No “Trafficking” Allowed

So you say you operate a medical marijuana “dispensary,” and pursuant to the California Compassionate Use Act of 1996 (how cuddly), you sell the stuff to folks in need of this sort of “medical treatment.”

You may very well be in a legit business, but forget trying to get this past the Revenooers, who are likely to disallow your business deductions and credits, citing Internal Revenue Code Section 280E, “Expenditures in connection with the illegal sale of drugs.”  Notwithstanding the fact that some 17 states and the District of Columbia have legalized medical marijuana!

Taxpayer Olive found this out the hard way, and a recent decision of the Tax Court upheld the IRS in the matter.  Seems that Mr. Olive operated the Vapor Room Herbal Center (yep – that’s the name of his business), a sole proprietorship whose principal business was the retail sale of medical marijuana.  And despite Olive’s contention that he was entitled to deduct his business expenses, because his business did not consist of illegal trafficking in a controlled substance, the Court came to a different conclusion, namely that “trafficking” is precisely what was going on here.  The Court concluded that Code Section 280E indeed does preclude a taxpayer from deducting expenses incurred in a medical marijuana dispensary business even if the business is legal under State law!

So there went all those deductions – “up in smoke” as it were.

And speaking of tax dodgers, if you’re a federal employee and have been shirking your federal tax obligations, look out for Rep. Jason Chaffetz (R-Utah), whose recent “Federal Employee Tax Accountability Act” passed the House overwhelmingly, and if passed by the Senate (Don’t hold your breath – do they pass anything any more?), would make anybody who works for Uncle Sam and who may be “seriously delinquent” in paying up, ineligible for further federal employment.

“Employees who consciously ignore the channels and processes in place to fulfill their tax obligations must be held accountable,” quoth Chaffetz.  “In short, if you refuse to pay your federal taxes, you should be fired.”

Seems IRS, itself, recently reported that about 3% of the federal civilian and Postal Service work force owed something like $1 billion to the Revenooers for 2010!  And this clan includes 684 congressional staff members who owed more than $10 million themselves!

Sounds like a measure which might be right up Harry Reid’s alley, don’t you think?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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