280e Is Back – Harborside File Reply Suit To IRS

It;’s a 35 page document.

Here’s their introduction.

It all goes back to the court in the New Year and we imagine it’ll be ding dong battle for sometime to come yet.

THE INTRODUCTION

The Sixteenth Amendment permits Congress to directly tax income, but only after the taxpayer subtracts certain expenses so the taxable amount reflects the taxpayer’s “gain.” For businesses in most industries, that calculation is uncontroversial because the Internal Revenue Code and the Commissioner appropriately permit companies to assess and subtract their “cost of goods sold,” or “COGS,” when determining income. The Sixteenth Amendment and the Internal Revenue Code thus typically work in harmony.
When it comes to cannabis dispensaries, however, the Commissioner applies a narrow and rigid definition of COGS that excludes expenses necessary for production. He does so because expenses that do not qualify as COGS are typically handled as deductions from taxable income, but I.R.C. § 280E purports to make cannabis dispensaries ineligible for such deductions because federal law (disregarding the practical reality of how the industry lawfully operates) considers such businesses traffickers in illegal drugs. By dictating a narrow conception of COGS—excluding, for example, costs associated with acquiring or testing the raw cannabis—the

1 Case: 19-73078, 11/30/2020, ID: 11909739, DktEntry: 54, Page 8 of 35

Commissioner and the Tax Court artificially inflate Harborside’s taxable income in a manner that Harborside cannot then reduce through deductions.

Clever, but unconstitutional. Curtailing COGS in that manner, without the ability to later deduct those expenses from taxable income, causes Harborside’s taxable income to diverge from any legal, historical, or commonsense idea of “gain.” In some cases, such as 2007 for Harborside, it forces companies operating at a loss—without income—to nonetheless pay substantial income taxes.

The Commissioner cannot have it both ways: if he is correct that Harborside is ineligible for the COGS it assessed here, then I.R.C.§ 280E violates the Sixteenth Amendment. Harborside’s determination of COGS clearly reflects income and comports with well-established statutory and regulatory standards for tax inventory accounting. The Commissioner does not truly contend otherwise, pointing to no instance where Harborside used improper accounting methods or miscalculated its actual income. Foisting on Harborside a new method of accounting thus both overstepped the Constitution and misconstrued tax law.

2Case: 19-73078, 11/30/2020, ID: 11909739, DktEntry: 54, Page 9 of 35

This Court should either invalidate Section 280E of the Internal Revenue Code as unconstitutional or remand for the Tax Court to reassess Harborside’s COGS.

THE FULL DOCUMENT

Harborside-reply-brief-113020

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