Californians Helping to Alleviate Med. Problems, Inc. v. Comm'r of Internal Revenue

Citation128 T.C. 173,128 T.C. No. 14
Decision Date15 May 2007
Docket NumberNo. 20795–05.,20795–05.
PartiesCALIFORNIANS HELPING TO ALLEVIATE MEDICAL PROBLEMS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

P provided counseling and other caregiving services (collectively, caregiving services) to its members, who were individuals with debilitating diseases. P also provided its members with medical marijuana pursuant to the California Compassionate Use Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5 (West Supp.2007). P charged its members a membership fee that generally reimbursed P for its costs of the caregiving services and its costs of the medical marijuana. R determined that all of P's expenses were nondeductible under sec. 280E, I.R.C., because, R determined, the expenses were incurred in connection with the trafficking of a controlled substance.

Held: Sec. 280E, I.R.C., precludes P from deducting its expenses attributable to its provision of medical marijuana.

Held, further, P's provision of its caregiving services and its provision of medical marijuana were separate trades or businesses for purposes of sec. 280E, I.R.C.; thus, sec. 280E, I.R.C., does not preclude P from deducting the expenses attributable to the caregiving services.

Matthew Kumin, Henry G. Wykowski, and Willian G. Panzer, for petitioner.

Margaret A. Martin, for respondent.

LARO, Judge.

Respondent determined a $355,056 deficiency in petitioner's 2002 Federal income tax and a $71,011 accuracy-related penalty under section 6662(a). 1 Following concessions by respondent, including a concession that petitioner is not liable for the determined accuracy-related penalty, we decide whether section 280E precludes petitioner from deducting the ordinary and necessary expenses attributable to its provision of medical marijuana pursuant to the California Compassionate Use Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5 (West Supp.2007).2 We hold that those deductions are precluded. We also decide whether section 280E precludes petitioner from deducting the ordinary and necessary expenses attributable to its provision of counseling and other caregiving services (collectively, caregiving services). We hold that those deductions are not precluded.

FINDINGS OF FACT

Certain facts were stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. When the petition was filed, petitioner was an inactive California corporation whose mailing address was in San Francisco, California.

Petitioner was organized on December 24, 1996, pursuant to the California Nonprofit Public Benefit Corporation Law, Cal. Corp.Code secs. 5110–6910. (West 1990).3 Its articles of incorporation stated that it “is organized and operated exclusively for charitable, educational and scientific purposes” and “The property of this corporation is irrevocably dedicated to charitable purposes”. Petitioner did not have Federal tax-exempt status, and it operated as an approximately break-even (i.e., the amount of its income approximated the amount of its expenses) community center for members with debilitating diseases. Approximately 47 percent of petitioner's members suffered from Acquired Immune Deficiency Syndrome (AIDS); the remainder suffered from cancer, multiple sclerosis, and other serious illnesses. Before joining petitioner, petitioner's executive director had 13 years of experience in health services as a coordinator of a statewide program that trained outreach workers in AIDS prevention work.

Petitioner operated with a dual purpose. Its primary purpose was to provide caregiving services to its members. Its secondary purpose was to provide its members with medical marijuana pursuant to the California Compassionate Use Act of 1996 and to instruct those individuals on how to use medical marijuana to benefit their health. Petitioner required that each member have a doctor's letter recommending marijuana as part of his or her therapy and an unexpired photo identification card from the California Department of Public Health verifying the authenticity of the doctor's letter. Petitioner required that its members not resell or redistribute the medical marijuana received from petitioner, and petitioner considered any violation of this requirement to be grounds to expel the violator from membership in petitioner's organization.

Each of petitioner's members paid petitioner a membership fee in consideration for the right to receive caregiving services and medical marijuana from petitioner. Petitioner's caregiving services were extensive. First, petitioner's staff held various weekly or biweekly support group sessions that could be attended only by petitioner's members. The “wellness group” discussed healing techniques and occasionally hosted a guest speaker; the HIV/AIDS group addressed issues of practical and emotional support; the women's group focused on women-specific issues in medical struggles; the “Phoenix” group helped elderly patients with lifelong addiction problems; the “Force” group focused on spiritual and emotional development. Second, petitioner provided its low-income members with daily lunches consisting of salads, fruit, water, soda, and hot food. Petitioner also made available to its members hygiene supplies such as toothbrushes, toothpaste, feminine hygiene products, combs, and bottles of bleach. Third, petitioner allowed its members to consult one-on-one with a counselor about benefits, health, housing, safety, and legal issues. Petitioner also provided its members with biweekly massage services. Fourth, petitioner coordinated for its members weekend social events including a Friday night movie or guest speaker and a Saturday night social with live music and a hot meal. Petitioner also coordinated for its members monthly field trips to locations such as beaches, museums, or parks. Fifth, petitioner instructed its members on yoga and on topics such as how to participate in social services at petitioner's facilities and how to follow member guidelines. Sixth, petitioner provided its members with online computer access and delivered to them informational services through its Web site. Seventh, petitioner encouraged its members to participate in political activities.

Petitioner furnished its services at its main facility in San Francisco, California, and at an office in a community church in San Francisco. The main facility was approximately 1,350 square feet and was the site of the daily lunches, distribution of hygiene supplies, benefits counseling, Friday and Saturday night social events and dinners, and computer access. This location also was the site where petitioner's members received their distribution of medical marijuana; the medical marijuana was dispensed at a counter of the main room of the facility, taking up approximately 10 percent of the main facility. The peer group meetings and yoga classes were usually held at the church, where petitioner rented space. Pursuant to the rules of the church, petitioner's members were prohibited from bringing any marijuana into the church. Petitioner also maintained a storage unit at a third location in San Francisco. Petitioner used the storage unit to store confidential medical records; no medical marijuana was distributed or used there.

Petitioner paid for the services it provided to its members by charging a membership fee that covered, and in the judgment of petitioner's management approximated, both the cost of petitioner's caregiving services and the cost of the medical marijuana that petitioner supplied to its members. Petitioner notified its members that the membership fee covered both of these costs, and petitioner charged its members no additional fee. Members received from petitioner a set amount of medical marijuana; they were not entitled to unlimited supplies.

On May 6, 2002, petitioner's board of directors decided that petitioner would henceforth discontinue all of its activities. Petitioner thus ceased conducting any activity and filed a “Final Return” (Form 1120, U.S. Corporation Income Tax Return) for 2002. This return reported the following items on the basis of an accrual method of accounting:

+-----------------------------------------------------------------------------+
                ¦Gross      ¦              ¦             ¦          ¦      ¦       ¦          ¦
                ¦receipts or¦              ¦             ¦          ¦      ¦       ¦$1,056,833¦
                ¦sales      ¦              ¦             ¦          ¦      ¦       ¦          ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦Less       ¦              ¦             ¦          ¦      ¦       ¦          ¦
                ¦returns and¦              ¦             ¦          ¦      ¦       ¦8,802     ¦
                ¦allowances ¦              ¦             ¦          ¦      ¦       ¦          ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦Balance    ¦              ¦             ¦          ¦      ¦       ¦1,048,031 ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦Cost of    ¦              ¦             ¦          ¦      ¦       ¦          ¦
                ¦goods sold:¦              ¦             ¦          ¦      ¦       ¦          ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦           ¦Inventory at  ¦             ¦          ¦      ¦       ¦          ¦
                ¦           ¦beginning of  ¦             ¦          ¦      ¦$12,551¦          ¦
                ¦           ¦year          ¦             ¦          ¦      ¦       ¦          ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦           ¦Purchases     ¦             ¦          ¦      ¦575,317¦          ¦
                +-----------+--------------+-------------+----------+------+-------+----------¦
                ¦           ¦Cost of labor ¦             ¦          ¦      ¦203,661¦          ¦
...

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    ...not generally disallow deductions attributable to a taxpayer's non-drug-related business. Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173, 182 (2007). Although petitioner references gross receipts, section 280E is a tax on gross income. Despite ef......
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