By Rachel Gillette and James Mann
The Tax Court’s decision yesterday in Harborside Health v. Commissioner, 151 TC No. 11 (2018) [
opinion here] is another loss for a cannabis sector taxpayer. The opinion eviscerates every single argument made by the taxpayer’s counsel, leaving open for a subsequent opinion only the question of whether the taxpayer owes accuracy-related penalties. In the decision, Judge Holmes endorses the reasoning in IRS Chief Counsel Advice Memorandum 201504011 (2015) regarding the interaction of Section 263A and Section 471 with respect to cannabis-related cost of goods sold (COGS) calculations. Simply put, Harborside reads Section 263A out of the Internal Revenue Code with respect to cannabis-touching businesses, holding that the Section 280E disallowance of deductions prevents any additions to the cost of goods sold under the uniform capitalization rules of more-recently enacted Section 263A.
Further, the opinion is entirely dismissive of taxpayer’s Sixteenth Amendment claims, pointing out that “Section 471 wasn’t found unconstitutional during the many decades when it was the only means of calculating COGS, and it wouldn’t be unconstitutional now if Congress repealed Section 263A.”
It is also worth noting that the Tax Court held that Harborside was a reseller, not a producer, and that producers are subject to a different set of regulations under Section 471 that allow additional expenses to be included in COGS.
In reviewing the briefs presented to the Tax Court in Harborside, it seems unfortunate that the taxpayer relied so heavily on constitutional claims that were summarily dismissed. The IRS was not forced to go beyond its position as set forth in Chief Counsel Advice Memorandum 201504011. Harborside is clearly an adverse precedent, but may not be the final word on the Section 263A question.
About Greenspoon Marder
Greenspoon Marder is a national full-service business law firm with over 200 attorneys and offices across the United States. We are ranked among
American Lawyer’s Am Law 200, as one of the top law firms in the U.S. since 2015. Our firm was founded with the goal of providing the highest quality legal services at the highest value for our clients. Each of our clients is unique and so are their legal needs. We believe no one size fits all for professional services. Our lawyers offer flexible and creative solutions to meet our clients’ respective needs. Our mission is to understand the challenges our clients face, build collaborative relationships and craft solutions with a focus on strategic goals.
Natalie Villanueva, Director of Marketing
954.333.4308 | email@example.com
This Greenspoon Marder LLP Client Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice nor a solicitation of any type. Please contact the author(s) or your Greenspoon Marder LLP contact if you have any questions regarding the currency of this information. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer’s legal qualifications and experience.