Olive v. Commissioner , 792 F.3d 1146 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
MARTIN OLIVE, No. 13-70510
Petitioner-Appellant,
Tax Ct. No.
v. 14406-08
COMMISSIONER OF INTERNAL
REVENUE, OPINION
Respondent-Appellee.
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.
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 ordinary or necessary business 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 Petitioner-
Appellant.
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.
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 they can 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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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
inventory from 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.
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
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
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 Californians Helping 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
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.
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 properly concluded that I.R.C.
§ 280E precludes Petitioner from deducting, pursuant to
I.R.C. § 162(a), the ordinary and necessary business expenses
10 OLIVE V. CIR
associated with his operation of the Vapor Room. We
therefore affirm the Tax Court’s decision.
AFFIRMED.