In Uncategorized on 10/23/2019 at 17:18

To the Constitution

Not landscape architecture, but another effort to get around Section 280E and get deductions for pottery. And Judge Goeke is buying none of it. But Judge David Gustafson obliges all and sundry with a rip-roaring dissent, to take the lead from Judge Holmes in The Great Dissenter stakes.

Here’s Northern California Small Business Assistants Inc., 153 T. C. 4, filed 10/23/19. The NoCals were potters who claimed Eighth Amendment “excessive fines” clause protects their deductions from IRS’ depredations.

No facts in dispute, so the NoCals want summary J. They get it; IRS wins, and all the judges say they should. The one common point of majority, concurrences and dissent is that the NoCalls didn’t establish excessivity as to them.

Preliminarily, does the Eighth Amendment apply to corporations? Well, the Supremes haven’t said, although maybe so some Justices thought it might could do. Anyhow, Judge Goeke ducks that one, because whether it does or not, disallowing those deductions isn’t an excessive fine.

The Sixteenth Amendment indisputably allows taxing gross income, from whatever source derived. Disallowing pottery deductions and credits taxes no more than gross.

“Deductions from gross income do not turn on equitable considerations; rather they are pure acts of legislative grace, the prudence of which is left to Congress.  Congress is free to grant, restrict, and deny deductions as it sees fit.” 153 T. C. 4, at p. 9 (Citations omitted).

This disallowance is not like the post-Prohibition Federal excise tax on sellers of liquor in States that banned alcoholic beverages via the local option clause in the Twenty-First Amendment. There, the Feds had no interest in punishing State law violators, so the Tenth Amendment put paid to that.

“In contrast, section 280E is enacted under Congress’ unquestionable authority to tax gross income pursuant to the Sixteenth Amendment and is directed at persons who operate a business in violation of State or Federal law.  See sec. 280E (‘[S]uch trade or business * * * consists of trafficking in controlled substances * * * which is prohibited by Federal law or the law of any State in which such trade or business is conducted.’).  Section 280E is directly tied to Congress’ policy objective to limit and deter trafficking in illegal controlled substances.” 153 T. C. 4, at pp. 10-11.

And the disallowance of credits and deductions to druggisti  goes back 37 (count ‘em, 37) years. Every attempt to let the deductions in, whether legislatively or judicially, has cratered.

Congress has the power and has Constitutionally used it.

The NoCals claim that only their Section 162 ordinary-and-necessary deductions are barred, not their Section 164 SALTs nor their Section 167 depreciation. But Judge Goeke says “Read line one of Section 280E. No deduction or credit shall be allowed.” No means no.

Finally, the NoCals say they aren’t “trafficking,” as that means something nefarious or sinister, and boo is legal in the Golden State. It might be CA-legal, says Judge Goeke, but you’re selling it, and that’s trafficking enough for him. And also for three (count ‘em, three) other Tax Court cases I’ve blogged, Martin Olive, Canna Care and PMAC.

“Our precedent is unambiguous.  Congress, rather than this Court, is the proper body to redress petitioner’s grievances.  We are constrained by the law, and Congress has not carved out an exception in section 280E for businesses that operate lawfully under State law.  Until then, petitioner is not entitled to deduct expenses incurred in the operation of its drug-related business.” 153 T. C. 4, at p. 16.

Judges Thornton, Marvel, Paris, Kerrigan, Buch, Lauber, Nega, Pugh, and Ashford agree.

Well, maybe not so unambiguous, because there are 33 (count ‘em, 33) pages of concurrences and dissents.

Judge Patrick J (“Scholar Pat”) Urda sits this dance out.

Judge Albert G (“Scholar Al”) Lauber concurs to man’splain to Judge Elizabeth A. (“Tex”) Copeland that Section 280E deterrence to pottery isn’t a penalty. There’s lots of deterrents in 26USC. Here’s a couple: “Sections 4911 and 4912, for example, impose excise taxes on improper expenditures by public charities.  Section 4941 imposes an excise tax on self-dealing by private foundations.  Sections 6671 through 6720 impose assessable penalties for such activities as promoting abusive tax shelters (sec. 6700), aiding and abetting understatements of tax (sec. 6701), failing to furnish information about reportable transactions (sec. 6707), and furnishing fraudulent statements to various parties (secs. 6690, 6720).  And section 6663(a) imposes a civil fraud penalty equal to 75% of an underpayment of tax due to fraud.  These penalties can be extremely large relative to the conduct meant to be deterred.  See, e.g., sec. 4941(b)(1) (imposing tax equal to 200% of amount involved); sec. 6700(a) (imposing penalty equal to $1,000 per occurrence or 100% of gross income derived from activity); sec. 6707(b) (imposing penalty of $200,000 or up to 75% of gross income derived from activity).” 153 T. C. 4, at p. 18. Nobody ever said any of these fell foul of the Eighth Amendment. Judges Goeke, ex-Ch J L Paige (“Iron Fist’) Marvel, and Judge Ashford agree.

But Taishoff says none of the misdeeds cited by Judge Scholar Al is expressly permitted by State law, and they all directly impact the integrity of the Federal fisc, Judge. Pot sales don’t.

Judge Morrison, backed up by Ch J Maurice B (“Mighty Mo”) Foley, concurs as to result, but doesn’t care if the Eighth Amendment applies to corporations, nor whether Section 280E is a fine, because even if it were, it isn’t excessive as to the NoCals. Therefore, they’re cool with summary J.

Judge Elizabeth A. (“Tex”) Copeland says substance over form. This is a fine because it’s punitive. It doesn’t matter what you call it. It’s overbroad, a sweeping denial, attacking every deduction, and expressly enacted to stifle the drug trade. It hasn’t anything to do with revenue-raising. And whether the Eighth Amendment applies to corporations is nothing to the point. Judges Gustafson and Gale agree.

David Gustafson, going for The Great Dissenter title that Judge Mark V Holmes (inexplicably absent from this throwdown) seems to be vacating, agrees that the NoCals didn’t show the pate-whanging they got was “excessive.”

But the Sixteenth Amendment doesn’t create a free-fire zone for Congress to blast whatever activity it doesn’t like. There’s still the Fifth Amendment, and the First. And definitely the Eighth.

Section 280E taxes more than income; while COGS and Section 481 slide under the tag, wiping out the 160s goes to the bottom line. Remember, taxable income equals accretion to wealth; if those deductions  are wiped out, the NoCals and their fellow potters are being taxed on more than the accretion to wealth.

The prohibition on excessive fines goes back to the English Bill of Rights of 1689, when they swapped Jamie Two for Dutch Billy. It’s there to prevent excessive punishment for an illegal act. That’s what this is, no matter what gloss you put on it. Protection against governmental piling-on is a basic right of a free people.

And prior appellate learning is wide of the mark: they never did a proper Eighth Amendment analysis.

“I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than a taxpayer’s ‘income’ within the meaning of the Sixteenth Amendment.  Accordingly, I would hold that the Sixteenth Amendment does not permit Congress to impose such a tax and that section 280E is therefore unconstitutional.” 153 T. C. 4, at p. 33. Judges Gale and Copeland are on board with this.

Remember, before you toss this as a dissent, it was Judge Gustafson’s dissent in Graev that triggered the famous Section 6751(b) Boss Hoss kerfuffle and silt-stir that has resounded down the corridors of time.

I hope the NoCals have enough money left to appeal. I’d love to see what the Supremes do with this.

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