The U.S. Tax Court issued a Memorandum Opinion in the Alterman and Gibson case this past week. The decision is important to Marijuana dispensaries and potential investor as it lays the foundation for the record keeping requirements of dispensaries in order for them to comply with the provisions of IRC§280E. IRC§280E limits the ability of dispensaries to deduction expenses to only those which are properly categorized as “Costs of Goods Sold” all other “ordinary and necessary” are not deductible. The issue in the Alterman case was whether expense related to the sale of marijuana merchandise were deductible as “ordinary and necessary business expenses or disallowed. The court held that the Alterman’s had failed to establish that the sale of marijuana and the sale of marijuana merchandise were separate businesses and therefore the IRC§280E exclusion applied to the entire business not just the marijuana dispensary.
Alterman is a record keeping case pure and simple. The books and records of the dispensary were incomplete and failed to support a separate merchandise business. The claim of a separate business derives from the CHAMP case where the dispensary also offered a separate counseling service. The counseling service was found to be a separate and distinct service and was therefore not subject to IRC§280E. But in the Alterman case the Tax Court held that the dispensary business and the merchandise business were a “unitary activity”. The ultimate take away from a lengthy Tax Court opinion is that in order to claim an exemption from IRC §280E there really need to be separate businesses not just separate components of the same business.
The taxpayer’s in Alterman were not able to meet their burden of proof and therefore Decision was entered in favor of the IRS along with Negligence penalties. The attack on IRC§280E will not be successful by trying to carve up a dispensary into discrete business units, this is a legislative problem.
