Jason Marin: Californians Helping Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue

Californians Helping to Alleviate Med. Problems, Inc. v. Comm’r of Internal Revenue, 128 T.C. 173, 128 T.C. 14 (U.S.T.C. 2007)

Issue & Ruling

In 1981 a case was filed in tax court that gave rise to the Internal Revenue Code (I.R.C.) § 280E, which disallows expenses with operating a business or trade that traffics controlled substances listed in schedules I and II on the Controlled Substance Act (CSA). Controlled substances listed in Schedules I and II are drugs with no medical use and carry the potential for abuse. Marijuana is listed in Schedule I. Because of this listing,  companies that deal in Marijuana sales are subject to I.R.C. § 280E and cannot deduct operating expenses from federal income taxes. Often, companies establish multiple operating entities to allocate operating expenses between the entity that distributes Marijuana and the non-distributing entity. Companies may fall into tax problems when the entities have intercompany transactions and do not adequately distinguish the expenses and revenues between each operating entity.


One interesting case where the corporation successfully claimed some of the operating expenses is Californians Helping Alleviate Medical Problems, Inc. v. Commissioner of Internal Revenue, (CHAMP). CHAMP was organized on December 24, 1996. The articles of incorporation stated it “is organized and operated exclusively for charitable, educational and scientific purposes” and “The property of this corporation is irrevocably dedicated to charitable purposes.” Although CHAMP was one organization, it “operated with a dual purpose.” The first and primary purpose was to provide caregiving service to members who suffered from severe illnesses such as Acquired Immune Deficiency Syndrome (AIDS), cancer, multiple sclerosis. The second purpose was to provide the members with medical Marijuana under the California Compassionate Use Act.

Each member of CHAMP would pay a membership fee in exchange for the right to obtain caregiving services and medical Marijuana. CHAMP provided its caregiving services at the main facility, which was an office in a community church. The services consisted of support groups sessions; these discussions would occasionally host a guest speaker. Other group meetings focused on women-specific issues. An additional caregiving service CHAMP provided to some low-income members was daily lunches and hygiene products. Additionally, it would give one-on-one sessions with counselors about benefits, housing, and legal issues. CHAMP also coordinated field trips for its members and social services, provided members with online computer access, and encouraged them to participate in political activities.

The second service the members received was the distribution of Marijuana. The Marijuana was dispensed at a counter taking up 10 percent use of the main facility. Although it operated with two distinct purposes, it had one accounting record and would pay all the operating expenses from the membership fees it received. On May 6, 2002, the board of directors decided CHAMP would cease and file a final tax return. On August 4, 2005, the Commissioner mailed a notice of deficiency disallowing the costs of goods sold totaling $212,958, determining this expense is within the meaning of Section 280E “Expenditures in Connection with the Illegal Sale of Drugs.”

The expenses were substantiated and were ordinary, necessary, and reasonable in conducting operations. The court analyzed the economic interrelations between the two activities. It held that the activity of dispensing medical Marijuana was “trafficking” within the meaning of §280E, but the caregiving service was considered a separate activity. The benefits offered in the caregiving services, such as discussion groups, food distribution, counseling services, and more, were distinct from dispensing medical Marijuana.


Although CHAMP relied on the income from the fees and connected to marijuana-related matters, the court held that the fees were for consideration of both caregiving services and medical Marijuana. This decision allowed CHAMP to allocate the expenses between the two activities. Previously disallowed operating expenses were allowed and apportioned to the caregiving services. In some instances, the court allocated the entire expense to the caregiving service activity, such as the “truck and auto” and “laundry and cleaning” expense.

The separation of the two activities was crucial in this case. As the Marijuana industry continues to grow, it will be interesting how the entrepreneurs will structure their accounting operations to comply with Federal Taxes and be profitable.

Jason Marin
New York Law School | + posts

Jason Marin is a first-year, evening student at New York Law School and is interested in the financial aspects surrounding the cannabis industry.

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