FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PATIENTS MUTUAL ASSISTANCE 

COLLECTIVE CORPORATION, DBA 

Harborside Health Center,

Petitioner-Appellant,

v.

COMMISSIONER OF INTERNAL 

REVENUE,

Respondent-Appellee.

No. 19-73078

Tax Ct. Nos.

29212-11

30851-12

14776-14

OPINION

Appeal from a Decision of the

United States Tax Court

Argued and Submitted February 9, 2021

San Francisco, California

Filed April 22, 2021

Before: Andrew D. Hurwitz and Daniel A. Bress, Circuit 

Judges, and Clifton L. Corker,* District Judge.

Opinion by Judge Bress

* The Honorable Clifton L. Corker, United States District Judge for 

the Eastern District of Tennessee, sitting by designation.
2 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

SUMMARY**

Tax

The panel affirmed the Tax Court’s decision on a petition 

for redetermination of federal income tax deficiencies that 

turned on whether a cannabis dispensary that purchases the 

marijuana it resells and values its inventory using the cost 

method of accounting must account for its inventory cost in 

accordance with Treasury Regulation § 1.471-3(b).

Patients Mutual Assistance Collective Corporation, dba 

Harborside Health Center (“Harborside”), is one of the 

largest marijuana dispensaries in the country. For the years 

at issue, Harborside was a not-for-profit corporation and 

medicinal cannabis collective that operated a retail cannabis 

dispensary under California state law. Harborside claimed 

tens of millions of dollars in exclusions. The Commissioner 

of Internal Revenue disallowed nearly all of them, then 

issued notices of deficiency. On a petition for 

redetermination of the deficiencies, the Tax Court ruled in 

favor of the Commissioner, and this appeal followed.

Most corporations can claim deductions for “ordinary 

and necessary expenses” that are “paid or incurred during the 

taxable year in carrying on any trade or business.” I.R.C. 

§ 162(a). However, otherwise allowed deductions are not 

available to taxpayers who engage in certain activities that 

Congress regards as unlawful, I.R.C. § 280E, including 

trafficking in controlled substances like marijuana. The 

panel first declined to consider the constitutional claim, not 

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

has been prepared by court staff for the convenience of the reader.
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 3

raised in the Tax Court, that § 280E violates the Sixteenth 

Amendment.

Harborside next argued that some of its expenditures, 

even if they cannot be deducted under § 280E, can be 

excluded from income as part of its inventory cost under 

general inventory tax accounting rules. Rejecting 

Harborside’s arguments that would have made more of its 

costs excludible for tax purposes, the panel held that the Tax 

Court did not err in concluding that Harborside’s inventory 

cost is determined by Treas. Reg. § 1.471-3(b), which 

applies to a purchaser and reseller of the products it sells.

The panel declined to consider Harborside’s argument, 

not raised before the Tax Court, that the Tax Court should 

have allowed at least some of Harborside’s claimed 

exclusions as “necessary charges incurred in acquiring 

possession of the goods” under Treas. Reg. § 1.471-3(b). 

The panel therefore expressed no opinion on whether any of

Harborside’s claimed exclusions may have been properly 

regarded as inventory costs under § 1.471-3(b), nor did it 

address arguments made by amici curiae that Harborside did 

not advance on appeal.

COUNSEL

James B. Mann (argued), Brooklyn, New York, for 

Petitioner-Appellant.

Nathaniel S. Pollock (argued), Francesca Ugolini, and 

Michael J. Haungs, Attorneys; T. Joshua Wu, Deputy 

Assistant Attorney General; Richard E. Zuckerman, 

Principal Deputy Assistant Attorney General; Tax Division, 

United States Department of Justice, Washington, D.C.; for 

Respondent-Appellee.
4 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

Charles C. Sipos and Lauren Watts Staniar, Perkins Coie 

LLP, Seattle, Washington; Barak Cohen and Tre A. 

Holloway, Perkins Coie LLP, Washington, D.C.; for Amicus 

Curiae National Cannabis Industry Association.

Jennifer E. Benda, Hall Estill Hardwick Gable Golden & 

Nelson P.C., Denver, Colorado, for Amici Curiae Marijuana 

Industry Group and Cannabis Trade Federation Action.

OPINION

BRESS, Circuit Judge:

On its face, this tax case presents the technical issue 

whether a cannabis dispensary that purchases the marijuana 

it resells and that values its inventory using the cost method 

must account for its inventory cost in accordance with 

section 1.471-3(b) of the Treasury Regulations. But at its 

core, this dispute reflects the latest attempt by a medical 

marijuana retailer to ameliorate the significant tax 

consequences Congress has prescribed for businesses that 

Congress regards as trafficking in controlled substances. 

Under federal law, those prohibited substances include 

marijuana, even though some states have more recently 

legalized its sale. This disharmony between federal and state 

law produces the multi-million-dollar tax controversy before 

us. Ultimately, we hold that the taxpayer’s arguments either 

are without merit or were not preserved for our review. We 

therefore affirm the Tax Court.

I

The taxpayer is Patients Mutual Assistance Collective 

Corporation, one of the largest marijuana dispensaries in the 

United States. It is a C corporation under federal tax law that 
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 5

does business as Harborside Health Center. We refer to it as 

“Harborside.” This appeal concerns Harborside’s corporate 

income tax liabilities for its tax years ending July 31, 2007 

through July 31, 2012. To understand Harborside’s 

arguments, it is necessary to have some understanding of its 

business.

Harborside operates a retail cannabis dispensary. For the 

years at issue, Harborside was a not-for-profit corporation 

and medicinal cannabis collective operating under 

California laws governing medical marijuana operations. 

See Cal. Health & Safety Code §§ 11362.765(a), 11362.768. 

Consistent with California law, Harborside sold products 

only to individuals who possessed a physician’s written 

recommendation for medical marijuana. See id.

§ 11362.5(d). Prospective members also had to sign a 

cultivation agreement permitting other Harborside members 

to grow marijuana on their behalf as part of the Harborside 

collective.

Harborside sold several categories of products, including 

“buds,” or cannabis flowers. Harborside purchased buds 

from its patients-growers and did not grow any itself. 

Would-be sellers brought buds to Harborside’s purchasing 

office, where a Harborside employee would inspect and test 

the buds for quality. If the buds were acceptable, the 

employee negotiated a purchase price. Once Harborside 

purchased the buds, it stored them in a secure vault and sent 

a sample for third-party laboratory testing. If the results 

were satisfactory, employees would reinspect, trim, weigh, 

package, and label the buds in preparation for resale.

Harborside also purchased from nurseries marijuana 

“clones,” i.e., “cuttings from a female cannabis plant that can 

be transplanted and used to cultivate marijuana.” After 

acquiring clones, Harborside stored, cared for, and 
6 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

repackaged them before sale. Additionally, Harborside 

purchased and resold other marijuana-containing products, 

such as extracts and oils, which it purchased from other 

marijuana collectives, as well as non-marijuana products

such as branded shirts and various marijuana-related 

paraphernalia. As a C corporation, Harborside pays 

corporate income tax on its “taxable income.” I.R.C. 

§ 11(a); see also id. § 1361(a)(2) (defining 

“C corporation”).1 Taxable income is determined through a 

multi-step process. A taxpayer first computes its “gross 

income.” I.R.C. § 63(a). For a “merchandising” business 

such as Harborside, gross income includes the business’s 

“total sales, less the cost of goods sold.” Treas. Reg. § 1.61-

3(a). That “cost” is said to be “excluded” from the 

taxpayer’s income. See Max Sobel Wholesale Liquors v. 

Comm’r, 630 F.2d 670, 671 (9th Cir. 1980); see also Treas. 

Reg. § 1.162-1(a) (providing that “[t]he cost of goods 

purchased for resale” is treated as an exclusion from gross 

receipts).

Once a taxpayer has calculated its gross income, it 

subtracts any “deductions,” such as ordinary and necessary 

business expenses, to which it is entitled. I.R.C. §§ 63(a), 

161; see, e.g., id. § 162(a). The remaining amount is the 

taxpayer’s “taxable income.” Id. § 63(a). The regulations 

further provide that no item shall be treated as a deductible 

business expense “to the extent that it is used by the taxpayer 

in computing the cost of property included in its inventory,” 

1 Unless otherwise specified, all statutory and regulatory references 

are to the Internal Revenue Code or the Treasury Regulations, 

respectively codified as Title 26 of the United States Code and Title 26 

of the Code of Federal Regulations.
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 7

because in that case the item is properly treated as an 

exclusion. Treas. Reg. § 1.162-1(a).

A stylized example may be helpful to show how these 

concepts work in practice. If a corporation purchased 

100 domino sets for $6 each and resold them for $8 each, its 

gross sales would be $800. It would then exclude cost of 

goods sold of $600, resulting in gross income of $200. If the 

corporation also paid wages of $50 and rent of $25, it would 

seek to deduct those expenses under section 162(a), resulting 

in taxable income of $125.

The tax consequences are markedly different, however, 

if one is in the business of selling marijuana. Most 

corporations can claim deductions for “ordinary and 

necessary expenses,” such as employee salaries, rent, and 

license fees, “paid or incurred during the taxable year in 

carrying on any trade or business.” I.R.C. § 162(a). But 

taxpayers may not take the otherwise allowed deductions 

when they engage in certain activities that Congress regards 

as unlawful. See, e.g., Max Sobel, 630 F.2d at 671. That 

includes trafficking in controlled substances.

Section 280E is the relevant provision, and it 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.
8 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

I.R.C. § 280E. Under federal law, marijuana is such a 

controlled substance. See 21 U.S.C. § 812(c), sch. I(c)(10); 

21 C.F.R. § 1308.11(d)(23); Olive v. Comm’r, 792 F.3d 

1146, 1148 (9th Cir. 2015).

Harborside concedes it is subject to section 280E. 

Nevertheless, on its tax returns for the years at issue, 

Harborside claimed tens of millions of dollars in exclusions 

for cost of goods sold and business expense deductions. The 

Commissioner of Internal Revenue disallowed nearly all 

those exclusions and deductions and issued Harborside 

notices of deficiency showing over $29 million in tax 

deficiencies for those years. Harborside petitioned the Tax 

Court for redetermination of the deficiencies. After 

Harborside provided additional substantiation of its costs, 

the Commissioner agreed that amounts Harborside paid its 

suppliers to purchase goods were excludible. But he 

continued to deny Harborside’s other claimed exclusions 

and all its claimed deductions.

After a three-day trial, the Tax Court ruled in favor of the 

Commissioner. Patients Mut. Assistance Collective Corp. v. 

Comm’r, 151 T.C. 176 (2018). That decision addressed a 

range of issues, many of which Harborside does not raise on 

appeal. The parties then agreed to stipulated decisions under 

Tax Court Rule of Practice and Procedure 155 that identified 

approximately $11 million in agreed-upon deficiencies. 

According to the government, roughly $1 million of that 

amount corresponds to the disallowed exclusions, with the 

remainder due to the denied deductions.

This timely appeal followed. We have jurisdiction to 

review the Tax Court’s decisions under I.R.C. § 7482.
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 9

II

On appeal, Harborside’s strategy is twofold: take out 

section 280E as unconstitutional under the Sixteenth 

Amendment and, if that fails, seek a more favorable ruling 

on its exclusions, so that some of what it cannot deduct under 

section 280E might instead be treated as cost of goods sold 

excludible from gross receipts. We conclude that 

Harborside’s various arguments must be rejected.

A

We begin with its constitutional challenge. In recent 

years, cannabis businesses have tried to secure rulings 

invalidating section 280E as unconstitutional. These efforts 

have not been successful. The Tax Court recently rejected 

the argument that section 280E violates the Eighth 

Amendment’s Excessive Fines Clause. N. Cal. Small Bus. 

Assistants Inc. v. Comm’r, 153 T.C. 65, 72 (2019) (reviewed 

opinion). And the Tenth Circuit recently upheld section 

280E against a Sixteenth Amendment challenge. Alpenglow 

Botanicals, LLC v. United States, 894 F.3d 1187, 1201 (10th 

Cir. 2018).

Reprising an argument similar to the one the Tenth 

Circuit turned down, Harborside argues that the corporate 

income tax, as modified by section 280E, is a “direct tax” 

that taxes more than “incomes,” in violation of the Sixteenth 

Amendment. The most immediate problem, however, is that 

Harborside did not raise this constitutional challenge in the 

Tax Court.

Although Harborside did mention the Sixteenth 

Amendment in its Tax Court briefing, it did so only as part 

of an unrelated constitutional avoidance argument. 

Specifically, Harborside argued that the Commissioner’s 
10 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

denial of exclusions under the uniform capitalization, or 

UNICAP, rules of section 263A could render those rules 

unconstitutional given that section 280E also disallows 

deductions for those amounts. Before this court, however, 

Harborside explicitly abandoned its section 263A argument, 

and it points to no other occasion when it raised the Sixteenth 

Amendment before the Tax Court. Nor did the Tax Court in 

its extensive opinion address the Sixteenth Amendment 

argument that Harborside asserts here.

“Absent exceptional circumstances, this court will not 

consider an argument that was not first raised in the Tax 

Court.” Sparkman v. Comm’r, 509 F.3d 1149, 1158 (9th Cir. 

2007). In a previous case challenging section 280E on 

constitutional grounds, we declined to consider the argument 

because the taxpayer had not raised its challenge in the Tax 

Court. See Canna Care, Inc. v. Comm’r, 694 F. App’x 570, 

571 (9th Cir. 2017). Harborside provides no basis to treat 

this case any differently. We therefore decline to consider 

Harborside’s constitutional claim.

B

1

But just because Harborside is unentitled to deductions 

does not necessarily mean it cannot take exclusions for some 

of the amounts at issue. Section 280E does not purport to 

deny to those taxpayers within its scope the ability to seek 

exclusions that are available to other businesses. Patients 

Mutual, 151 T.C. at 204; Alterman v. Comm’r, 115 T.C.M. 

(CCH) 1452, 1460 (2018); Olive v. Comm’r, 139 T.C 19, 32, 

38 (2012). Harborside therefore argues that some of its 

expenditures, if they cannot be deducted, are actually part of 

its inventory cost under the general inventory tax accounting 

rules of section 471.
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 11

We pause to note the peculiarity of Harborside’s 

position, which is a function of the world that section 280E 

creates. As the Tax Court explained, all else being equal, 

taxpayers generally prefer deductions over exclusions. 

Patients Mutual, 151 T.C. at 205 & n.23, 207. This is 

because a taxpayer generally can avail itself of the benefit of 

a deduction—decreased taxable income, and thus lowered 

taxes—in the same tax year in which it paid or incurred the 

corresponding amount. Id. at 205; see, e.g., I.R.C. § 461(a). 

In contrast, a merchandising taxpayer typically receives the 

tax benefit from an exclusion in the year in which it sells (or 

otherwise disposes of) the product associated with that 

exclusion (which may be years into the future). Patients 

Mutual, 151 T.C. at 205; see, e.g., I.R.C. § 451(a).2 But 

although exclusions generally are not as good as deductions, 

they are better than nothing. So contrary to taxpayers’ usual 

preferences, and in an evident attempt to alleviate the effect 

of section 280E, Harborside takes the otherwise sub-optimal 

position that various expenditures it incurred in the course of 

purchasing and processing the marijuana it resold are in fact 

2 Taxpayers engaged in merchandising businesses often are subject 

to the UNICAP rules under section 263A, under which they must 

capitalize the costs of inventory acquired for resale, including certain 

“indirect costs . . . which are allocable to” the inventory. I.R.C. 

§ 263A(a)(2)(B); Treas. Reg. § 1.263A-1(c)(1). Taxpayers subject to 

section 263A would recover those costs as they sell or otherwise dispose 

of items in their inventories. See Mertens Law of Federal Income 

Taxation § 16.41, Westlaw (Mar. 2021 Update). However, section 263A 

expressly prohibits the capitalization of “[a]ny cost which (but for [the 

UNICAP rules]) may not be taken into account in computing taxable 

income for any taxable year.” Treas. Reg. § 1.263A-1(c)(2); see also

I.R.C. § 263A(a) (flush language). In other words, if a cost is not 

deductible, it cannot be capitalized under section 263A. On that basis, 

the Tax Court determined that the UNICAP rules were inapplicable to 

Harborside, Patients Mutual, 151 T.C. at 209, a determination that

Harborside does not dispute on appeal.
12 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

excludible costs. These expenditures total over $7 million 

and include, for instance, employee compensation relating to 

the negotiation of bud purchases and the cost of laboratory 

testing of marijuana. Because Harborside is a 

merchandising business that must maintain an inventory, 

resolving this issue requires determining which inventory 

tax accounting provisions apply. In other words, we are 

tasked with resolving the valuation rules Harborside must 

use to determine the expenditures allocable to Harborside’s 

cost of goods sold. We know those amounts include the 

purchase prices Harborside paid to buy marijuana. No one 

disputes that. But are any other items included as well? This 

question is a legal one involving the interpretation of the 

Internal Revenue Code and the Treasury Regulations, and 

our review therefore is de novo. See Estate of Saunders v. 

Comm’r, 745 F.3d 953, 957 (9th Cir. 2014). “Although a 

presumption exists that the Tax Court correctly applied the 

law, no special deference is given to the Tax Court’s 

decisions.” Knudsen v. Comm’r, 793 F.3d 1030, 1033 (9th 

Cir. 2015) (quotations omitted).

To answer the question presented, we begin with the 

Code’s notion of inventory. Inventory generally refers to the 

goods owned by the taxpayer that are intended for sale to 

purchasers or that will physically become part of the product 

sold to purchasers. See Treas. Reg. § 1.471-1. A winery, for 

instance, would include in its inventory not only the grapes 

it purchases to make wine, but also the bottles, corks, and 

labels it uses to package that wine for sale. See Internal 

Revenue Serv., The Wine Industry Audit Technique Guide 

21 (Mar. 2011).

Section 471 prescribes that whenever a taxpayer is 

required to maintain an inventory, such inventory “shall be 

taken by such taxpayer on such basis as the Secretary [of the 
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 13

Treasury or his delegate] may prescribe as conforming as 

nearly as may be to the best accounting practice in the trade 

or business and as most clearly reflecting the income.” 

I.R.C. § 471(a); see id. § 7701(a)(11)(B). In Thor Power 

Tool Co. v. Commissioner, 439 U.S. 522 (1978), the 

Supreme Court recognized that the second test—the clear 

reflection of income requirement—is “paramount,” 

emphasizing that the Treasury Regulations “state[] 

categorically that ‘no method of accounting is acceptable 

unless, in the opinion of the Commissioner, it clearly reflects 

income.’” Id. at 540 (quoting Treas. Reg. § 1.446-1(a)(2)). 

Thus, “the Code and Regulations give the Commissioner 

broad discretion to set aside the taxpayer’s method if, ‘in 

[his] opinion,’ it does not reflect income clearly.” Id.

(alteration in original).

Under the authority of section 471(a), the Internal 

Revenue Service has promulgated sections 1.471-1 through 

1.471-11 of the Treasury Regulations, which contain 

detailed rules governing how taxpayers must account for 

their inventories, including valuation methods. See Thor 

Power Tool, 439 U.S. at 532–33. Under these rules, 

taxpayers generally calculate the value of inventory using 

one of two methods: “cost” or “cost or market, whichever is 

lower.” Treas. Reg. § 1.471-2(c). Regulations for each 

method are provided in sections 1.471-3 and 1.471-4, 

respectively. A taxpayer electing to use the “cost” method 

therefore must apply the definition of “cost” contained in 

section 1.471-3. See id. § 1.471-2(b).

Under section 1.471-3, the definition of “cost” is keyed 

to whether a taxpayer “purchased” or “produced” a given 

product. Id. § 1.471-3(b)–(c). For a taxpayer that 

“produced” the product it sells, “cost” includes not only “the 

cost of raw materials and supplies entering into or consumed 
14 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

in connection with the product,” but also “expenditures for 

direct labor” and “indirect production costs incident to and 

necessary for the production of the particular article.” Id.

§ 1.471-3(c). In contrast, taxpayers reselling products that 

they “purchased” are entitled to include as cost only “the 

invoice price,” less certain discounts not relevant here, as 

well as “transportation or other necessary charges incurred 

in acquiring possession of the goods.” Id. § 1.471-3(b).

Harborside does not dispute that as a merchandising 

business, it must maintain its inventory in accordance with 

the regulatory scheme of section 471. See Treas. Reg. 

§§ 1.471-1, 1.471-2(b). Nor does Harborside dispute that it 

elected to use the “cost” method to account for its inventory. 

Id. §§ 1.471-2(c), 1.471-3. Harborside does dispute, 

however, which cost-method rules it is subject to for the 

years at issue. Before the Tax Court, Harborside argued that 

it had “produced” the products it sold and therefore should 

calculate the corresponding costs under section 1.471-3(c). 

The Tax Court rejected this argument and found that 

Harborside had “purchased,” not “produced,” the products it 

resold. Patients Mutual, 151 T.C. at 210–13. Harborside 

does not contest that determination on appeal. It therefore 

follows that Harborside’s excludible cost relating to those 

products must be determined under section 1.471-3(b), 

applicable to purchasers, i.e., resellers. See 151 T.C. at 213.

2

Resisting this straightforward conclusion, Harborside 

proffers various arguments as to why section 1.471-3(b) 

supposedly does not apply to it. In essence, section 1.471-

3(b) defines (and thereby limits) the types of outlays 

associated with purchased merchandise that a taxpayer can 

treat as inventory costs. Harborside wants to dump more 

such expenditures into its excludible costs than section 
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 15

1.471-3(b) would otherwise allow, largely because section 

280E does not allow corresponding deductions (and because 

section 263A’s UNICAP rules are therefore inapplicable). 

Hence Harborside argues it is outside section 1.471-3(b) 

altogether. But Harborside’s arguments are not persuasive.

First, Harborside asserts that it satisfied the general 

requirements of section 471—the “best accounting practice” 

and “clear reflection of income” rules—when it included the 

disputed exclusions within its inventory cost. See I.R.C. 

§ 471(a); Treas. Reg. § 1.471-2(a). Harborside argues that 

because the Commissioner does not directly assert that 

Harborside’s inventory methods fail either of these general 

requirements, he could not force the company to comply 

with the specific rules of section 1.471-3. But this argument 

misapprehends the statute and its implementing regulations.

As discussed, section 471(a) mandates that “inventories 

shall be taken by [a] taxpayer on such basis as the Secretary 

may prescribe as conforming as nearly as may be to the best 

accounting practice in the trade or business and as most 

clearly reflecting the income.” I.R.C. § 471(a) (emphasis 

added). Under this authority, the Service has promulgated 

detailed regulations, the validity of which Harborside does 

not question, governing how taxpayers are to compute their 

inventories. See Treas. Reg. §§ 1.471-1 to -11. The 

Treasury Regulations echo the section 471(a) requirement, 

providing that “the inventory practice of a taxpayer should 

be consistent from year to year, and greater weight is to be 

given to consistency than to any particular method of 

inventorying or basis of valuation so long as the method or 

basis used is in accord with §§1.471-1 through 1.471.11.” 

Id. § 1.471-2(b) (emphasis added).

Harborside wants us to treat section 471(a) as though it 

does not reference the implementing regulations, but it 
16 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

plainly does. Contrary to Harborside, compliance with 

section 471(a) cannot be assessed without consideration of 

its implementing regulations, here section 1.471-3(b). See

Thor Power Tool, 439 U.S. at 533–35, 538–40 (holding that 

where a taxpayer using the “cost or market, whichever is 

lower” method did not comply with section 1.471-4, its 

inventory failed to clearly reflect income). Harborside cites 

no authority suggesting otherwise.

Second, Harborside argues that because the 

Commissioner did not frame his challenge to Harborside’s 

inventory method in terms of a failure to clearly reflect 

income, he was without authority to compel Harborside to 

change its accounting methods—i.e., the way Harborside 

computed its inventory. This argument, too, is erroneous. 

Harborside is correct that the Commissioner may not force a 

taxpayer to use a particular accounting method where the 

taxpayer’s chosen method conforms to law. See, e.g., Jim 

Turin & Sons, Inc. v. Comm’r, 219 F.3d 1103, 1109 (9th Cir. 

2000). But the Commissioner does have the power to assert 

deficiencies where a taxpayer’s method of accounting does 

not conform with the applicable regulations. See, e.g., Thor 

Power Tool, 439 U.S. at 533 (sustaining the Commissioner’s 

disallowance of an inventory method of accounting that 

“was plainly inconsistent with the governing [Treasury] 

Regulations”). That is all the Commissioner sought to do 

here.

Third, Harborside argues that under our decision in Max 

Sobel Wholesale Liquors v. Commissioner, 630 F.2d 670 

(9th Cir. 1980), section 1.471-3(b) cannot be grounds for 

disallowing Harborside’s cost computation because it was 

(in Harborside’s view) a “permissible” determination of cost 

of goods sold. But Harborside misreads Max Sobel, which 

held that a statute limiting deductions did not give the 
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 17

Commissioner the authority to deny exclusions for cost of 

goods sold. See id. at 671–72. The Commissioner is not 

purporting to invoke section 280E as a basis to deny 

Harborside exclusions for cost of goods sold. Max Sobel

does not address the issue here, namely, which expenditures 

are includible in cost of goods sold in the first place.

Finally, Harborside argues that subsection (d) of section 

1.471-3 exempts it from the requirements of subsection (b) 

and permits it to include its purchasing and processing costs 

in its inventory cost. But section 1.471-3(d) does not apply 

to Harborside. That provision applies only to industries “in 

which the usual rules for computation of cost of production 

are inapplicable.” Treas. Reg. § 1.471-3(d). In such 

industries, “costs may be approximated upon such basis as 

may be reasonable and in conformity with established trade 

practice in the particular industry.” Id. The regulation 

provides three examples of such industries: “[f]armers and 

raisers of livestock,” certain “[m]iners and manufacturers,” 

and “[r]etail merchants” that use the “retail method” to 

approximate costs. Id. Rules for each such industry are 

further detailed in respective sections of the Treasury 

Regulations. See id. §§ 1.471-6 to -8.

Section 1.471-3(d) is inapplicable because Harborside 

has failed to show that marijuana retail is an industry “in 

which the usual rules for computation of cost of production 

are inapplicable.” Id. § 1.471-3(d). Each of the types of 

taxpayers to which subsection (d) applies faces some 

difficulty in using the standard methods. For example, 

farmers require special inventory costing rules “[b]ecause of 

the difficulty of ascertaining actual cost of livestock and 

other farm products.” Id. § 1.471-6(c). Farmers therefore 

are permitted to approximate their costs under special 

regulations. Id. (permitting farmers to use the “farm-price 
18 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR

method” or “unit-livestock-price method” for approximating 

cost).

Harborside presents no cogent argument for why a 

marijuana dispensary cannot compute its “cost of 

production” under the usual rules that apply to a retailer. 

And it does not claim that it is a “retail merchant” that uses 

the “retail method” in its cost accounting. Id. § 1.471-

3(d)(3). Harborside’s only argument appears to be that 

because its expenditures would be disallowed as deductions 

under section 280E, it instead should be allowed to exclude 

those amounts as costs by electing to proceed under section 

1.471-3(d) rather than section 1.471-3(b). But Harborside 

does not ground this entitlement to different treatment in any 

statutory or regulatory authority. That the normal inventory 

accounting rules may be unfavorable to Harborside does not 

make them inapplicable to it. Section 1.471-3(d) therefore 

bears no relevance to Harborside’s tax liabilities for the 

years at issue.

We thus hold that the Tax Court did not err in concluding 

that Harborside’s inventory cost for each of the years at issue 

is determined by section 1.471-3(b). Although Harborside 

is subject to serious tax consequences because of the nature 

of its business, see I.R.C. § 280E, the primary argument it 

has preserved for our review fails based on generally 

applicable provisions of federal tax law. Marijuana 

dispensaries, like all taxpayers, must abide by the intricacies 

of the Internal Revenue Code and the Treasury Regulations.

This leaves Harborside arguing that the Tax Court erred 

in its application of section 1.471-3(b) by failing to allow at 

least some of Harborside’s claimed exclusions (such as 

employee salaries relating to negotiating marijuana 

purchases) as “necessary charges incurred in acquiring 

possession of the goods.” Treas. Reg. § 1.471-3(b). 
PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 19

However, as with its Sixteenth Amendment claim, 

Harborside failed to raise this argument before the Tax 

Court. The issue is therefore forfeited for our review. See 

Sparkman, 509 F.3d at 1158–59; Merkel v. Comm’r, 

192 F.3d 844, 852 n.10 (9th Cir. 1999).

We therefore express no opinion on whether any of 

Harborside’s claimed exclusions may have been properly 

regarded as inventory cost under section 1.471-3(b). Nor do 

we address arguments made by amici that Harborside does 

not advance here. See United States v. Gementera, 379 F.3d 

596, 607 (9th Cir. 2004) (“Generally, we do not consider on 

appeal an issue raised only by an amicus.” (quotations 

omitted)).

AFFIRMED.