IRS Urges Ninth Circuit to Uphold §280E Treatment in Marijuana Dispensary’s Multi-Million Dollar Tax Case
- The IRS is asking the Ninth Circuit to uphold a ruling allowing it to exclude certain operating expenses, barred under Section 280E, when calculating a marijuana business's ability to pay federal tax debts.
- The case involves Mission Organic Center, a San Francisco dispensary whose offer to settle $5.25 million in tax debt was rejected after the IRS calculated its "reasonable collection potential" at about $57.85 million by disregarding expenses disallowed under Section 280E.
- Mission argued that Section 280E only limits deductible expenses for tax purposes and should not affect how the IRS evaluates offers in compromise, but the Tax Court rejected this, supporting the IRS's policy as consistent with Section 280E and within its authority.
- The outcome could impact how other state-legal marijuana businesses negotiate federal tax liabilities, as the case tests the application of Section 280E in settlement evaluations and IRS internal guidance versus Treasury regulations.
The Internal Revenue Service (IRS) is urging a federal appeals court to uphold a ruling allowing the agency to disregard certain operating expenses when determining a marijuana business’s ability to pay millions of dollars in federal tax debt.
In a brief filed today with the U.S. Court of Appeals for the Ninth Circuit, the government defended the Tax Court’s treatment of San Francisco marijuana dispensary Mission Organic Center under Section 280E of the federal tax code.
The case, Mission Organic Center Inc. v. Commissioner of Internal Revenue, centers on the dispensary’s attempt to settle unpaid federal tax liabilities through an offer in compromise.
Mission offered the Internal Revenue Service (IRS) $65,000 to resolve tax debts covering multiple years. During its review, however, an IRS revenue officer calculated the company’s “reasonable collection potential” at approximately $57.85 million, far above its then-outstanding liability of about $5.25 million.
A key reason for the enormous difference was Section 280E.
The provision prevents businesses trafficking in Schedule I or II controlled substances from deducting ordinary business expenses for federal income tax purposes. Because marijuana remains federally controlled, the IRS declined to count expenses that would be barred by Section 280E when calculating how much Mission could potentially pay.
Mission challenged that approach, arguing that Section 280E governs the calculation of taxable income but does not dictate which expenses can be considered when the IRS evaluates an offer in compromise.
The company’s [opening appellate brief](https://www.taxnotes.com/research/federal/court-documents/court-petitions-and-briefs/cannabis-business-says-tax-court-erred-upholding-oic-denial/7w4t7) argues that the IRS’s marijuana-specific provisions in its Internal Revenue Manual conflict with federal tax law and Treasury regulations governing offers in compromise.
The U.S. Tax Court [rejected that argument](https://law.co/app/cases/9000000986/mission-organic-center-inc) in December, finding that the IRS did not abuse its discretion by disregarding expenses made nondeductible under Section 280E when determining Mission’s reasonable collection potential.
The court said the IRS policy was consistent with the public policy underlying Section 280E and fell within the agency’s authority to establish guidelines for evaluating settlement offers.
Several judges disagreed, with dissents arguing in part that Section 280E concerns taxable income rather than the income actually available to pay a tax debt and that internal IRS guidance cannot override Treasury regulations.
Mission appealed the ruling to the Ninth Circuit in February.
A decision in the case could have implications for other state-legal marijuana businesses seeking to negotiate unpaid federal tax liabilities while Section 280E remains applicable to the industry.
The case is Mission Organic Center Inc. v. Commissioner of Internal Revenue, No. 26-828.