280E “Trafficking” In A Controlled Substance

If your cannabis business has been issued a notice of deficiency by the IRS disallowing deductions pursuant to IRC 280E, you may be wondering how your state-licensed dispensary is “trafficking” in a controlled substance that’s legal under state law  After all, if your marijuana dispensary is licensed by the state, taxed by the state, and otherwise operates legally under state law, how can cannabis tax law treat your state-licensed dispensary as being engaged in “trafficking” under IRC 280E?

Unfortunately for marijuana dispensaries and other businesses that buy and sell cannabis, tax courts have addressed this issue in several decisions. Under the wording of IRC 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.”

IRC 280E

While tax courts note that “trafficking” in controlled substances is not defined in IRC 280E, the courts have looked to other sections of the Internal Revenue Code, Controlled Substances Act, and even Webster’s dictionary to define the term for purposes of 280E.

How CHAMP Defined Trafficking

In CHAMP, the taxpayer’s attorney argued that by supplying medical marijuana to patient members, the taxpayer was not “trafficking” within the meaning of IRC 280E.  Unfortunately, the court gave meaning to the term by referring to the verb “traffic” in Webster’s dictionary which is defined as “to engage in commercial activity: buy and sell regularly.”  With that expansive definition the court found that in supplying medical marijuana to its member patients, the marijuana dispensary was regularly buying and selling marijuana, and therefore “trafficking” in a controlled substance within the context of 280E.

How Other Cases Defined Trafficking

The CHAMP court’s holding that dispensing medical marijuana pursuant to California law is ‘trafficking’ within the meaning of 280E was applied in Olive v. Commissioner to deny deductions.  In a decision that proved just as unfortunate for the marijuana dispensary, the court in Alternative Health Care Advocates looked to the Controlled Substances Act’s definition of “dispense” as delivering a controlled substance to an ultimate user, and IRC 7208 which defined “trafficking” in the context of criminal acts relating to stamps as knowingly or willfully buying, selling, offering for sale, or giving away washed or resorted stamps for use.  

Since marijuana is a controlled substance within the meaning of Schedules 1 and 2 of the Controlled Substances Act, tax and appellate courts have concluded in several cases that marijuana dispensaries that sell marijuana are ‘trafficking’ in a controlled substance within the context of IRC 280E.

Attorney Jin Kim is a tax attorney in Sacramento, California. She represents cannabis businesses with tax debt against thewho owe the IRS, CDTFA, and other tax agencies. To schedule a free consultation with her office call (916) 299-9913.