Harborside Looks to Win 280E Case, Get Tax Guidance

By Hilary Corrigan Jul 17, 2020

The attorney representing one of the country’s largest dispensaries in a closely-watched tax case has left his law firm and kept the case.

Former Greenspoon Marder LLP partner James Mann told WeedWeek he left the firm about two weeks ago, having no incentive to go to work in a big office building any longer. Law360 reported Mann’s move earlier this week.

He remains Oakland-based Harborside Health Center’s attorney in the case involving industry-hated tax rule 280E, which denies tax deductions and credits to those dealing in federally illegal drugs. In the spring, Harborside appealed a 2019 U.S. Tax Court ruling that found it underpaid taxes by $11M over a five-year stretch. Harborside has asked the U.S. Court of Appeals for the Ninth Circuit to rule 280E unconstitutional.

The argument involves whether 280E circumvents the 16th Amendment that only lets Congress levy taxes on income. Harborside has argued that courts have long defined income as gain. Since the cannabis industry can’t deduct expenses, the resulting taxable income looks larger than it really is. 

Harborside also disputes the Tax Court’s finding on its cost of goods sold (COGS) calculations. COGS for Harborside include expenses from buying flower, for instance, and testing and processing. The case argues Harborside should be allowed to allocate certain expenses to COGS—a way to reduce taxable income.

The government’s response is expected in late August. “I look forward to seeing their reply brief,” he said.

‘Big help to the industry’

Last week, the IRS asked the court for an extension on its reply, originally due this month. It noted that the case raises “significant, complex, and novel issues.” It also points to the briefs that trade organizations have filed in the case, supporting Harborside.

“Because of this case’s significance,” the request states, preparing the reply brief “will require more-than-typical consultation” with attorneys from both the IRS and the Department of Justice.

Mann stresses that there has been no real authoritative written guidance on these issues from the government. So the fact that the different government attorneys are working on this is a positive development for his client.

“Win or lose, it would be really great for the cannabis industry to get some guidance,” he said. “That’ll be a big help to the industry.”

“Part of the problem now is just lack of knowing what the rules are,” he said.

Mann expects an even better outcome with his case. “I think it should prevail,” he said.

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