## Facts

- Northern California Small Business Assistants, Inc. (NCSBA) operated a medical-marijuana dispensary in California in compliance with state law.
- For tax year 2012, NCSBA reported income from dispensary operations and claimed business deductions and other deductions under multiple Internal Revenue Code provisions.
- The IRS issued a notice of deficiency determining a substantial income tax deficiency and an accuracy-related penalty under I.R.C. § 6662(a).
- The IRS disallowed NCSBA’s claimed deductions (other than cost of goods sold), relying on I.R.C. § 280E, which denies deductions and credits for a trade or business consisting of trafficking in Schedule I or II controlled substances.
- NCSBA petitioned the Tax Court and moved for partial summary judgment, arguing that § 280E (1) violates the Eighth Amendment, (2) reaches only § 162 deductions, and (3) does not apply to a business operating legally under state law.

## Issues

1. Whether I.R.C. § 280E is a punitive exaction that, as applied, violates the Eighth Amendment’s Excessive Fines Clause.
2. Whether § 280E disallows only deductions under I.R.C. § 162, or instead bars all otherwise allowable deductions and credits (other than cost of goods sold).
3. Whether § 280E applies to a marijuana business that is lawful under state law, given the statute’s use of the term “trafficking.”

## Decision

- The Tax Court denied NCSBA’s motion for partial summary judgment.
- The court held § 280E is not a penalty provision and therefore does not violate the Excessive Fines Clause.
- The court held § 280E’s text (“[n]o deduction or credit shall be allowed”) bars all deductions and credits, not merely those under § 162, except for cost of goods sold.
- The court held § 280E applies to state-lawful marijuana dispensaries because marijuana remains a Schedule I controlled substance under federal law and the business activity constitutes “trafficking” for § 280E purposes.

## Legal Principles

- Deductions are a matter of legislative grace; Congress may define taxable income by denying deductions for specified activities without thereby creating a “fine” under the Eighth Amendment.
- I.R.C. § 280E’s prohibition on “deduction or credit” applies broadly across the Code and is not confined to I.R.C. § 162.
- For § 280E, federal controlled-substance classification governs; state legality does not remove marijuana sales from the statutory concept of “trafficking.”
- A taxpayer engaged in selling marijuana may be limited to recovering cost of goods sold while being denied other deductions and credits.

## Conclusion

The Tax Court upheld the IRS’s application of I.R.C. § 280E to a state-lawful marijuana dispensary, rejecting an Excessive Fines challenge and holding that § 280E broadly disallows all deductions and credits (other than cost of goods sold) for businesses trafficking in marijuana under federal law.


N. Cal. Small Bus. Assistants, Inc. v. Comm’r, 153 T.C. 65 (2019)