Deduction for seized marijuana goes up in smoke.

• Author: Beavers, James A.
• Position: 2015 Tax Court memorandum decision in Beck v. Commissioner

The Tax Court held that the owner of two medical marijuana dispensaries could not deduct the operating expenses of the dispensaries as ordinary and necessary business expenses or the cost of marijuana and marijuana-based products that the Drug Enforcement Administration (DEA) seized from one of the dispensaries as costs of goods sold.

Background

Jason Beck was the owner and operator of two medical marijuana dispensaries in California, one in San Francisco and one in West Hollywood, under the business name Alternative Herbal Health Services (AHHS).The San Francisco location was open from 2001 to 2007, and the West Hollywood location was opened in 2004 and currently remains open. Under California law, the sale of marijuana for medical purposes is legal; however, under federal law, marijuana is a controlled substance that is illegal to sell for medical or recreational purposes.

Beck's dispensaries sold various strains of marijuana, marijuana seeds, prerolled marijuana joints, and edible food items prepared with marijuana. Beck did not grow marijuana at either dispensary to sell but rather purchased marijuana from growers. Customers who purchased marijuana and edibles from the petitioners dispensaries were able to smoke and consume those products there, but the dispensaries did not sell pipes, papers, or vaporizers. Beck and his employees also conducted the following activities with customers at no charge: education on the effects of various strains of marijuana on the body, education on the use and benefits of vaporizers; discussions on the various types of marijuana that were for sale; discussions on how to grow marijuana and the best grow shops to buy supplies from; counseling as to how to load various smoking devices; and loading, grinding, and packing marijuana for customers' use.

Beck accepted only cash from customers at the dispensaries. He kept rudimentary records, including cash register Z tapes, to track most of the sales at the dispensaries, other than sales through a vending machine at the West Hollywood location, for which no records were kept. However, Beck or his employees at some point destroyed most of what few sales records were kept.

Despite California's approval of Beck's business, the federal government took a dim view of the enterprise, and in January 2007, the DEA obtained a search warrant for the West Hollywood dispensary. In the search, the DEA seized marijuana, food products suspected to contain marijuana, and...