In San Jose Wellness v. Commissioner 156 TC 4 (2021), the Court ruled that depreciation and charitable deductions made by the business were not deductible.
Section 280E reads:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”
The Tax Court opined that since marijuana is a controlled substance, that 280E applied to the pot store. Thus essentially, Pot stores are taxed on their gross income.
Remarkably though Pot stores can deduct costs of goods sold however. CHAMP v. Commissioner 128 TC 173 (2007).
Category Archives: income tax
Zombie Tax effect on Bernie Sanders
So, President Biden’s Tax plan has to gifts for farmers and small business owners. Reduction of the Estate tax exemption from $11.5 Million to $3.5 Million ($7 Million per couple). And capital gain recognition upon the death of an ancestor. So, let’s take Bernie Sanders. He dies owning real estate totalling about $3 Million and his basis is about $800,000. This translates into a $2.2 Million gain. This gets taxed at 45% = $990,000. So, let’s take Grandma who dies with $4 Million in a farm with a basis of $100,000. Capital gain of $3.9 Million x 45% tax = $1,755,000 to be paid over 15 years by the family or they have to sell the farm to some conglomerate probably. Same numbers if Grandma owned a gas station. Jobs will be lost, wealth will be lost, investment will be lost. If you want to raise taxes, raise it the simplest way possible, raise rates on income for everyone. Then everyone sees that their taxes are going up and that the Government is spending money.
Trump Organization Indictments
In the grand scheme of things $3.5 Million of benefits spread over 13 years for a billion dollar operation is not a huge issue and in probably 99.9% of the cases leads to a civil, not criminal case. However there are some of the charges that are on pretty solid ground while others are tenuous. The charges involving the rent free apartment are the strongest. He and his wife lived in the apartment and clearly the checks for the rents were paid by the Trump Organizations without calling it compensation and his salary was reduced by the rent payments. This leads to the inevitable conclusion that he was receiving a rent free apartment as part of his compensation. The private school tuition payments for his children are on the tenuous side. Those were actually paid by Donald Trump or by his trust. That would tend to make them a gift from Mr. Trump and if they are less than $28,000 per year per child, they don’t even trigger a gift tax calculation. So, that part of the indictment might fail (although apparently there is a plea deal in the works so he will cooperate with an investigation into former President Trump).
So, the lesson from this is that if you are a hard target of those who wish to discredit you, you probably should make sure that all transactions are fully defensible and not bleed into the tax fraud realm. Tax avoidance is acceptable and if there is a business purpose and economic reality to a transaction, it is not fraud. In this case, the rent free apartment is of a possible tenuous business purpose (perhaps he was on 24 hour/day call and needed to be close to the office), but normally that still doesn’t cure the economic reality that he was getting a place to stay courtesy of his employer and his salary was being reduced accordingly. Those two facts push it into the compensation zone and it was taxable and shows intentionality.
IRS Extending Tax Filing Deadline
The IRS is extending the Tax filing deadline. Returns and payments will be due May 17, 2021 for 2020 individual returns. There is no extension for Corporation, S. Corporation or Partnership returns got similar delays. There is no indication that Fiduciary returns got extended either.
“In a statement, the IRS said the extension would be automatic, with no need to file any forms and no penalties or interest on taxes due that are paid between April 15 and May 17.”
1st Quarter Estimated Taxes however are still due on April 15.
Maryland is extending their deadline to July 15. The extension applies to individual, pass-through, fiduciary and corporate income tax returns, including first and second quarter estimated payments. It’s brought on by the recent and pending legislation at the state and federal levels impacting 2020 tax filings during the pandemic.
Virginia has not weighed in with an extension, yet.
Short Sales, Stock Manipulation, and other stuff
Under the 2017 Tax Act Theft losses are no longer deductible. In Adkins v. United States the Court implicitly agreed that a loss from a pump and dump scheme was a theft loss. This means that as a Taxpayer you are stuck with a capital loss either short or long term if you are the victim of stock manipulation.
Lately, there has been some game playing (interestingly with GameStop). The Company appeared to be on the ropes due to COVID and having stores in brick and mortar malls. Some investors sold the stock short. There is a little known fact on Wall Street, stocks go down faster than they go up most of the time. So, you can make a lot of money if you bet correctly. Gamers and others decided it would be fun to play a trick on short sellers in GameStop. So, they started buying either the stock or call options on the stock. This had the effect of making the demand higher and the stock started going up. People who sold short (meaning they borrowed the shares), had to buy the stock to stop the bloodbath. People who wrote naked call options (meaning the wrote options thinking the stock would go down) had to buy options themselves to cover or buy the stock. This cause the stock to go up further.
A few handy lessons in this. (1) If you are going to sell short, protect yourself at the beginning by purchasing a call option. A call option gives you the right to buy the stock a specified price. That way, if the stock goes up, you have upper level protection against the loss. (2). Stock manipulation occurs all the time. We don’t see it as clearly as in this case. Sometimes its for fun or an academic exercise where people don’t actually buy the stock, just take some actions which have the effect of propping it up, or knocking it down. For example, remember the urine in the beer hoax about Corona Beer, that caused a market shift downward temporarily. Another example a college class had 10 people call five different brokers to ask what’s going on with a certain penny stock (but not to buy). Brokers being salesmen figured the calls were a flurry of interest. And started touting the stock to their customers. And the stock went up slightly. (3) Beware of high pressure salesmen who attempt to get you to buy a stock. Its possible that they or their bosses own a chunk of that stock and once it goes up, they will dump it (pump and dump) leaving you to hold the bag.
So, while stocks are a great investment tool, there is some fraud out there. So, be wise in your investment strategy and use reputable brokers that you know personally.