There was an interesting appeals case that turned into a writ of certiorari, which is a petition for the U.S. Supreme Court to hear a case. It started in U.S. Tax Court with this case: Green Solutions Retail, Inc. v. United States.
Green Solutions is a Colorado-based cannabis dispensary that had its 2013 and 2014 tax returns audited by the IRS. Apparently, the dispensary ignored Section 280E, which states:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
Section 280E originated as a Congressional reaction to the landmark 1981 case Edmondson v. Commissioner.
Here’s a little background. Section 63 defines taxable income. Included in this definition of taxable income is income derived from illegal activities. What used to be common (I haven’t seen this practice used in a long time by the IRS) was a person would be convicted of a crime in which they benefited monetarily. When the person’s prison sentence was completed, the IRS would reconstruct the person’s income, in regards to the illegal activity, and issue a Notice of Deficiency (NOD).