Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-70510/USCOURTS-ca9-13-70510-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
Martin Olive
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

MARTIN OLIVE,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellee.

No. 13-70510

Tax Ct. No.

14406-08

OPINION

Appeal from a Decision of the

United States Tax Court

Diane Kroupa, Tax Court Judge, Presiding

Argued and Submitted

April 16, 2015—San Francisco, California

Filed July 9, 2015

Before: Alex Kozinski and Susan P. Graber, Circuit

Judges, and Dee V. Benson,* Senior District Judge.

Opinion by Judge Graber

* The Honorable Dee V. Benson, Senior United States District Judge for

the District of Utah, sitting by designation.

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2 OLIVE V. CIR

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 ordinaryor necessarybusiness 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.”

COUNSEL

Henry G. Wykowski (argued), Henry G. Wykowski &

Associates, San Francisco, California, for PetitionerAppellant.

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.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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OLIVE V. CIR 3

OPINION

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 theycan 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

1 A “vaporizer” is an apparatus that extracts from marijuana its principal

active component, tetrahydrocannabinol or “THC.” Using a vaporizer

allows the user to inhale vapor instead of smoke.

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4 OLIVE V. CIR

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

inventoryfrom 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 medical marijuana; and educate patrons on

how to use the vaporizers and consume medical marijuana

responsibly. All these services are provided to patrons at no

charge.

Petitioner filed business income tax returns for tax years

2004 and 2005, which reported the Vapor Room’s net income

during those years as $64,670 and $33,778, respectively. 

Although Petitioner reported $236,502 and $417,569 in

Vapor Room business expenses for 2004 and 2005, the Tax

Court concluded that § 280E of the Internal Revenue Code

precluded Petitioner from deducting any of those expenses. 

Petitioner timely appeals.

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OLIVE V. CIR 5

The Internal Revenue Code provides that, for the purpose

of computing taxable income, an individual’s or a business’s

“gross income” includes “all income from whatever source

derived,” including “income derived from business.” I.R.C.

§ 61(a)(2). The Code further allows a business to deduct

from its gross income “all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying

on [the] trade or business.” Id. § 162(a). But there are

exceptions to § 162(a). See, e.g., id. §§ 261–280H (listing

“Items Not Deductible”). One such exception applies when

the “amount paid or incurred during the taxable year” is for

the purpose of “carrying on any trade or business . . .

consist[ing] of trafficking in controlled substances.” Id.

§ 280E. Although the use and sale of medical marijuana are

legal under California state law, see Cal. Health & Safety

Code § 11362.5, the use and sale of marijuana remain

prohibited under federal law, see 21 U.S.C. § 812(c).

We turn first to the text of I.R.C. § 280E. See Blue Lake

Rancheria v. United States, 653 F.3d 1112, 1115 (9th Cir.

2011) (holding that statutory interpretation begins with the

statute’s text). To determine whether Petitioner may deduct

the expenses associated with the Vapor Room, then, we must

decide whether the Vapor Room is a “trade or business [that]

consists of trafficking in controlled substances . . . prohibited

by Federal law.” We start with the phrase “trade or

business.”

The test for determining whether an activity constitutes a

“trade or business” is “whether the activity ‘was entered into

with the dominant hope and intent of realizing a profit.’” 

United States v. Am. Bar Endowment, 477 U.S. 105, 110 n.1

(1986) (quoting Brannen v. Comm’r, 722 F.2d 695, 704 (11th

Cir. 1984)); see also Vorsheck v. Comm’r, 933 F.2d 757, 758

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6 OLIVE V. CIR

(9th Cir. 1991) (per curiam) (applying the same standard to

§ 162(a) deductions). The parties agree, and the Tax Court

found, that the only income-generating activity in which the

Vapor Room engaged was its sale of medical marijuana. The

other services that the Vapor Room offered—including,

among other things, the provision of vaporizers, food and

drink, yoga, games, movies, and counseling—were offered to

its patrons at no cost to them. The only activity, then, that the

Vapor Room “entered into with the dominant hope and intent

of realizing a profit,” Am. Bar Endowment, 477 U.S. at 110

n.1, was the sale of medical marijuana. Accordingly,

Petitioner’s “trade or business,” for § 162(a) purposes, was

limited to medical marijuana sales.

Given the limited scope of Petitioner’s “trade or

business,” we conclude that the business “consist[ed] of

trafficking in controlled substances . . . prohibited by Federal

law.” The income-generating activities in which the Vapor

Room engaged consisted solely of trafficking in medical

marijuana which, as noted, is prohibited under federal law. 

Under § 280E, then, the expenses that Petitioner incurred in

the course of operating the Vapor Room cannot be deducted

for federal tax purposes.

Petitioner’s argument relies primarily on the phrase

“consists of,” rather than on the phrase “trade or business.” 

According to Petitioner, the use of the words “consists of” is

most appropriate “when a listing is meant to be exhaustive”;

the word “consisting,” he argues, is not synonymous with the

word “including.” Relying on that proposition, Petitioner

contends that, for § 280E purposes, a business “consists of”

a service only when that service is the sole service that the

business provides. Because the Vapor Room provides

caregiving services and sells medical marijuana, Petitioner

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OLIVE V. CIR 7

concludes that his business does not “consist of” either one

alone and therefore does not fall within the ambit of § 280E.

To support that line of reasoning, Petitioner cites the Tax

Court’s decision in CaliforniansHelping to Alleviate Medical

Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173

(2007). His reliance on CHAMP is misplaced. In CHAMP,

the petitioner’s income-generating business included the

provision not only of medical marijuana, but also of

“extensive” counseling and caregiving services. Id. at 175. 

The Tax Court noted that the business’s “primary purpose

was to provide caregiving services to its members” and that

its “secondary purpose was to provide its members with

medical marijuana.” Id. at 174. The court found, after

considering the “degree of economic interrelationship

between the two undertakings,” that the petitioner was

involved in “more than one trade or business.” Id. at 183. 

That is not the case here. Petitioner does not provide

counseling, caregiving, snacks, and so forth for a separate fee;

the only “business” in which he engages is selling medical

marijuana.

An analogy may help to illustrate the difference between

the Vapor Room and the business at issue in CHAMP. 

Bookstore A sells books. It also provides some

complimentary amenities: Patrons can sit in comfortable

seating areas while considering whether to buy a book; they

can drink coffee or tea and eat cookies, all of which the

bookstore offers at no charge; they can obtain advice from the

staff about new authors, book clubs, community events, and

the like; they can bring their children to a weekend story time

or an after-school reading circle. The “trade or business” of

Bookstore A “consists of” selling books. Its many amenities

do not alter that conclusion; presumably, the owner hopes to

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8 OLIVE V. CIR

attract buyers of books by creating an alluring atmosphere. 

By contrast, Bookstore B sells books but also sells coffee and

pastries, which customers can consume in a cafe-like seating

area. Bookstore B has two “trade[s] or business[es],” one of

which “consists of” selling books and the other of which

“consists of” selling food and beverages.

Petitioner’s arguments related to congressional intent and

public policy are similarly unavailing. He contends that

I.R.C. § 280E should not be construed to apply to medical

marijuana dispensaries because those dispensaries did not

exist when Congress enacted § 280E. Congress added that

provision, he maintains, to prevent street dealers from taking

a deduction. According to Petitioner, Congress could not

have intended for medical marijuana dispensaries, now legal

in many states, to fall within the ambit of “items not

deductible” under the Internal Revenue Code. We are not

persuaded.

That Congress might not have imagined what some states

would do in future years has no bearing on our analysis. It is

common for statutes to apply to new situations. And here,

application of the statute is clear. See Chamber of Commerce

of U.S. v. Whiting, 131 S. Ct. 1968, 1980 (2011) (stating that

“Congress’s authoritative statement is the statutory text”

(internal quotation marks omitted)). Application of the

statute does not depend on the illegality of marijuana sales

under state law; the only question Congress allows us to ask

is whether marijuana is a controlled substance “prohibited by

Federal law.” I.R.C. § 280E. If Congress now thinks that the

policy embodied in § 280E is unwise as applied to medical

marijuana sold in conformance with state law, it can change

the statute. We may not.

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OLIVE V. CIR 9

Finally, for three reasons, we are not persuaded by

Petitioner’s argument that section 538 of the Consolidated

and Further Continuing Appropriations Act, 2015, Pub. L.

No. 113-235, 128 Stat. 2130, precludes the government from

continuing to defend Petitioner’s appeal. First, statements by

a later Congress do not inform us about the intent of a

previous Congress. See Mackey v. Lanier Collection Agency

& Serv., Inc., 486 U.S. 825, 840 (1988) (“The views of a

subsequent Congress form a hazardous basis for inferring the

intent of an earlier one.” (internal quotation marks and

brackets omitted)). Second, a decision not to expend funds to

enforce a particular statute says nothing about the meaning of

that statute. “What one house of Congress thinks, in the

2010s, about enforcement priorities for the agency is entirely

uninformative about the intent of Congress when it enacted

a statute in [an earlier year].” Navarro v. Encino Motorcars,

LLC, 780 F.3d 1267, 1277 n.5 (9th Cir. 2015). Third, section

538 does not apply. It provides that certain funds may not be

used to prevent states, such as California, “from

implementing their own State laws that authorize the use,

distribution, possession, or cultivation of medical marijuana.” 

Pub. L. No. 113-235, § 538 (emphasis added). Here, the

government is enforcing only a tax, which does not prevent

people from using, distributing, possessing, or cultivating

marijuana in California. Enforcing these laws might make it

more costly to run a dispensary, but it does not change

whether these activities are authorized in the state.

In summary, the Tax Court properlyconcluded that I.R.C.

§ 280E precludes Petitioner from deducting, pursuant to

I.R.C. § 162(a), the ordinary and necessary business expenses

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10 OLIVE V. CIR

associated with his operation of the Vapor Room. We

therefore affirm the Tax Court’s decision.

AFFIRMED.

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