Deductions disallowed medical-marijuana dispensary, section 280E not in violation of Eighth Amendment

Deductions disallowed medical-marijuana dispensary

The U.S. Tax Court today issued a “reviewed opinion” in a case in which the IRS applied section 280E to deny deductions claimed by the taxpayer, the operator of a medical-marijuana dispensary in California.


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The majority opinion, in denying the taxpayer’s motion for summary judgment, held that section 280E does not violate the “Excessive Fines Clause” of the Eighth Amendment:

  • Because section 280E does not impose a fine or penalty, but instead, simply disallows a deduction from gross income; and
  • Because income tax deductions do not turn on equitable considerations; rather they are “pure acts of legislative grace, the prudence of which is left to Congress.”

The case is: Northern California Small Business Assistants Inc. v. Commissioner, 153 T.C. No. 4 (October 23, 2019). Read the Tax Court’s 49-page opinion [PDF 188 KB] that includes concurring opinions and also opinions that concur in part and that dissent in part.


The taxpayer is a California corporation that operates a medical-marijuana dispensary legally under California law.

The IRS determined a deficiency of about $1.26 million and imposed an accuracy-related penalty of about $253,000 on a finding that the taxpayer was subject to the limitations of section 280E—the Code provision that disallows all deductions for a business that consists of trafficking in a controlled substance as defined by Schedule I or II of the Controlled Substances Act.

The taxpayer countered that section 280E imposes a gross receipts tax as a penalty in violation of the Eighth Amendment of the U.S. Constitution. Alternatively, the taxpayer asserted that even if section 280E is constitutional, it only bars ordinary and necessary business deductions under section 162 and does not apply to other distinct sections of the Code. Finally, the taxpayer claimed that it is not subject to section 280E because its business is legally operated under California law, and therefore does not consist of “trafficking” in a controlled substance. 

Tax Court’s opinion

The majority and concurring opinions concluded that section 280E is not a penalty provision and therefore does not violate the prohibition on excessive fines in the Eighth Amendment of the U.S. Constitution. As the majority opinion noted, the court disagreed with the taxpayer’s argument that the aim of section 280E is to punish, rather than tax, and therefore it is a penalty that must be limited by the Excessive Fines Clause of the Eighth Amendment.

The Tax Court further rejected the additional arguments put forward by the taxpayer in attacking section 280E, and held that section 280E is not limited to deductions claimed under section 162, but applies to bar all deductions claimed by the taxpayer.

The Tax Court concluded:

The broader statutory scheme also supports our conclusion that section 280E means what it says—no deductions under any section shall be allowed for businesses that traffic in a controlled substance.

* * *

We are constrained by the law, and Congress has not carved out an exception in section 280E for businesses that operate lawfully under State law. Until then, [the taxpayer] is not entitled to deduct expenses incurred in the operation of its drug-related business.

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