280E MJ Tax Technicality, Lawyering, and Risks

A draft sent from me to scholarly private marijuana tax attorney Kat Allen (Tax L.L.M. from NYU) is followed by her response.

My draft:

At a webinar put on by MJbizdaily last week, two contrasting styles of tax lawyering were on display.  Some say section 471(c) lets taxpayers reduce their tax bill under the section 280E Selling Expense Tax; some say it doesn’t.  I don’t know the merits of the 471(c) issue, and hope not to study them.

Nick Richards urged a position contrary to that of the IRS stated position on section 471(c).  That might pay off in a couple of cases.  First, if you win the lottery audit lottery and don’t get audited, you pay less tax.  Second, maybe the IRS agent gives you some fraction of the aggressive claim you made just to get rid of you.  Fighting the IRS may appeal to the rebellious spirit of some in the marijuana community.

The other style, attributed to Kat Allen by Henry Wykowski, was to accept the IRS position on section 471(c).  That approach might pay off if the Service figures you are eager to comply, so that you don’t warrant further scrutiny.  The only time I’ve been audited personally was several years back, and I ended up getting a refund.  I have a hunch I won’t be audited again.  

Kat Allen’s response:

The promulgation of the regulations can’t really be overstated, such that the two positions are on very unequal footing. With the exception of the audit lottery, the second paragraph would be more appropriate prior to summer 2020, but not anymore. So, it’s kind of misleading to frame it this way. As to the audit lottery, I’d point out the extremely high audit rates of the industry: audits are practically guaranteed and reinforced by the enforcement programs of the IRS over the last decade. In this industry, it’s more like buying a lottery ticket where you not only will probably lose, you’ll end up having to pay more money than if you just didn’t gamble.

Proponents of 471(c)/280E also never really clarify what exactly they’re doing; are they entirely circumventing 280E or are they just trying to capitalize indirect costs like via UNICAP (s. 263A) without the flush language of 263A(a)? I’ve never seen someone explain this and remain baffled; it’s always just an argument of whether or not it could be done. Still, if the position is an entire circumvention of 280E, that position is unreasonable and will only harm the business.

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If others studying this issue want to send in reactions, I’ll probably post them.

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