In Uncategorized on 12/20/2018 at 16:27

I’m going back a long time, remembering a book from my boyhood, but today we have a full-dress T. C. hitting the shareholders of the S Corp which provides management services to a CA medical pottery with the Section 280E deduction-killer.

Here’s Alternative Health Care Advocates, et al., 151 T. C. 13, filed 12/20/18, handing out all the goodies they’ve acquired from their members. And fighting about COGS, because their Section 263A argument for deductions founders on Section 280E. Judge Pugh rehashes (no pun intended) Martin Olive and P-MAC, both of which I’ve blogged in extenso. You’ll find the citations to these cases in the opinion.

The old “trafficking” dictionary-chaw is still around, but it’s a clear loser for the Alternatives. Their non-boo sales are a minuscule part of the gross. And they’re not a “producer” anyway, only a “reseller,” so whatever IRS gives them for COGS is what Section 471 allows.

The als have a Sub S that handles payroll, rent, advertising, hiring and firing employees for the Alternatives. The als want to deduct from the management fees their sub S get from the Alternatives the expenses they pay for the foregoing, claiming they’re not traffickers. But the sub S only works for the Alternatives, although they were hoping to pick up other potteries to service.

Judge Pugh: “Because Alternative and [sub S] are legally separate entities, we must analyze whether [sub S]’ own business activities also constituted ‘trafficking in controlled substances’ as contemplated by section 280E.  Petitioners argue that, as a management services company, [sub S] did not itself engage in the purchase and sale of marijuana.  But the only difference between what Alternative did and what [sub S] did (since Alternative acted only through [sub S]) is that Alternative had title to the marijuana and [sub S] did not. [Sub S] employees were directly involved in the provision of medical marijuana to the patient members of Alternative’s dispensary.  While [sub S] and Alternative were legally separate, [sub S] employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative); that was [sub S]’ primary business. We do not read the term ‘trafficking’ to require [sub S] to have had title to the marijuana its employees were purchasing and selling.  Neither that section nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another.  Without clear authority, we will not read such a limitation into these provisions.” 151 T. C. 13, at pp. 28-29.

This jogged my memory of Lou Boudreau, player-manager of the Cleveland Indians, and his book of that name. The manager is also a player.

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