sclerosis and other serious illnesses. On its final tax return for 2002, the taxpayer showed a $239 loss. The IRS denied all the nearly $213,000 in deductions because, it concluded, the taxpayer’s principal purpose was to traffic in marijuana.
IRC section 280E prohibits the deduction of all expenses and credits related to trafficking in controlled substances. Although the taxpayer objected to characterizing its activities as trafficking, the Tax Court applied a dictionary definition of the word and thus the restrictions of section 280E. The taxpayer also argued that its marijuana distribution was secondary to its care giving, for which deductions were not prohibited by section 280E. The Tax Court examined the scope of the care-giving activities and agreed they were a separate business from the drug trafficking, accounting for the majority of its expenses. Therefore, the taxpayer was allowed to deduct those expenses.
The Tax Court’s willingness to find two separate businesses—even though the clients of both were the same and the activities were all designed to help these individuals—may be beneficial to other taxpayers if other courts are willing to follow this conclusion. Numerous tax rules that require the existence of two or more businesses, such as partial liquidation and spinoffs, may be affected by this decision.
Californians Helping to Alleviate Medical Problems Inc. v. Commissioner , 128 TC no. 14 .
Prepared by Edward J. Schnee , CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.