The Tax Court yesterday held that § 280E prevents a California nonprofit company from deducting the expenses associated with the costs of providing medical marijuana to patients with debilitating diseases because such activities constitute "trafficking in controlled substances" within the meaning of the statute. (47% of the patients have AIDS; the remainder have cancer, multiple sclerosis, and other serious illnesses.) However, the court permitted the taxpayer to deduct other expenses associated with its counseling and caregiver services because those activities constituted a separate trade or business within the meaning of § 280E. Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner, 128 T.C. No. 4 (5/15/07). For more, see below the fold.
Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. They do not express an intent to deny the deduction of all of a taxpayer’s business expenses simply because the taxpayer was involved in trafficking in a controlled substance. We hold that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner also is involved in the trafficking in a controlled substance.
Petitioner argues that its supplying of medical marijuana to its members was not “trafficking” within the meaning of section 280E. We disagree. We define and apply the gerund “trafficking” by reference to the verb “traffic”, which as relevant herein denotes “to engage in commercial activity: buy and sell regularly”. Webster’s Third New International Dictionary 2423 (2002). Petitioner’s supplying of medical marijuana to its members is within that definition in that petitioner regularly bought and sold the marijuana, such sales occurring when petitioner distributed the medical marijuana to its members in exchange for part of their membership fees.
For additional commentary on the case, see
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Russ Fox, Partially Up In Smoke
