## Facts

- Californians Helping to Alleviate Medical Problems, Inc. (CHAMP) was a California nonprofit public benefit corporation formed in 1996.
- CHAMP operated a community center serving members with serious illnesses (including AIDS, cancer, and multiple sclerosis).
- CHAMP provided extensive non-marijuana caregiving services, including counseling, support groups, wellness classes, and distribution of food and hygiene products.
- CHAMP also provided medical marijuana to qualified members under California’s Compassionate Use Act and gave instruction on its use.
- Members were required to present a physician’s recommendation and valid identification; members were prohibited from reselling or redistributing marijuana.
- CHAMP charged membership fees intended to reimburse its costs for both caregiving services and medical marijuana.
- On its 2002 federal return, CHAMP deducted expenses associated with both its caregiving operations and its medical-marijuana activity.
- The Commissioner determined a deficiency of $355,056 and asserted a § 6662(a) accuracy-related penalty of $71,011, later conceding the penalty.
- The Commissioner disallowed CHAMP’s claimed deductions under I.R.C. § 280E on the theory that the organization’s activities constituted a trade or business of trafficking in a controlled substance.

## Issues

1. Whether I.R.C. § 280E disallows CHAMP’s ordinary and necessary expenses attributable to providing medical marijuana.
2. Whether I.R.C. § 280E also disallows CHAMP’s ordinary and necessary expenses attributable to its counseling and other caregiving services.
3. Whether CHAMP’s caregiving services and its medical-marijuana activity constituted separate trades or businesses permitting allocation of expenses.

## Decision

- The Tax Court held that § 280E barred deductions for expenses attributable to CHAMP’s provision of medical marijuana.
- The court held that CHAMP conducted two separate trades or businesses: (1) caregiving services and (2) provision of medical marijuana.
- Because the caregiving services were a separate trade or business not consisting of controlled-substance trafficking, § 280E did not bar deductions for expenses properly attributable to caregiving.
- The court permitted allocation of shared costs (including overhead) between the two trades or businesses, allowing deductions for the caregiving portion.
- The § 6662(a) accuracy-related penalty was not imposed because it was conceded by the Commissioner.

## Legal Principles

- I.R.C. § 280E disallows deductions or credits for amounts paid or incurred in carrying on a trade or business that consists of trafficking in a controlled substance prohibited by federal law, including marijuana.
- State authorization of medical marijuana does not prevent federal application of § 280E to expenses attributable to marijuana distribution.
- A taxpayer may operate more than one trade or business; § 280E applies only to the trade or business (or activities comprising it) that involves controlled-substance trafficking.
- When separate trades or businesses exist, ordinary and necessary expenses under § 162 remain deductible to the extent they are attributable to the non-trafficking trade or business, subject to reasonable allocation and substantiation.

## Conclusion

The Tax Court applied § 280E to deny deductions connected to CHAMP’s medical-marijuana activity but allowed § 162 deductions for expenses allocable to CHAMP’s separate, substantial caregiving business, permitting allocation of shared costs between the two lines of activity.


Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r, 128 T.C. 173 (2007)