Sec. 280e basically states that a company conducting activities which comprises of trafficking controlled substances within the meaning of schedule I and II of the Controlled Substance Act may not take deductions or credits on any amounts incurred while doing business.
Back in 2016, the IRS had issued a notice of deficiency to the Northern California Small Business Assistant, Inc (NCSBA). This was for its 2012 income tax of $1,264,212. The IRS issued an accuracy-related penalty of $252,842. The NCSBA filed a petition with the Tax Court on the grounds that Sec. 280e violates the US Constitution’s 8th Amendment prohibition of excessive fines. The 8th Amendment states “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishment inflicted.” The NCSBA argued that it was legally operating under California law which does not consist of “trafficking” a controlled substance.
The Tax Court stated that Sec. 280e is not a penalty provision and does not violate the 8th Amendment. The Tax Court also ruled that Sec. 280e does apply to business operating legally under state law. The court disagreed with NCSBA’s claim that Sec. 280e should be limited to ordinary and necessary business deductions. Under Sec. 280 “no deduction or credit shall be allowed.”
Judge David Gustafson overseeing the case stated that additional income tax liability due to disallowance of deductions under Sec. 280e was a fine, in part, because Sec. 280e was designed to punish and deter “unlawful” activity of trafficking marijuana. Gastafson had concluded that more proceedings would be required to determine whether such a fine is excessive and. whether the 8th Amendment’s protections extend to corporate taxpayers.
For further information regarding Sec. 280e, ask for a free consultation