Marijuana Businesses, Section 280E, and the Sixteenth Amendment

168 Tax Notes Federal 1643 (2020)

97 Tax Notes State 929 (2020)

Case Legal Studies Research Paper No. 2020-13

11 Pages Posted: 19 Oct 2020

See all articles by Erik M. Jensen

Erik M. Jensen

Case Western Reserve University School of Law

Date Written: August 31, 2020

Abstract

Quite a few judicial opinions in recent years have discussed the constitutionality of Internal Revenue Code section 280E, which denies income-tax deductions and credits to taxpayers for any trade or business that involves “trafficking in controlled substances,” as the section is applied to cannabis businesses. Since marijuana is a controlled substance under federal law, section 280E comes into play for those in the cannabis industry even though that industry has been legalized in many states. This article makes two main points. One is that, even though courts have consistently rejected taxpayers’ arguments that Congress may not impose limits on business-related deductions, that shouldn’t mean that Congress can deny all deductions from gross income for trafficking individuals and still have a “tax on incomes” exempted from the direct-tax apportionment rule by the Sixteenth Amendment. The second is that the Sixteenth Amendment isn’t even arguably relevant if the taxpayer engaged in the cannabis business is a C corporation, a taxable entity. The Supreme Court concluded, before the 1913 ratification of the amendment, that a corporate income tax is not a direct tax that has to be apportioned to be valid. Denial of significant deductions to a corporate taxpayer may be an important policy issue, but it’s not a constitutional one.

Keywords: IRC section 280E, marijuana businesses, Sixteenth Amendment, direct-tax apportionment rule, Flint v. Stone Tracy Co.

JEL Classification: K34

Suggested Citation

Jensen, Erik M., Marijuana Businesses, Section 280E, and the Sixteenth Amendment (August 31, 2020). 168 Tax Notes Federal 1643 (2020), 97 Tax Notes State 929 (2020), Case Legal Studies Research Paper No. 2020-13, Available at SSRN: https://ssrn.com/abstract=3706247

Erik M. Jensen (Contact Author)

Case Western Reserve University School of Law ( email )

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