No, not Pres. Nixon’s 1971 initiative that has been either a blessing or a curse (depending upon your point of view). This is IRS’ ongoing fight to tax to the uttermost limits of the law the medical MaryJaners in the 33 (count ‘em, 33) States where medical vegetation is legal.

And IRS slugs successfully the wannabe “gold standard” of the Golden State’s medico-potteries, Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, 151 T. C. 11, filed 11/29/18.

The fight is over COGS (Cost Of Goods Sold), an adjustment to gross receipts, not a deduction. Per Section 280E, P-MAC can’t deduct expenses for trafficking in a controlled substance, which cannabis is, despite attempts to remove it from the schedule; Judge Holmes has a list of eight such attempts, 151 T. C. 11, at p. 36, all unsuccessful.

If you’re coming late to the party, see my blogposts “Everybody Must Get Stoned,” 8/3/12, and “He Canna Care,” 10/22/15. Judge Holmes cites extensively to the cases I discussed.

So if COGS are all this is about (and it is; see below for the rest), can P-MAC capitalize per Section 263A, or are they stuck as “resellers” with the much more restrictive Section 471 rules?

P-MAC first claims that DOJ stiped out with prejudice their attempted civil forfeiture of the premises wherein P-MAC operated. But that’s no basis for claim preclusion, as DOJ and P-MAC couldn’t have tried the tax issues in the civil forfeiture. And the case P-MAC cites goes more to election of remedies than claim preclusion.

Next is the obligatory dictionary chaw. Judge Holmes twice quotes Shakespeare, and every dictionary the parties and he can find going back to 1893 (I kid you not; 151 T. C. 11, at pp. 29-30). The issue is where the words following the phrase “consists of” in Section 280E is an exhaustive or non-exhaustive list.

Read the opinion. Exhaustive or non-exhaustive? I’m exhausted.

If exhaustive, P-MAC wins, but Section 280E is eviscerated. Can’t have that. And while Congress prevents DOJ from spending taxpayer cash on medico-pottery-busting, that doesn’t obliterate Section 280E as far as IRS is concerned; they’re Treasury, not Justice.

I’m sure some of my readers are saying “It’s not justice, that’s for sure.”

Howbeit, Judge Holmes finds that allowing P-MAC Section 263A capitalization would allow an end-run around Section 280-E and Section 263A(2), which says if an expense wasn’t allowable before Section 263A took effect, it can’t be capitalized now. “So if something wasn’t deductible before Congress enacted section 263A, taxpayers cannot use that section to capitalize it.  Section 263A makes taxpayers defer the benefit of what used to be deductions–it doesn’t shower that as grace on those previously damned.” 151 T. C. 11, at p. 53.

Judge Holmes the Puritan?

On facts and circumstances, P-MAC is only running a pottery, no other trade or business; its ancillary services (mandated by CA law) and gift shop activities only provide one-half of one percent of the gross. Their marketing and branding aren’t separate trades or businesses, because they weren’t conducted or reported that way.

And on facts and circumstances, P-MAC is a “reseller,” not a “producer,” per Section 471, so their COGS are substantially reduced. They don’t do enough with the stuff and keep it under tight enough wraps.

I have to give P-MAC’s attorneys a Taishoff “good try.” The found P-MAC a Constitutional argument. If they can’t treat their costs as COGS, they’re being taxed on more than their gross income, and the Sixteenth Amendment prohibits that. (Yes, protesters, it is valid).

“Harborside would get COGS adjustments for its direct inventory costs no matter what–even if it was trafficking cocaine or any other controlled substance not legal under California law.  The only things Harborside doesn’t get are indirect inventory costs granted as deductions and then deferred under section 263A.

“The section 263A capitalization rules don’t apply to drug traffickers. Unlike most businesses, drug traffickers can’t capitalize indirect expenses beyond what’s listed in the section 471 regulations.  Section 263A expressly prohibits capitalizing expenses that wouldn’t otherwise be deductible, and drug traffickers don’t get deductions.  Because federal law labels Harborside a drug trafficker, it must calculate its COGS according to section 471.” 151 T. C. Memo. at p. 56.

Now what’s missing from this picture? Hint, Judge Holmes is writing this opinion for a unanimous bench.

Those of my readers who’ve stuck with me through this laborious trudge will cry out with one voice “Section 6751(b) Boss Hoss!”

“This leaves only the issue of whether Harborside owes accuracy-related penalties under section 6662(a).  We will address this issue in a separate opinion.” 151 T. C. 11, at p. 62.

Cain’t hardly wait.