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Olive v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

July 9, 2015

MARTIN OLIVE, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee

Argued and Submitted, San Francisco, California April 16, 2015.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 14406-08. Diane Kroupa, Tax Court Judge, Presiding.

SUMMARY[**]

Tax

The panel affirmed the Tax Court's decision assessing deficiencies and penalties arising from taxpayer's operation of a medical marijuana dispensary in San Francisco.

The panel affirmed the Tax Court's conclusion that 26 U.S.C. § 280E precluded taxpayer from deducting any amount of ordinary or necessary business expenses associated with operation of the Vapor Room dispensary because it is a " trade or business . . . consist[ing] of trafficking in controlled substances . . . prohibited by Federal law."

Henry G. Wykowski (argued), Henry G. Wykowski & Associates, San Francisco, California, for Petitioner-Appellant.

Kathryn Keneally, Assistant Attorney General, and Richard Farber (argued) and Patrick Urda, Attorneys, Tax Division, United States Department of Justice, Washington, D.C., for Respondent-Appellee.

Before: Alex Kozinski and Susan P. Graber, Circuit Judges, and Dee V. Benson,[*] Senior District Judge.

OPINION

Susan P. Graber, Circuit Judge:

Petitioner Martin Olive appeals the Tax Court's decision assessing deficiencies and penalties for tax years 2004 and 2005, which arise from Petitioner's operation of the Vapor Room Herbal Center (" Vapor Room" ), a medical marijuana dispensary in San Francisco. The Tax Court held, among other things, that 26 U.S.C. (I.R.C.) § 280E precluded Petitioner from deducting any amount of ordinary or necessary business expenses associated with operation of the Vapor Room because the Vapor Room is a " trade or business . . . consist[ing] of trafficking in controlled substances . . . prohibited by Federal law." I.R.C. § 280E. Reviewing that legal conclusion de novo, DHL Corp. v. Comm'r, 285 F.3d 1210, 1216 (9th Cir. 2002), we agree and, therefore, affirm the Tax Court's decision.

Established in 2004, the Vapor Room provides its patrons a place where they can socialize, purchase medical marijuana, and consume it using the Vapor Room's vaporizers.[1] The Vapor Room sells medical marijuana in three forms: dried marijuana leaves, edibles, and a concentrated version of THC. Customers who purchase marijuana at the Vapor Room pay varying costs, depending on the quantity and quality of the product and on the individual customer's ability to pay.

The Vapor Room is set up much like a community center, with couches, chairs, and tables located throughout the establishment. Games, books, and art supplies are available for patrons' general use. The Vapor Room also offers services such as yoga, movies, and massage therapy. Customers can drink complimentary tea or water during their visits, or they can eat complimentary snacks, including pizza and sandwiches. The Vapor Room offers these activities and amenities for free.

Each of the Vapor Room's staff members is permitted under California law to receive and consume medical marijuana. Petitioner purchases, for cash, the Vapor Room's inventory from licensed medical marijuana suppliers. Patrons who visit the Vapor Room can buy marijuana and use the vaporizers at no charge, or they can use the vaporizers (again, at no charge) with marijuana that they bought elsewhere. Sometimes, staff members or patrons sample Vapor Room inventory for free. When staff members interact with customers, occasionally one-on-one, they discuss illnesses; provide counseling on various personal, legal, or political matters related to ...


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