Marijuana, and the IRS have a difficult relationship. A recent tax case from the United States Court of Appeals for the Ninth Circuit, Organics Cannabis Foundation LLC v. Commissioner (Jun. 19, 2020) is an unhappy story about a tax audit of several marijuana dispensaries. Any marijuana business faces extra tough tax treatment, since Section 280E of the tax code flatly disallows all tax deductions for a business that consists of “trafficking in controlled substances.” Isn’t marijuana legal in California and many other states? Yes, but federal law hasn’t caught up, and the tax law still calls it trafficking. This flat “you can’t deduct it” rule even includes regular trade or business expenses that are easily deductible by everybody else. That means marijuana businesses need tax lawyers to help them finesse their income and expenses very carefully.
This tax dispute started escalating, so the IRS wanted to turn audit notices into final tax bills. After an audit, the IRS usually writes it up and proposes more taxes. You can “protest” in writing to send your tax dispute to the next level of the IRS, the IRS Appeals Office. But if you fail to protest, or if you do not resolve your case at IRS Appeals, you’ll receive an IRS Notice of Deficiency by certified mail. It can’t come any other way. A Notice of Deficiency is often called a “90-day letter” by tax practitioners, because you’ll have 90 days to respond. Writing to the IRS to protest a Notice of Deficiency is a waste of time. In fact, only one response to a Notice of Deficiency is permitted: filing a Tax Court petition in the U.S. Tax Court clerk’s office in Washington, D.C. The Tax Court judges hear cases in federal courthouses all over the country, but the clerk’s office is in Washington.
If you miss the 90-day deadline, the U.S. Tax Court cannot hear your case, and that’s what happened here. The dispensaries tried to file their petitions in Tax Court April 22, 2015, the last day in the 90 days they were allowed to file them. They used FedEx, which seems reasonable, right? FedEx said it tried to deliver them (too early maybe), but FedEx said it couldn’t. So, FedEx delivered to the Tax Court on the morning of April 23, 2015, one day too late. The dispensaries noted that FedEx tried to deliver them on the 22nd, but the Tax Court and the Ninth Circuit rejected the argument that the clerk’s office was inaccessible on that day. A clerk’s office is “inaccessible” on the last day of a filing period only if the office cannot practicably be accessed for delivery of documents during a sufficient period of time up to and including the point at which the clerk’s office is scheduled to close. The dispensaries had no evidence that the Tax Court Clerk’s Office could not have been accessed during the rest of the day after FedEx unsuccessfully attempted delivery.
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