The Importance of Business Names in 280E Marijuana Dispensary Cases

Cannabis businesses involved in the buying and selling of marijuana face significant tax challenges borne by IRC 280E.  According to that section of the Internal Revenue Code, no deduction is allowed for any amount paid or incurred in carrying on any trade or business if such trade or business consists of trafficking in controlled substances prohibited by Federal law.  Accordingly, marijuana dispensaries operating legally under state law find themselves denied tax deductions for ordinary and necessary business expenses.

CHAMP Tax Court Decision  

While courts have been fairly consistent in applying 280E to disallow tax deductions for marijuana dispensaries, the court in CHAMP did offer an avenue for deducting expenses that can be allocated to a separate trade or business that does not traffick in marijuana.  Specifically, the court found the taxpayer marijuana dispensary in CHAMP to be engaged in two trades and businesses; one that dispensed marijuana and the other that provided caregiving services.  Accordingly, the court held that “280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petition also is involved in the trafficking in a controlled substance.”  Following the CHAMP decision, marijuana dispensaries have argued with little success that they too are engaged in two trades and business and thereby entitled to deduct expenses attributable to their non-trafficking business.

The Differences Between CHAMP and Other Marijuana Dispensaries

Subsequent decisions finding marijuana dispensaries to be engaged in a single trade and business of trafficking marijuana and thereby precluded by 280E from deducting expenses have distinguished their taxpayers from the one in CHAMP.  Courts have noted that 18 of the 24 employees at CHAMP worked exclusively in caregiving services, the dispensary operated on a break-even basis as a nonprofit, the extensive caregiving services provided, and other points, but interestingly, in Olive the court even noted that the name of the dispensary ‘California Helping To Alleviate Medical Problems’ stressed it’s caregiving mission, whereas the name of the taxpayer before it, ‘The Vapor Room Herbal Center,’ stressed the sale and consumption of marijuana.  Accordingly, even the name of a dispensary can influence the court’s determination of whether a dispensary is engaged in two separate trades and businesses for purposes of 280E; at least to the extent the court may be inclined to find only a single unitary business of selling marijuana.