Ninth Circuit Declines to Hear Constitutional Objections to Section 280E (April 23, 2021)

23 Apr 2021 | News

Ninth Circuit Declines to Hear Constitutional Objections to Section 280E (April 23, 2021)

Ninth Circuit Declines to Hear Constitutional Objections to Section 280E (April 23, 2021)

23 Apr 2021 | News

Ninth Circuit Declines to Hear Constitutional Objections to Section 280E (April 23, 2021)

April 23, 2021

To our Clients and Friends:

Ninth Circuit Declines to Hear Constitutional Objections to Section 280E

Last month we reported the U.S. Supreme Court was considering taking up an appeal from the 10th Circuit in a matter involving section 280E of the Internal Revenue Code, the provision of federal tax law that prohibits a marijuana business (or any taxpayer engaged in “trafficking” a controlled substance) from deducting from gross income its operating expenses. The high Court was set to make its decision whether to hear the case on March 19; it has since rescheduled the conference a number of times, however, with still no outcome. That case, Standing Akimbo, LLC, et al., Petitioners v. United States, can be found on the Court’s docket here.

Meanwhile another 280E case has been making its way through the courts. That matter, entitled Patients Mutual Assistance Collective Corporation, DBA Harborside Health Center, v. Commissioner, is a U.S. Tax Court case which upheld the Internal Revenue Service’s denial of a California medical marijuana dispensary’s claimed deductions for expenditures incurred in its operations. The Tax Court in that matter concluded that the Service did not err in denying those deductions pursuant to Section 280E. It also concluded that there was no error in the Service’s determination that Treas. Reg. § 1.471-3(b) should apply to the taxpayer and that, accordingly, the taxpayer should account for its cost of goods sold as would any other retailer, i.e., by including in COGS essentially only the actual purchase price of the products it sells. Its other operating expenses—rents, employee salaries, etc.—could not be included in that calculation and thus could not result in decreased taxable income.

Harborside appealed that Tax Court decision to the Ninth Circuit, arguing (as the taxpayer is arguing in the Standing Akimbo case) that Section 280E violates the Sixteenth Amendment by subjecting more than just its “incomes” (to use the word in the Amendment) to taxation. The taxpayer further argued that it should be considered a “producer,” not a purchaser and reseller, for purposes of the 471 Regulations and that in any case the Service erred in not allowing the taxpayer to include more of its expenditures in its costs of goods sold. In a published decision on April 22, the Ninth Circuit rejected all three of these arguments. Both the constitutional challenge to Section 280E and calculation of COGS argument the appellate court declined even to consider as it concluded that these arguments had not been made to the Tax Court below. As for whether Harborside was a producer or a retailer, the panel simply determined that the Tax Court’s upholding the Service’s determination that Harborside was a retailer was not in error.

A disappointment for Harborside, to be sure, but not a decision as to the constitutionality of Section 280E. Going forward, though, it may not matter for much longer as Congress continues to consider moving marijuana from Schedule I to Schedule III. Doing so would make Section 280E inapplicable to businesses like Harborside and Standing Akimbo and render most of these controversies moot. We expect there to be developments on that question in coming months.

For further information or any questions on this case and Section 280E, please contact Robert Morrow (, Head of CMX’s Tax Practice Group or Marvin Miller (, Head of CMX’s Cannabinoids and Psychotherapeutics Practice Group.


Crath Miller & Xistris LLP

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