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Law School Case Brief

Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner - 128 T.C. 173 (2007)

Rule:

26 U.S.C.S. § 280E has the following effect: All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill.

Facts:

Petitioner provided counseling and other caregiving services (collectively, caregiving services) to its members, who were individuals with debilitating diseases. Petitioner also provided its members with medical marijuana pursuant to the California Compassionate Use Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5.  Petitioner charged its members a membership fee that generally reimbursed Petitioner for its costs of the caregiving services and its costs of the medical marijuana. Respondent IRS determined that all of Petitioner's expenses were nondeductible under sec. 280E, I.R.C., because the expenses were incurred in connection with the trafficking of a controlled substance.

Issue:

Did section 280E preclude petitioner from deducting the ordinary and necessary expenses attributable to its provision of medical marijuana pursuant to the California Compassionate Use Act of 1996?

Answer:

Yes.

Conclusion:

The Court denied the deductions based on sales of medical marijuana. The Court recognized Congress’s sharply defined public policy against dealing illegal drugs, even if State law permitted their possession. However, since the petitioner was regularly and extensively involved in the provision of caregiving services, and those services were substantially different from petitioner's provision of medical marijuana, expenses relating to care giving were properly deductible under 26 U.S.C.S. § 162(a).

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