Authored By:  Jordan Zoot

We welcome Jordan to Cannabis Law Report. as well as writing detailed pieces about tax and accountancy issues relating to law in the cannabis sector Jordan has a incisive knowledge about how the cannabis sector operates and writes wickedly funny articles on his blog . We’re looking forward to publishing his work regularly.

Jordan is the principal of The Cannabis Practice Group [“CPG”] of aBIZinaBOX Inc.

The CPG has professionals in Evanston, IL, and Oakland, CA. The practice is led by Jordan S. Zoot, CPA, Managing Director – CEO, who has been in professional practice since 1982. See their capabilities reel at.

Read his full biography below the article.


On June 13, 2018, the United States Tax Court published its Opinion in Alterman & Gibson v. Commissioner, T.C. Memo 2018-83. Alterman involved income tax deficiencies and penalties asserted by the IRS for 2010 and 2011 against individual taxpayers who owned and operated a small Colorado cannabis dispensary. The individual taxpayers had filed joint returns for 2010 and 2011 in which they reported the income from their cannabis dispensary.

The amount of the income tax deficiencies and penalties asserted by the IRS against the taxpayers (2010: Tax $157,821, Penalty, $31,564; 2011: Tax $233,421, Penalty, 46,684) undoubtedly represented substantial liabilities to the individuals. These deficiencies, however, are modest for a case involving a cannabis dispensary. These deficiencies are also modest for a case that proceeds to trial before the Tax Court with such a limited likelihood of success.

The decision in Alterman was published as a memorandum decision. A Tax Court Opinion is published as a memorandum opinion when the Tax Court considers the case solely involves the application of well-established principles of federal tax law to situations that are not unusual. Anyone interested in the taxation of the cannabis industry should read the Alterman opinion for that very reason. The Alterman opinion describes how a dispensary should not be operated. The taxpayers did a poor job or maintaining financial and inventory records. Their accountant did not provide the detailed workpapers that are a requirement to support the amounts reported in the tax return. There was no evidence that the taxpayers maintained proper inventory records to support amount recorded as Cost of Goods Sold. The taxpayers in Alterman lost on every issue except for those issues the IRS conceded before the commencement of the trial.

The decision against the taxpayers in Alterman is primarily the result of failure to comply with the basic recordkeeping requirements of the Regulations and IRS guidelines. The case primarily involves recordkeeping, compliance with reporting requirements, and the maintenance of a comprehensive system of internal accounting controls. Taxpayers are expected to maintain proper records, and tax return preparers, particularly Circular 230 practitioners, are held to a higher standard than taxpayers are.

Tax professionals should be particularly careful to correct deficiencies identified as part of the annual tax return preparation process. A failure to take corrective action lays the foundation for the Internal Revenue Service to assert the existence of pattern of repeated and potentially reckless and intentional disregard of the regulations and requirements. Such a pattern can result in the assertion of the “second tier” enhanced penalty under IRC Sec. 6694(b)(2). Such a penalty assertion could result in an additional sanction through a practitioner disciplinary referral to the Office of Professional Responsibility [“OPR”].

The issues where the taxpayers did not prevail go beyond IRC 280E. The taxpayers inAlterman lost principally because they failed to create and maintain the types of books of account, records and another documentary evidence required that is required of taxpayers. The deficiencies in Alterman could have been significantly reduced if the taxpayers had prepared, maintained and presented to the Court adequate financial records and supporting documentation.

The statute, regulations and IRS policy provide basis for the abatement of all of the asserted delinquency penalties under IRC§ 6651(a) and the accuracy related substantial understatementpenalty contained in IRC Sec. 6662. The delinquency penalties for failure to file returns and failure to pay tax as well as the accuracy related penalty do not apply if the taxpayer’s failure to comply is due to reasonable cause and not to willful neglect1. Reasonable cause means that the taxpayer exercised ordinary care and prudence2. It is clear from the Opinion that the Court did not believe the taxpayers’ actions met the burden that is imposed on taxpayers to demonstrate the existence of reasonable cause at the time of the failure to file, of the failure to pay, or of the disregard of the rules which caused the accuracy related penalty to apply.

The Internal Revenue Manual defines reasonable cause as conduct which, when judged separately based on the facts and circumstances at hand, justifies the non-assertion or abatement of applicable penalties against taxpayers who have exercised ordinary business care and prudence in addressing their tax filing, payment and record keeping responsibilities3.

Further, courts have held that “reasonable cause exists where:

  • A taxpayer relies on the advice of counsel that a tax return is not required to be filed4.

  • A taxpayer’s good faith belief that no return is due may constitute reasonable cause for late filing5.

  • A taxpayer’s reliance upon on the advice of a competent tax advisor6. The taxpayer must have received incorrect advice after contacting a tax advisor who is competent on the specific tax matter and who is furnished all necessary and relevant information.

  • In addition, the taxpayer must have exercised ordinary business care and prudence in determining whether to obtain additional advice based on the taxpayer’s own information and knowledge.

The “reasonable care” requirement in connection with the execution of recordkeeping and maintenance of records relating to the operation of a business can provide a foundation for a waiver by the IRS of the assertion of the twenty percent substantial understatement penalty.

1 IRC §6651(a)(1)

2 Rags. §301.6651-1(c); U.S. v. Boyle, 469 U.S. 241 (1985)

3 IRM (8-20-98)

4 See U.S. v. Boyle, 469 U.S. 241 (1985); Paxton Est. v. Comr., 86 T.C. 785 (1986).

5 See, e.g., LFAM Corp. v. U.S., 99-1 USTC ¶50,223 (Fed. Cl. 1999); Diaz v. U.S., 90-1 USTC ¶50,209 (C.D. Cal. 1990) (Good faith belief that employees were independent contractors is reasonable cause for failure to file employment tax returns).

6 U.S. v. Boyle, 469 U.S. 241 (1985). See also Henry v. Comr., 170 F.3d 1217 (9th Cir. 1999) (Reliance on accountant in treating option sale as capital gain instead of ordinary income held reasonable); IRM (8-20-98).


The bulk of the issues in the Alterman case involved IRC §280E either directly or indirectly.

We have previously written extensively on this topic.1 Alterman should be read by anyone contemplating engaging in commercial business within the cannabis industry.Alterman is a “poster child” example of what not to do. Alterman provides a punch list of actions to avoid. Diligence is required of a cannabis industry business in vetting professionals [e.g. attorneys, certified public accountants] as well as in securing appropriate advice relating to compliance, security, and inventory control. The selection of an advisor lacking in competence will exacerbate the problems for a cannabis business.

Alterman is likely significant for the cannabis industry for another reason. A dispensary case is pending before the Tax Court – Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center v. Commissioner (Docket Nos. 29212-11, 30851-12 and 14776-14) – that involves much larger income tax deficiencies than the deficiencies inAlterman.

Harborside had been fully briefed and pending decision for over a year when the Opinion in Alterman was filed. A decision in the consolidated Harborside cases appeared imminent. However, the IRS filed a motion to reopen the record in the Harborside cases on June 14, 2018 – the day after the Opinion in Alterman was filed. The IRS undoubtedly moved to reopen the record to address an over-sight relating to the IRS’ penalty assertions. A motion to reopen the record is required in some Tax Court cases as a consequence of the decision of the Tax Court in Graev v Commissioner, 149 T.C. No. 23 (December 20, 2017). The reopening of the record in the Harborside cases will delay for at least a couple of months the issuance of a decision.

The Opinion in Alterman is significant for the cannabis industry for another reason. Judge Richard T. Morrison’s analysis in Alterman is likely to portend the analysis the Tax Court will apply in the consolidated Harborside cases. We are hopeful the accounting and inventory records in the Harborside cases will create a substantially stronger evidentiary record. Strong internal accounting controls, proper recordkeeping and diligence are critical create a foundation to minimize the impact of IRC §280E on a cannabis dispensary.

Taxpayers will continue to lose in proceedings in the Tax Court unless they have prepared and maintained complete and accurate financial records. The creation and maintenance of complete and accurate financial records for a cannabis dispensary requires the guidance of qualified professionals as well as adherence to the recordkeeping guidance they provide.

1 A Methodology for Cost and Expense Allocations for IRC Sec. 280E – in particular, Footnotes 9, 10, 11 and 12 contain an extensive elucidation of IRS requirements with respect to internal accounting controls over cash, IRS requirements for reporting certain cash transactions, the purpose, use, and type of accounting records which must be maintained, and record retention requirements.



The Cannabis Practice Group [“CPG”] of aBIZinaBOX Inc.

300 Frank Ogawa Plaza, Suite 370

Oakland, CA 94612

Phone: 1-510-761-9977


Jordan Zoot is licensed as a CPA in CA, FL, IL, NY, and TX. He has a national reputation of technical and transactional taxation of pass-thru entities [Partnerships, LLC’s and S Corporations], private equity and alternative asset funds primarily in distressed mortgages and assets, professional services, real estate, venture-funded tech start-ups, and the commercial cannabis industry in California.

Mr. Zoot has extensive experience in taxpayer and practitioner representation with the Examination, Appeals and Collection functions with IRS, including Special Procedures – Bankruptcy, Insolvency, Offer in Compromise, and Circular 230 Practitioner Representation with the Office of Professional Responsibility [“OPR”]

Mr. Zoot has a member of the AICPA, and state societies [CalCPA, FICPA, ICPAS, NYSSCPA, and TSCPA] for over thirty years. He has served an appointed member of AICPA’s Responsibilities in Tax Practice, Practice Management, and Subchapter K Technical Committees and as the CITP Champion for Illinois. He has had extensive involvement in the regulation commenting process with the US Treasury.

Mr. Zoot is engaged at numerous points of contact in a lead role with AICPA senior executives in the process of developing policy, advocacy and education for CPA’s serving the legal cannabis industry. He has been involved with OPR in connection with the cannabis industry, Title 31 [FinCEN] matters and the IRS’s OVDP Amnesty Program.

Mr. Zoot is engaged with CalCPA’s Government Liaison Office in connection with SWOT analysis, talking points for engagement with the legislature, the cannabis regulatory agencies, Bureau of Cannabis Control “BCC” [Retail, Retail-Delivery, Distribution – Packaging], California Dept. of Public Health “CDPH” [Manufacturing, Processing, Extraction], California Dept. of Food and Agriculture “CDFA” [Cultivation] and the California Dept. of Tax and Fee Administration [“CDTFA”] in connection with urgently need regulatory guidance for Cannabis Cultivation, Excise and Sales Taxes.

The firm is skilled in dealing with:

• The unique financial record-keeping needs of cultivators, distributors, processors, and extractors.

• The selection of optimal operating structures for each participant in the California cannabis industry.

• Adjusting structures and modifying financial record-keeping to comply with a rapidly evolving regulated California marketplace.

• Understanding of the challenges presented by a long history in this industry of “doing business in cash” and the associated problems.

• The practical needs related to banking, card processing, and anti-money laundering issues applicable to this industry.

• The complex processes relating to permitting, licensing as well as reporting and paying cannabis excise tax and gross receipts tax at the municipal and county level.

• Implementing effective strategies for addressing the onerous impact of the limitation on the deduction of ordinary and necessary business expenses imposed by Internal Revenue Code §280E on businesses engaged in “trafficking”.

A Leader in California’s Cannabis Practice, the CPG will retain its position as a leader in financial record-keeping and be reporting for California’s medical and recreational cannabis industry by constantly adjusting to the demands of this evolving industry.

The CPG moderates a California Cannabis Regulation subreddit at