The Tax War Against Medical Marijuana

Think what you may about medical marijuana (legal in about 17 states), there is a certainty for federal income tax purposes: Marijuana is a Class I narcotic so deducting expenses on a tax return for a marijuana dispensary is a violation of Section 280E of the Tax Code. This poses obvious difficulties for operators of dispensaries. And the federal government has targeted California dispensaries on two fronts: the IRS and landlords.

I’ve reported on this issue before. In early 2011, I noted it would take a while for the cases to get to the Tax Court. In Janet Novack’s excellent summary of the situation, Ms. Novack notes that two dispensaries have filed Tax Court cases. They’ll likely be heard late this year, with decisions coming in 2013.

The problem for the dispensaries is that the law is very clear here, and the IRS is likely correct in assessing the tax. It doesn’t matter that medical marijuana is legal in California–federal tax law is black and white on this issue. While I expect the probable losses in Tax Court to be appealed to the 9th Circuit Court of Appeals, the dispensaries appear to me to be in a losing battle.


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