In Uncategorized on 05/04/2020 at 16:22

Richmond Patients Group, 2020 T. C. Memo. 52, filed 5/4/20, is, once again, the story of a pottery trying to dodge the Section 280E traffic.

And, once again, COGS are on the menu. Section 280E, as I have exhaustively (and exhaustingly) blogged, bans Section 162 ordinaries-and-necessaries for potteries. But COGS (Costs Of Goods Sold) aren’t deductions, rather adjustments to gross receipts to establish gross income. Potteries sell pot, so keep inventory, hence can use COGS to offset gross receipts.

RPG is taxed as a C Corp. Getting their Section 162s decimated in Year One, they try a change in accounting method to try capitalizing via Section 263A what they can’t deduct via Section 162. Judge Kerrigan isn’t having any.

“Section 263A includes in COGS only expenses that are otherwise deductible. Sec. 263A(a)(2). Section 280E prohibits taxpayers from taking business deductions under section 162. Therefore, section 263A does not allow Richmond to capitalize indirect costs into COGS that it would not otherwise be able to deduct.” 2020 T. C. Memo. 52, at p. 15.

So overboard go deductions for “rents, compensation of officers, salaries and wages, repairs and maintenance, taxes and licenses, charitable contributions, depreciation, pension and profit sharing plans, employee benefit programs, and other expenses.” 2020 T. C. Memo. 52, at p. 14.

But IRS does give RPG testing and packaging in COGS, 2020 T. C. Memo. 52, at p. 11.

RPG wants to claim it’s a producer, and so get Section 471 indirect costs into their COGS.

Judge Kerrigan tells them they’re smoking…you know the rest.

“…Richmond did not provide live plants, clones, or seeds to its members. Richmond was under no obligation to purchase what its member providers offered for sale. Rather, it purchased bulk marijuana grown by its members for resale. Member providers trimmed the marijuana flowers before Richmond purchased them. No improvements were made to the marijuana from the time it was purchased to the time it was sold. Richmond inspected, sent out for testing, trimmed, dried and maintained the stock, and packaged and labeled marijuana. These activities are those of a reseller and not a producer.” Order, at p. 16. (Citation omitted).

As RPG is taxed as a C Corp, no need for Boss Hossery (that’s for individuals), and RPG didn’t raise it anyway. Besides, IRS had a Section 6751(b) sign-off dated the same day as the thirty-day letter.


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