Tax Court deals another blow to cannabis dispensaries
In recent years, numerous cannabis businesses that are legal under state law have unsuccessfully challenged section 280E of the Internal Revenue Tax Code, which prohibits tax deductions for a business that “consists of” trafficking in a controlled substance. A recent U.S. Tax Court ruling against a California medical cannabis dispensary continues the trend.
280E’s broad sweep: The taxpayer was a medical cannabis dispensary licensed by the city of San Jose, Calif. The business also sold noncannabis items such as T-shirts, pipes, and batteries. And it offered acupuncture, chiropractic, and other holistic services. The business claimed deductions for business expenses, depreciation, and charitable contributions for various tax years. The Internal Revenue Service disallowed all the deductions under I.R.C. sec. 280E. The taxpayer petitioned the Tax Court for review.
Medical cannabis, although legal in many states, under federal law, has been classified as a Schedule I controlled substance. Generally speaking, federal law preempts state law. For purposes of section 280E, dispensing cannabis qualifies as “trafficking” in a controlled substance.
The taxpayer argued that section 280E does not preclude deductions for depreciation and charitable contributions. Depreciation, the taxpayer claimed, was not “paid or incurred during the taxable year”; further, the charitable contributions were not made “in carrying on” a trade or business. Despite being aware of Tax Court precedent to the contrary, the taxpayer (for purposes of appeal) also claimed none of the expenses it deducted should be disallowed under 280E because the taxpayer’s business did not “consist of” trafficking in controlled substances.
The Tax Court rejected all the arguments. “[T]he text of section 280E sweeps broadly to preclude a deduction for ‘any amount paid or incurred during the taxable year in carrying on any trade or business … [that] consists of trafficking in controlled substances,’” it said, with emphasis. Further, it cited a number of relatively recent Tax Court decisions that found that “section 280E means what is says—no deductions under any section” of the code for businesses trafficking in a controlled substance.
The court noted it had dismissed the argument that the taxpayer’s business did not “consist of” trafficking in a controlled substance because it also sold noncannabis items and provided various services in the 2018 Patients Mutual case. There, the court ruled against another California dispensary that claimed expense deductions should not be disallowed under sec. 280E.
As for the taxpayer’s claim that depreciation is not “paid or incurred during the taxable year,” it was “foreclosed by the Code and Supreme Court precedent,” specifically the Supreme Court’s 1974 decision in Commissioner v. Idaho Power. The Tax Court said, Idaho Power “leaves no doubt” that depreciation represents an “amount paid or incurred during the taxable year.” Therefore, “section 280E applies by its express terms to [the taxpayer’s] circumstances.” Also, the requirements of section 280E applied to charitable contributions, the court found.
The case is San Jose Wellness v. Commissioner, 156 T.C. No. 4 (Feb. 17, 2021).
Tax changes to watch for under the Biden administration
Other than the possibility of changing corporate tax rates, there is “nothing of earth-shattering importance” in terms of tax, estate, and regulatory changes expected from the Biden administration—for now, anyway—according to a panel of valuation experts on a recent BVR webinar. However, be aware that tax provisions will “start to sunset” during the new presidency, such as the 100% bonus depreciation tax break, which will start to phase out in 2023. Also watch for state tax changes, such as in New York, where tax rates may increase dramatically, which would potentially have an impact on business valuation.
The panel also discussed valuation issues with special purpose acquisition companies (SPACs), cryptocurrency, rumors of changes to fair value rules, virtual testimony, and how the pandemic has impacted our working lives. Moderated by Jay E. Fishman (Financial Research Associates), the panel members were: Raymond Rath (GlobalView Advisors), Neil Beaton (Alvarez & Marsal), and Stacy Collins (Financial Research Associates). A recording of the webinar, Power Panel: Live Expert Answers for Today’s Tough BV Questions, is available if you click here.
TAF launches diversity survey of the appraisal profession
The Appraisal Foundation (TAF) has launched a survey to gather both diversity-related demographic data and appraisers’ opinions about these issues. The survey is anonymous and does not ask for any personal information. It takes about three to four minutes to complete, and it is open through April 30. To take the survey, click here.
2020 Thomas Burrage Award recipients named
Giving back to the business valuation profession is how the late Thomas Burrage is remembered. Every year in his honor, the Burrage Award for Compassion, Collegiality and Character is given by the Expert Resource Connection, co-founded by Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements. The recipients of the 2020 award are Karen Warner and Jim Hitchner of Valuation Products and Services for their years of dedication to producing the Financial Valuation and Litigation Expert Journal. Our congratulations to this year’s well-deserved recipients!
Pepperdine private cost of capital survey is open
A BVWire poll found that 40% of respondents use the Pepperdine Private Capital Markets Reports for estimating small private-company cost of capital. Pepperdine conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is pepperdine.qualtrics.com/jfe/form/SV_6rgU11Uj6TTzTQq?region=34582.
Tomorrow is the deadline for proposals for healthcare papers
April 15 is the deadline for proposals for papers on issues of fair market value, general market value, and commercial reasonableness under the new Stark regulations. The Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The papers will be peer-reviewed, and BVR would like to see proposals from experts in all valuation disciplines, including experts not only in business and compensation valuation, but in machinery and equipment (M&E) and real estate as well. Please send an email with a summary of the topic of your proposed paper to andyd@bvresources.com.
Global BV News
Input wanted on two major IVS consultations soon to close
If you prepare, review, or use valuations that are compliant with International Valuation Standards (IVS), two consultations are of interest to you, and your input will be appreciated. Both consultations will have a significant influence on the future IVS. The public consultation on IVS 500 that outlines proposals for new standards covering the valuation of financial instruments will close on April 19. To give feedback, click here. The public consultation on Technical Revisions to IVS, which captures targeted revisions to the IVS based on feedback received since their last full update in January 2020, will close on April 30. To give feedback, click here.
Preview of the May 2021 issue of Business Valuation Update
Here’s what you’ll see:
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“New Study Analyzes Earnout Data in DealStats” (Brian Wendler and Rebecca Crowley, National Business Valuation Services). What the BVR DealStats database reveals about the nature of earnouts, keeping in mind the impact of the pandemic that has affected some industries far greater than a “normal” recession.
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“Company-Specific Risk Is Not All That Specific” (Peter J. Butler, CFA, ASA, Valtrend). All firms face company-specific risks, many of which are somewhat similar across industries and companies. So is anything really company-specific? An alternative method eliminates the need to totally guess at the company-specific risk premium.
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“The Strategic Premium: An Inside Look at M&A Prices” (Jim Horvath, FCBV, ASA, CPA, MBA, ValuQuest Limited). Synergistic/strategic value should not be combined into one level in the typical chart that shows levels of value. Some buyers pay a “strategic premium” that propels strategic value to the very top of the value chart and well in excess of the expected synergistic value. The author uses real-world examples to illustrate this concept.
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“Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value” (Gilbert E. Matthews, CFA, Sutter Securities, and Matthew L. Miller, Esq., Abrams & Bayliss LLP). Can fiduciaries of Delaware corporations breach their duties and face damages for a merger that provides stockholders with the equivalent of fair value in a judicial appraisal? The answer may surprise you.
The issue also includes:
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BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”
To stay current on business valuation, check out the May 2021 issue of Business Valuation Update.
The International Association of Certified Valuation Specialists