Circuit Court Agrees With Tax Court and Disallows All Expenses Other Than Sales Costs for Pot Facility.

The plaintiff is a medical marijuana facility operating in a state where such activity is legal.  It sold medical marijuana and provided vaporizers, food and drink, yoga, games, movies and counseling at no cost to patrons.  I.R.C. Sec. 280E disallows a deduction for amounts incurred by a business that traffics in a controlled substance.  The Tax Court noted that marijuana is a controlled substance and held that it was irrelevant that 15 states had legalized marijuana sales for medical purposes. Accordingly,  the Tax Court denied 100 percent of the petitioner's deductions associated with operating the vapor room were not deductible business expenses.  The Tax Court held that the petitioner failed to adequately substantiate revenue (and was not entitled to keep less formal documentation because the business is primarily a cash business) and must include all revenue in income that was reflected on its business ledgers (which exceeded the amount on the return).   The Tax Court did allow the petitioner to deduct it cost of goods sold (COOGS) as estimated by the court pursuant to the Cohan Rule, with a reduction of COGS by the amount of products given away. No operating expenses were deductible.  On appeal, the court affirmed.  The appellate court determined that the petitioner's business activity solely consisted of selling medical marijuana.  The other activities were not conducted for-profit.  As such, the petitioner's only business activity involved trafficking in a controlled substance, the I.R.C. Sec. 162 expenses for which were disallowed under I.R.C. Sec. 280E.  The court viewed it as immaterial that medical marijuana facilities did not exist at the time I.R.C. Sec. 280E was enacted.     Olive v. Comr., No. 13,-70510, 2015 U.S. App. LEXIS 11812 (9th Cir. Jul. 9, 2015), aff'g., 139 T.C. No. 2 (2012).