In Uncategorized on 09/21/2016 at 15:23

Y’all remember the ingenious move by Judge Kroupa (of tattered memory), when she loaded Marty Olive’s boo-pushing expenses into cost of goods sold (COGS), hence an adjustment and not a deduction to avoid Section 280E traffic.

If not, see my blogpost “Everybody Must Get Stoned,” 8/3/12. And if this is more about marijuana than you wanted to know, I got an e-mail the other day from a reader who is doing extensive research; so I’m trying to keep my readers satisfied.

Well, the capitalization rules latterly adopted in Section 263A and the regs thereto were claimed to hurt business by requiring capitalization of that which was formerly expensed, thus boosting inventory and raising COGS.

But the Imp of Unintended Consequences might help out the bigger boo-pushers, who are non-deductible under Section 280E. They want COGS, since their deductions are useless.

This is only theoretical, of course. In the case of Golden State Cooperative, Inc., Docket No. 2502-15, filed 9/21/16, they’re below the three-year-average $10 million annual gross receipts cutoff for the capitalizing COGS-enhancer.

However, and notwithstanding anything to the contrary or at variance with the foregoing (as my high-priced colleagues would say), the Golden Staters have a friend in The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Invariable, Incontrovertible, Indefatigable, Ineluctable, Ineffable, Imperturbable, and Illustrious Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes. And he even finds “a couple issues” not dealt with by the parties in this off-the-bencher.

The Golden Staters understated income for the year at issue by 0.55%, because they counted in credit card payments (and how they got a bank to let them accept credit cards must be an interesting story, what with PATRIOT acts and money-laundering laws) on the swipe and not when the cash hit a few days later. At the end of the tax year, this is a problem. Golden State concedes, so Judge Holmes gives IRS a win on the tax, but wait for the penalty phase.

Golden State was a consignee, meaning it sold what growers gave it and paid the growers. So Golden State never owned the stuff. Still, since the total of payments would be the same whether Golden State bought the stuff (presumably on credit), took title, and resold, or just hawked the stuff without owning, there’s no difference as regards using COGS. Golden State gets no greater tax benefit one way or the other.

“So the first issue that was actually argued by the parties was the potential allocation of indirect costs to this inventory under Section 263A. This section is relatively new — it’s certainly newer than Section 280E — and was actually designed to increase the cost-of-goods-sold adjustment for many businesses. This was actually harmful to most businesses because it is a form of capitalization rather than immediate expensing. But in the marijuana trade, the incentive to argue that indirect costs are included in COGS is much greater because COGS are an adjustment that medical marijuana dispensaries can take; deductions they cannot.” Order, at pp. 9-10.

But even relegating Golden State to Section 471 standard inventory methods, Judge Holmes finds a few bucks of COGS for Golden State, after giving them a big scare.

Golden State is a cooperative; it never owns the boo it’s flogging. “This means that the marijuana involved is not technically, or at least is arguably not technically, part of the inventory of the seller, and thus the seller might not be entitled to a cost-of-goods-sold adjustment for goods sold on consignment. Instead, as we said in cases decided before, 280E, such a consignee might have to take account of the cost of purchasing or rather reimbursing the gardeners or suppliers of the marijuana not as a cost-of-goods-sold adjustment but as another ordinary business expense, which means, in the end, that it might be the case that a cooperative that is working on the consignment model will have even the costs of its inventory swept up under Section 280E.” Order, at p. 12.

Just before Golden State’s hardworking counsel has a seizure, Judge Holmes drops that one.

“However, that was not argued in this case, and I will not decide this case on that basis. I note that, by doing this as a bench opinion, I raise the subject but this bench opinion has no precedential value.” Order, at pp. 12-13.

Judge Holmes gives the Golden Staters the price of a latte or two for the bags, the cost of which they can substantiate, wherein they packed the good stuff. And he gives them the grow supplies, as they are called in the industry (I hasten to add that I am paraphrasing the decision here, and know nothing of this of my own knowledge), the plant food, water and such that the Golden Staters used to mature young plants handed over by the growers. And the cones, which Judge Holmes tells us is another form of container for marijuana, nets them a few bucks (I will not make the obvious pun about a Saturday Night Live sketch from decades ago).

The Golden Staters had great records, and Judge Holmes lauds them, but has to follow Ninth Circuit and the Martin Olive case, above referred to. Golden State’s lawyer, recovered from the shock, says he wants to preserve the issue of deductions for appeal, and Judge Holmes is down with that.

Golden State wants the multiple-businesses dodge, but that doesn’t work, as the amenities they offer aren’t separately charged for. All the Golden Staters are doing is pushing the good stuff.

If their deductions are knocked out by Section 280E, then the Golden Staters are clearly in the five-and-ten penalty zone.

But the year at issue is pre-Olive in Tax Court, and definitely pre-Olive in Ninth Circuit. So the big item, the disallowed deductions, are a good faith mistake. Judge Holmes gave the Golden Staters a few pennies on COGS, so no penalty there. And the tiny understatement was a timing error, not an attempt to fiddle.

Good stuff.



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