More on Marijuana Taxation: Beck v. Commissioner & Accounting for Excise Tax Paid – CCM 201531016
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More on Marijuana Taxation: Beck v. Commissioner & Accounting for Excise Tax Paid – CCM 201531016

Business Entity Selection and the Tax Consequences of Converting

More on Marijuana Taxation: Beck v. Commissioner & Accounting for Excise Tax Paid – CCM 201531016

UGH! I vowed to stop writing about the tax implications of marijuana cultivation and distribution.

The catholic guilt of a dysfunctional adolescence must be burning deep today as resisting the urge to come back for yet another round of punishment is futile. So here goes … Please be easy on me this time.

I have two semi related points to pontificate and two relatively new developments to share.

First, the industry changed a LOT in 10 years and is bound to change even more so in the next 5.

Back in the day when it was edgy to represent dispensary owners, a select group of elite practitioners committed to defending the rights of a few remarkable industry pioneers spent countless hours debating all the nuanced tax issues arising out of pedaling for profit Mother Nature’s unadulterated gift to us. 2009 and 2010 in particular were extraordinary years, especially for those who prevailed when called out by the IRS OPR.

These days the industry attracts reprobates; those fringe extremes of society that tend to coalesce and leave a residue, much like pork fat as it cools. I can’t help but chuckle every time I see advertisements by people selling all sorts of crap into this industry. When it comes to taxes and marijuana 3 points seem to resonate:

  1. As the industry continues to mature more and more people will make claims to have a developed prowess in the nuanced tax ramifications of proper reporting etc, best beware.
  2. More so than ever you need to know who to trust when engaging someone for hire including exactly how valuable their particular goods or services might be relative to your particular mission.
  3. Investing your own time grasping the fundamental arguments inherent to IRC 280E will be paramount to your ongoing viability AND understanding this aspect of the code need not cost you too terribly much $$.

Second, the elegance of IRC 280E is its simplicity.

IRC 280E states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted”

One of the beauties of this section of the code is that if – for argument sake – our federally elected officials happen to align and amend ONE WORD in IRC 280E, from ‘or’ to ‘and’ so that the last sentence would read “… AND the law of any State in which such trade or business is conducted” – the implications of the tax argument shift to being that of a “state’s rights” issue, subsequently calling into question federal authority over mother natures’s gift.

Taken together these two points IMHO reinforce the remarkable fragility of both the marijuana industry itself as well as those incidental industries for goods and services. Continue to lightly tread as it all could change quite literally over night.

With that here are two brief updates to absorb:

  1. In Beck v. Commissioner, (T.C. Memo 2015-149) the taxpayer, Mr. Beck, a dispensary owner represented himself regarding a $1,040,000 deficiency plus a $210,000 accuracy-related penalty. How many different ways can you say DUMB ASS? The court ruled in part that Mr. Beck was not entitled to a IRC 165 loss deduction for $600,000 of items seized in a DEA raid. So if you are raided, any losses incurred are for the foreseeable future not deductible. DON’T GET RAIDED!  Follow the local law to keep the DEA at bay.
  2. This Chief Counsel Memorandum addresses how a State of Washington marijuana excise tax properly accounts for the expenditure for federal income tax purposes. It is very basic. If you paid the State of Washington marijuana excise tax you should treat the expenditure as a reduction in the amount realized on the sale of the marijuana. Undoubtedly until a substantial authority supersedes this should apply in Colorado and any other state that fully legalizes marijuana as well.


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