Legal Archives - Green Market Report

Debra BorchardtDebra BorchardtJune 25, 2020


Aleafia Health Inc. (OTC: ALEAF) and its subsidiary Emblem Cannabis Corporation and Aphria Inc. (NASDAQ:APHA)have said that the parties entered into a settlement agreement on June 25, 2020, to resolve their outstanding dispute in respect of the termination of the parties’ wholesale cannabis supply agreement.

Under the terms of the Settlement Agreement Emblem will get C$29.1 million which will consist of a C$15.5 million cash payment, the issuance of common shares of Aphria with an aggregate market value of C$10 million that will be freely tradeable and transferable in Canada and waiver of claimed receivables. The parties have also agreed to a mutual release of all existing and potential claims relating to the Supply Agreement, and to the dismissal of the arbitration proceedings that had previously been commenced.

“The settlement agreement is fair and satisfactory to both parties and allows Aleafia Health to move forward with a significantly strengthened balance sheet. With a substantial injection of value into our business, we can focus on our continued growth,” said Aleafia Health CEO Geoff Benic.

This settlement ends any and all potential claims and litigation against and between Aphria, Emblem, and Aleafia Health relating to the Supply Agreement.

A Busted Deal

The original problem stemmed from a deal that was agreed to on September 11, 2018, which said that Aphria would provide up to 175,000 kg equivalents of cannabis products over an initial five-year term, commencing May 1, 2019. Aleafia terminated its deal to buy cannabis from Aphria saying the company failed to meet its supply obligations.

“Following Aphria’s failure to meet its supply obligations under the Supply Agreement, Emblem has exercised its contractual right to terminate the Supply Agreement in accordance with its terms. The termination of the Supply Agreement by Emblem was made without prejudice to its rights accrued to the date of termination (including its rights to be refunded the unused balance of its deposit) and its rights to seek damages as a result of Aphria’s default and termination thereunder.”

At the time, Aphria released a statement saying, “We are disappointed that Aleafia has chosen to terminate its Agreement with Aphria Inc. The Company had every intention of fulfilling its obligations under the Agreement. As a large shareholder of Aleafia, Aphria made good faith efforts to ensure the continuation of the Agreement understanding it was in the best interest of all parties involved. However, the termination of this legacy Agreement frees up significant supply allowing the Company to service its brands that are in high-demand across the country.”

Sean HockingSean HockingJune 24, 2020


If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA


Why is California’s cannabis industry in a state of chaos 2+ years after adult-use sales of cannabis were legalized?  Why did California fail so badly in transforming a stable, lightly-regulated medical cannabis industry into a heavily regulated medical and adult-use cannabis industry?  Why is California’s underground cannabis industry booming while its legal cannabis industry is struggling?  Why do so many self-anointed cannabis experts distribute so much advice of so little value?  Why have the Equity Programs that were expressly created to assist and subsidize economically disadvantaged individuals with start-up cannabis businesses had so little success?

There are hundreds of smart advisors in California’s cannabis industry who can, and will, provide a variety of good answers to each of the preceding questions.  In some instances, many advisors are likely to agree on the best answer to each of these questions.  With respect to some of the preceding questions, we suspect California’s recognized cannabis advisors will have a variety of answers.  Most of these answers, but certainly not all, will be somewhat accurate answers.  Many of these answers will be useful, or helpful.  All will be wrong!

Before we explain why the answers California’s cannabis advisors to our introductory questions will almost universally be wrong, we must address a tangential issue.

This article will solely focus on California’s cannabis industry.  The comments in this article, however, are to some significant degree applicable in every State that has legalized cannabis in some form.  Our comments relating to California’s cannabis industry apply in other States for the same reason the answers of California’s cannabis advisors to our introductory questions will almost always be wrong.


California’s cannabis industry, as an industry that moves an agricultural commodity from grower to consumer, is unique.  The cannabis industry in every other state that has legalized cannabis is unique in the same sense.  In any state that has legalized cannabis, there is no other industry in that State that moves an agricultural commodity from farmer to consumer that is close to being comparable to the cannabis industry of that State.  The cannabis industry of every State that has legalized cannabis is also different in some significant respects from the cannabis industry in every other State.


Please consider how many times have you heard an advisor with respect to some aspect of the conduct of business in the cannabis industry preface an opinion relating to a business issue involving cannabis with a statement, “The opinion that follows must be adjusted for the laws and regulations of the State in which you are operating.”  We submit that such a disclaimer is not made with sufficient frequency if at all.



Federal laws impact the cannabis industry in every State.  Federal law may preempt state law, but in most instances, federal law will not preempt State law.  Every state that legalizes cannabis in some form establishes a body of law specifically applicable to the State’s cannabis industry.  A State’s cannabis businesses will also be subject to the general business laws of the particular State.  The general business laws may be preempted by those laws enacted specifically for the State’s cannabis industry, but in most instances, there will be no preemption.


California’s cannabis industry is not unique because cannabis remains federally illegal as a commodity.  California’s cannabis industry is not unique because trafficking in cannabis is subject to the tax penalty of the Internal Revenue Code (“IRC”) §280E.  Both of these issues are frequently discussed as making the cannabis industry in California unique.  These aspects of the conduct of business in the cannabis industry apply in every state that has legalized cannabis.



California’s cannabis industry moves an agricultural commodity from a cultivator to a consumer.  This industry is at the same time both the simplest form of this type of industry and the most complex form of this type of industry.  In its simplest form, a farmer grows this commodity and sell part of the cannabis crop to her next-door neighbor.  Compare growing cannabis to growing tomatoes.  In the simplest of circumstances, there is no substantive difference between the movement of tomatoes as a commodity from grower to consumer and the movement of cannabis.



Now consider the complexity of a commercial tomato industry that moves millions of tons of tomatoes each year from farmers to consumers.  The conduct of business in California’s cannabis industry is subject to all of the complexities that apply to the conduct of business in California’s tomato industry.  However, California added laws and regulations to most aspects of the conduct of business in the cannabis industry that do not apply to tomatoes or any other commodity-based industry.  Every aspect of the movement of cannabis as a commodity from cultivator to consumer in California is subject to cannabis-specific laws and regulations in addition to those laws and regulations that apply to the movement of all commodities from growers to consumers.



The cannabis industry in every other state that has legalized cannabis is unique in that State from every other commodity-based industry for the same reason that  California’s cannabis industry is unique as a commodity-based industry.  In every state that has legalized cannabis, the movement of cannabis as a commodity from cultivator to consumer will be subject to cannabis-specific laws in addition to those laws that apply to the movement of all commodities.  It is the cannabis-specific laws and regulations that make a State’s cannabis industry unique as a commodity-based industry in the State.


Not only does every State that has legalized cannabis have a unique commodity-based industry, but the cannabis industry of every State will also differ to some extent from the cannabis industry in every other State.  Even if one State adopts a legal cannabis regime that is identical to another State, the cannabis industries in these two States will be different to some degree.  Invariably, there will be some differences in the general laws of each State when you take into account all of the general bodies of law that apply to the conduct of business in a commodity-based industry in a State.  Those bodies of general law applicable to the conduct of business that come immediately to mind include tax law; commercial law; real estate law; securities law; corporate law; transportation law; insurance law government law; and administrative law.


As a consequence of saturation, we have ceased to be offended by articles and webinars that purport to provide solutions to cannabis business issues that are applicable in every State that has legalized cannabis.  While these presentations may provide useful guidance, the answer to any question relating to the conduct of business in a State’s cannabis industry will always involve some State-specific gloss.  In some instances, the gloss will be relatively minor.  In other instances, the best answer to a question relating to the conduct of a cannabis business in one State will be completely different from the answer to the same question with respect to a cannabis business in another State.



The conduct of business in California’s cannabis industry is a circumstance where having only a little information will very likely prove fatal for a cannabis business.  The licensing of cannabis businesses in California provides an illustration.  Hundreds of advisors have assisted thousands of individuals in California in securing cannabis business licenses – frequently at significant cost.  Many individuals successfully secured licenses.  Many did not.  Of the thousands of individuals who secured cannabis business licenses, almost none will establish a successful cannabis business.  Securing a local license for the conduct of a cannabis business is a necessary first step, but it is solely one small step among many on the path to a successful business.


Long-term success in any business function in California’s cannabis industry requires a comprehensive general understanding of the industry as well as a comprehensive understanding of the business niche the particular business fills in this industry.  Such an understanding cannot be achieved without also understanding how that same business function would be conducted in any other commodity-based industry.  Cannabis-specific laws and regulations add a gloss to the general laws and regulations that apply to the conduct of the same business function in other commodity-based industries.


California’s cannabis industry is in a state of chaos at the present time.  This state of chaos exists because so many leaders in the industry, both in the private sector and in the public sector, lack a comprehensive general understanding of this commodity-based industry.  Unfortunately, substantial amounts of money will be lost, and the hopes of many will be dashed, because so many smart people so freely opine without fully understanding the extent to which the unique aspects of California’s cannabis industry make their opinions erroneous to a greater or lesser degree.


The preceding is particularly true in connection with the management of taxes which is our area of expertise.  We have not yet examined a California cannabis business that we considered to be properly managing its tax responsibilities.  Most California cannabis businesses are throwing away money through the failure to properly manage taxes except for those California cannabis businesses that are succeeding with tax management through tax evasion.

Debra BorchardtDebra BorchardtJune 19, 2020


A new report from Canaccord Genuity analyst Bobby Burleson suggests that budget constraints as a result of COVID-19 impacts could generate faster support for cannabis legalization. Prior to the pandemic, several states were gearing up for ballot initiatives in the 2020 election. Social distancing seemed to cause many to table those efforts. Now only a few states look to be in play in November.

Burleson noted that prior to the pandemic, he had identified 16 states with cannabis initiatives planned for the election. A combination of medical and recreational programs were teeing up for voters. Fast forward to June and limited moves are expected except for New Jersey, Arizona, and New Mexico where legislation looks to continue making progress. South Dakota could pass medical and Louisiana’s governor signed a law expanding its medical program.

COVID Proves Expensive

“COVID-19 is driving a severe budget crisis for states across the country and an analysis by the Center on Budget & Policy Priorities projects an aggregate state budget shortfall of 10% for the current fiscal year (ends June 30) and for the shortfall to grow to 25% for fiscal 2021,” Burleson wrote. Tax revenues for states are forecast to drop by 12%in 38 states. he expects these budget shortfalls will motivate states to pass some form of legalization to generate tax revenues.

He cited Massachusetts as a prime example. It’s the only state in the northeast that has an established and growing recreational program. Demand has been strong and New Yorkers have accounted for as much as 50% of the sales. All of that tax money could be going into New York’s state coffers, but instead, it’s staying in Massachusetts. Michigan is seeing similar results. Demand in the state is also coming from residents in Ohio, Indiana, and Missouri who are driving there to make purchases.


Getting the designation as an essential service and being allowed to remain open during the pandemic further underscores the support for legalization. Despite social distancing, curbside service, and hastily arranged delivery options, dispensaries said that sales remained strong further supporting the demand from state residents.

StaffStaffJune 16, 2020


Editors Note: This is a guest post.

Many people think of setting up a prosperous business at some point in their lives. Ideally, it should be relatively easy to manage, free of extra costs, and, of course, profitable. However, a lot of potential business owners get easily discouraged by the fact that there are usually many legal issues to sort out and not everyone feels comfortable with that. However, it seems that marijuana dispensary business is a good idea to make some profit relatively effortlessly. If you follow some guidelines about the legal steps that should be taken, you could set up this kind of business and enjoy the profits that come from it. In this article, you will find some points to cover and advice to follow when thinking of a marijuana business.

Re-think your attitude and engagement

Like every business, marijuana dispensary needs commitment and understanding. Without engagement and dedication, there’s pretty much nothing you could achieve. If you want to make a profit from the marijuana business, you need to get committed. If you’re a beginner in the field, try to read some materials to get in-depth knowledge of the market and the legal issues. Without doing so, you’re not able to take any further steps. You can read about this field for example on

Legal issues to consider

Having done some research in the marijuana field, you should be aware of some basic legal issues. However, you should also think about certain inconveniences that may appear on the way. For example, if you want to be a marijuana dispensary owner, you cannot have any criminal record, such as convictions of a drug felony. It will be necessary to obtain a relevant certificate from the local court. What’s more, you should be aware of the fact that the drug law is changing really fast, so it would be essential to stay up-to-date and make any changes in your company if they are required.

Start-up and application

When you are aware of all the risks and things involved, you can begin the start-up process. Usually, the application process is quite strict and lengthy in the case of marijuana-related businesses. It’s typically aimed at detecting and discouraging all the people who are not fully convinced, knowledgeable, and dedicated to this kind of business. Then, you need to pay a licensing fee which will allow you to run the shop and business in a particular location. The price of the fee depends on the place you want to work in – licenses for places in the city center are normally a lot higher than those in the suburbs. Before you get a license, you normally need to show your bank account statement to prove that you have enough means to run the business successfully.

Finding a rental property

Once you are legally able to run our own business, it’s time to look for a rental property that you’d like to turn into your own marijuana dispensary. Make sure if the property is private or public (which means you’ll be renting e.g. from the city governors). The second option may be more profitable, as the places owned by the city are usually cheaper to rent. Moreover, some private landlords may disapprove of the kind of business you’re planning to run, so it’s necessary to talk to them honestly, not to have any problems in the future. Make sure that the property is in a good state, without any damage or other faults. To find some tips connected with renting a commercial property, read this article.

 Getting a marijuana license

The next step that is needed for setting up a marijuana dispensary is obtaining a marijuana license. Obviously, it’s a restricted business and no one is permitted to open such a shop without any permission. In order to get one, it’s best to contact a lawyer who will help you study all the laws and make sure that your business plan goes along all of them. Sometimes it’s quite challenging to do such analysis on your own, as you may not be knowledgeable enough in this field. Plus, it’s not reasonable to risk shutting down your just-opened business.

Legal issues connected with marketing

Once you establish your business, it’s natural to start a marketing and advertising campaign. It’s not a secret that the main part of marketing is now taking place online, either via a professional website or social media channels, such as Instagram, Twitter, or Facebook. However, in the case of marijuana-related business, there is some legal restriction referring to that. You need to remember that billboard, radio, or TV ads of marijuana are not permitted. The same goes for the so-called pop-up ads, which are the advertisements that appear on various sites you get on and lure to visit the targeted website. Therefore, you should be careful with your marketing campaigns and don’t hesitate to consult a lawyer if you’re not sure about a particular thing. If you want to read more about online marketing connected with marijuana business, take a look for example here.

 Setting up a marijuana dispensary business may seem challenging at first, but apparently, after considering legal issues thoroughly, it may be a good idea for a profitable business. It’s good, however, to stay in touch with a trustworthy lawyer, who will sort out all the possible problems and inconsistencies.

Debra BorchardtDebra BorchardtJune 12, 2020


The Stanley Brothers in Colorado made their name by targeting a strain called Charlotte’s Web that had greater amounts of CBD than THC in order to treat a young girl with a rare form of epilepsy. The girl, Charlotte Figi, suffered from Dravet Syndrome that caused her to have multiple seizures in a single day. This strain of cannabis seemed to quell the seizures and allowed her to live a better life. Sadly, Figi recently passed away.

The company called the strain Charlotte’s Web in her honor and even changed its name to Charlotte’s Web Holding Inc. (OTC:CWBHF). Then the company attempted to trademark the name Charlotte’s Web, but was rejected. In October 2019, the United States Patent & Trademark Office rejected the trademark application for “Charlotte’s Web” in a nonfinal Office Action.  The USPTO specifically found that the name “Charlotte’s Web identifies a particular strain of low THC, high CBD content Cannabis sativa plants” does not function as a trademark.

CBD company AAXLL contends that anyone can use the name Charlotte’s Web since it isn’t trademarked. The company believes that CWI made “a serious mistake in adopting the generic name of a strain as its corporate and brand name since everyone has the right to use the name of a strain.”

The logic here is that no company can trademark a specific strain of cannabis. No one company can own the Jack Herer or Purple Kush or Girl Scout Cookies. However, master growers often apply for patents on strains they create as intellectual property. GW Pharmaceuticals (GWPH) has numerous patent applications for various cannabis drug combinations. Since the federal government is loathe to trademark anything related to marijuana, states stepped in to protect various brand names.

AAXALL Fights Back

AAXLL disputes CWI’s central allegation that Charlotte’s Web is not the name of a strain of hemp.  AAXLL CEO Joseph Maskell notes that CWI itself referred to “the Charlotte’s Web strain” in its own 2019 public offering documents.

Maskell also states, “U.S. federal trademark law already dictates that cultivar or strain names are generic from the get-go, so the Charlotte’s Web name of the strain was never protected as a trademark. CWI cannot prevent the rest of the world from referring to Charlotte’s Web as a strain of hemp any more than a French winery could prevent the world from referring to Chardonnay as a varietal name of grapes.”

AAXLL’s Maskell comments that USPTO’s rejection of CWI’s trademark application would demonstrate Maskell concludes, “the family-run Balance CBD brand will not be bullied by CWI.  It’s shameful that a large publicly traded corporation uses such tactics to intimidate competition to try to cover up their past mistakes”

Charlotte’s Web Fights To Protect Name

Like any large company, Charlotte’s Web is fighting to protect its name. In a company filing it wrote, “CW currently has a portfolio of pending U.S. plant, utility and design patent applications directed to CW’s most promising plant genetics, proprietary extraction technology, cannabinoid isolation methods and cannabinoid conversion processes and industrial designs. CW also has pending U.S. and Canadian trademark applications.”

While AAXALL points to the government trademark rejection as a reason it should get to use the name, Charlotte’s Web says that the rejection was due to the product falling under the Controlled Substances Act and FD & C Act. Not because of a strain argument. It said it, “May rely on common law theories of trademark protection and enforcement in cases of actual or suspected trademark infringement of the trademarks it wishes to protect.” The company also noted that such battles to protect its name and trade secrets could be expensive.

Litigation Lineup

Any large company is always seen as a litigation target. There is the assumption that a big company has the money to settle a case rather than fight. Charlotte’s Web market share in the CBD industry is the largest and has at times been as much as a third, although competition has caused that number to decline.

The company faces a class-action lawsuit that its CBD products contain more hemp than the label says. The company contends the products are accurately labeled. Another lawsuit is being fought with AgriMed, who had the license to sell CW products in the state of Illinois. AgriMed says CW competed against it by selling CW products in the state as well. CW says that AriMed didn’t pay the royalties it said it would. That trial had been planned for May 2020.


Sean HockingSean HockingJune 9, 2020


If you wish to re-publish this story please do so with following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA


Harborside has new tax lawyers.  Harborside’s (OTC:HSDEF) new tax lawyers have appealed the DECISION of the United States Tax Court entered October 19, 2019, that determined Harborside has deficiencies in income tax in the total amount of $11,013,236.75 for the years 2007-2012.

Harborside has appealed this DECISION to the Ninth Circuit Court of Appeals.  Harborside filed its Opening Brief on May 26, 2020. [See Case: 19-73078, 05/26/2020, ID: 11701759, DktEntry: 19-1]

The determination Harborside has an additional $11+M federal income tax liabilities for the years 2007-2012 is based on Judge Mark V. Holmes’ Opinion on the substantive income tax issues filed November 29, 2018.  Patients Mut. Assistance Collective Corp v. Comm’r, 151 T.C. 176 (2018).

In a related Opinion filed December 20, 2018, Judge Holmes declined to impose an accuracy-related penalty on Harborside in connection with these income tax deficiencies.  Patients Mut. Assistance Collective Corp v. Comm’r, 151 T.C. Memo. 176 (2018).


Law Professor Bryan Camp wrote an outstanding article relating to COGS and Cannabis that Harborside’s new lawyers should have carefully read before they filed this Opening Brief. Professor Camp states,


“In real life . . . inventory accounting, Alterman & Gibson v. CIR,, TC Memo 2018-82. June 1, 2018] a case involving poor representation of a medical marijuana business. Disclaimer: not only do I not teach COGS but I also never practiced it, so if you dive below the fold, you may catch me out in error. I know for some readers that is actually an incentive to read on—kind of like waiting for a crash on the racetrack. But if you find yourself guffawing at something, please do not hesitate to publicize the error in the comments section. And remember, at least I’m not representing anyone!”[1]


We wrote a several articles relating to Harborside’s dispute with with the Internal Revenue Service (“IRS”) for its tax years 2007-2012.  [[  We criticized Harborside’s counsel for pursuing an argument that was not likely to succeed while at the same time foregoing the opportunity to maximize the tax savings that the IRS gave to cannabis dispensaries in Chief Counsel Memorandum 201504011.  We predicted Judge Holmes first Opinion.  [[  We did not anticipate Judge Holmes second Opinion.  [[


While we stand behind our criticism of Harborside’s original tax counsel, Harborside has made a grievous error in changing counsel.  Harborside’s new tax lawyers lack adequate education and experience in federal tax law and accounting to pursue this appeal.  Harborside’s costs for tax counsel have no doubt increased, but the quality of the representation has not. 

As I read Harborside’s Opening Brief I recalled something my mother told me on a number of occasions when I was in grade school,

“Be sure you understand what a word means before you use it.”


Lest anyone think we are being too harsh, we will concede Harborside’s new tax lawyers may actually prevail in this appeal, although success in this appeal seems highly unlikely for multiple reasons.  This appeal should not have been taken.  It is unnecessary.  The Tax Cuts and Jobs Act [“TCJA”] gave most cannabis businesses the precise relief with respect to Cost of Goods Sold (“COGS”) that Harborside is seeking in this appeal.  The Act was effective January 1, 2018.


Harborside’s original tax lawyers could have saved Harborside substantial amounts by taking the actions that were available to minimize federal income tax liabilities instead of trying to change the law.  Harborside’s new tax lawyers are following the same futile path.


We will devote the balance of this article to explaining how the [[ Act can be utilized to avoid this aspect of Harborside’s federal tax problems.  In [[ we explained how the impact of IRC §280E could be neutralized.


The provisions related to the treatment of “trafficking expenses” and the composition of Cost of Goods Sold have been complex since Congress created IRC Sec. 280E in response to the decision in


In January 2015, the Internal Revenue Service issued an internal memorandum [CCM201504011] that opined on how state-legal cannabis businesses should compute federal income taxes. Drafted by the IRS Chief Counsel, the memo rejects many of the tax deductions that these businesses have traditionally made. The memo challenges tax strategies that allow these businesses to stay afloat, and imposes a strict interpretation of IRC Sec. 280E.


The expenditures which had been traditionally scrutinized under IRC Sec. 280E include:


  • Employee salaries
  • Utility costs such as electricity, internet and telephone service
  • Health insurance premiums
  • Marketing and advertising costs
  • Repairs and maintenance
  • Rental fees for facilities
  • Routine repair and maintenance
  • Payments to contractors


The disallowance of IRC Sec. 263A principles by the CCM added


General and administrative costs (bookkeeping, legal expenses, technology costs)

  • State excise taxes
  • Storage of cannabis
  • Purchasing cannabis
  • Depreciation of cannabis


The Tax Court decisions in Harborside has been viewed as creating an entire set of new rules related to accounting for inventories and the calculation of cost of goods sold [“COGS”] for the cannabis industry[2].The most significant aspect of the opinion in the Harborside case is that it is a reviewed opinion.  As a reviewed opinion, Harborside is binding on all of the judges of the Tax Court unless and until some substantive issue addressed in this opinion is reversed or modified by a higher court.  The substantive decisions addressed in the Harborside opinion largely confirmed and clarified earlier, and in many instances memorandum, opinions issued by other Tax Court judges.  Judge Mark V. Holmes’ opinion in Harborside is comprehensive, thoughtful and well-written as is invariably true of opinions written by Judge Holmes.

The most significant aspect of the Harborside opinion for California’s cannabis industry lies not in the opinion but in the interplay between this opinion and California’s regulation of its cannabis industry.  The Harborside opinion rejected the use of IRC Sec. 263A and approved the use of IRC Sec. 471 in the determination of COGS.

[Lead in to IRC Sec. 471(c)(3)


(c)Exemption for certain small businesses


(1)In general In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year—


  • subsection (a) shall not apply with respect to such taxpayer for such taxable year, and


  • the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either—


(i) treats inventory as non-incidental materials and supplies, or


(ii) conforms to such taxpayer’s method of accounting reflected an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.


(2) Applicable financial statement – For purposes of this subsection, the term “applicable financial statement” has the meaning given the term in section 451(b)(3)[3].

(3) Application of gross receipts test to individuals, etc.

In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership.

(4) Coordination with section 481

Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.


We were amused by the article[4] [Member Blog: IRC Section 471(c) of the TCJA May Mitigate the Curse of 280E for the Cannabis Industry]

which appeared in the CCIA Journal in May 2020 which was authored by a member of the same firm the prepared the CA-9 brief.


[1] The article continues

Most businesses that sell stuff must comply with the inventory accounting rules in §471. COGS becomes even more important to businesses that get hit with §280E, the section that prohibits deductions and credits for any trade or business activity that “consists of trafficking in controlled substances…which is prohibited by Federal law….” [Note: that is not a grammatical error: it is the prohibition of trafficking that is the trigger, not the prohibition of the substances themselves].

The restrictions in §280E give affected businesses every incentive to cram as much of their business costs into COGS as they can. That is because the idea underlying COGS is that costs of acquiring or producing property that held for sale is not a §162 “expense” (hence deductible from the income the sale of property produces) but is instead part of the computation of gross income when the property is sold.

I am thinking that this idea of COGS is a necessary result from the famous formula in §1001 that says the income produced by the sale of property is the amount realized minus the taxpayer’s basis in the property sold. COGS is the method of allocating basis to the items of property a business sells. If I sell a bottle of car wax for $10, I am selling property. I do not have $10 of gross income minus the expenses of acquiring that bottle. COGS accounting allows me to report as gross income only the net of the $10 over the cost of acquiring the bottle because I have a basis in the bottle (I wonder…had a CPA written the classic song by Police would it have been titled “Basis in A Bottle”?). But if I wax your car for $10, I must report the entire $10 as gross income. I have no basis in my labor. If I can deduct my costs of performing that service from the $10, then perhaps it’s the same result.

COGS reminds me of form over substance. For those interested in more theory, you cannot do better than Joe Dodge’s “The Netting of Costs against Income Receipts (Including Damage Recoveries) Produced by Such Costs, without Barring Congress from Disallowing Such Costs,” 27 Va. Tax Rev. 297 (2007)(advocating a computational netting approach to the treatment of contingent attorneys fees). My takeaway from that article is that there is no principled distinction between netting expenses against gross receipts to arrive at gross income and netting expenses against gross income to arrive at net income. Both methods of accounting are based on the same underlying principle: it takes money to make money and the money used should be deducted from the money made. 

Take salaries, for example.  Treas. Reg. 1.471-11(b) tells you that some salaries can be accounted for as part of the COGS calculation of gross income while other salaries must be taken as deductions from gross income. Now, for a business that sells stuff, perhaps it does not make much of a tax difference whether a particular employee’s salary is taken as a §162 deduction or goes into COGS. But a business subject to the limitations in §280E really needs to get its COGS numbers right.”


[2] The inventory costing methods available under IRC Sec. 471 includes

Small businesses which have average gross receipts for trailing three years of less than $25 million

  • and are not a tax shelter
  • may rely on their book method of determining COGS for tax purposes. Stated differently, qualifying taxpayers do not need to make book-to-tax adjustments for COGS.

IRC Sec. 471(a) states

“Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income”.


If an industry adopts best practices of capitalizing the majority of direct and indirect costs into COGS and the use of such a method clearly reflects income, then the IRS cannot adjust the taxpayer’s method of determining COGS solely for the purpose of “clearly reflecting income” based on IRC Sec. 471(a).

The Regulations define “Inventories at Cost” as:

For merchandise on hand at the beginning of the taxable year, the inventory price of such goods [See Reg. 1.471-3(a)

In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate. The cost of transportation or other necessary charges incurred in acquiring possession of the goods [See Reg. 1.471-3(b)]

In the case of merchandise produced by the taxpayer since the beginning of the taxable year;

the cost of raw materials and supplies entering into or consumed in connection with the product, expenditures for direct labor, and

indirect production costs incident to and necessary for the production of a particular article, including in indirect production costs an appropriate portion of management expenses, but not including any cost of selling or return on capital, whether by way of interest or profit. See Reg. Sec. 1.263A-1 and 1.263A-2 for specific rules regarding the treatment of production costs [Reg. 1.471-3(c)]

Inventories of a Retailer – A retailer may use the retail inventory method.  The retail inventory method uses a formula to convert the retail selling price of ending inventory to an approximation of cost (retail cost method) or an approximation of lower of cost or market (retail LCM method) [Reg. Sec. 1.471-8 – Further, a taxpayer may use the retail inventory method instead of valuing inventory at cost under Reg. Sec. 1.471-3 or lower of cost or market under Reg. Sec.1.471-4.]


Manufacturer’s Inventory – To conform as nearly as possible to the best accounting practices and to clearly reflect income[7], both direct and indirect production costs must be taken into account in the computation of inventory costs in accordance with the “full absorption” method of inventory costing.

Under the full absorption method of inventory costing production costs must be allocated to goods produced during the taxable year, whether sold during the taxable year or in inventory at the close of the taxable year, determined in accordance with the taxpayer’s method of identifying goods in inventory. Thus, the taxpayer must include as inventoriable costs all direct production costs and all indirect production costs [Reg. Sec. 1.471-11, for the purposes of this section, the term financial reports refer to the GAAP.]

A taxpayer should be able to capitalize the cost of goods sold when doing so is consistent with industry practices[9].  Taxpayers in the cannabis industry could justifiably assert that substantial authority existed to sustain the use of IRC Sec. 263A in the calculation of the cost of goods sold prior to the release of Chief Counsel Memorandum 201504011.’

This CCM requires:

Taxpayers trafficking in a Schedule I or Schedule II controlled substance to determine the cost of goods sold using the applicable inventory-costing regulations under IRC Sec. 471 as these regulations existed when IRC Sec. 280E was enacted; and

Unless the taxpayer is properly using a non-inventory method to account for the Schedule I or Schedule II controlled substance pursuant to the Code, Regulations, or other published guidance, the IRS may require an adjustment to clearly reflect income.

The ability to use IRC Sec. 263A and assert that the IRC Sec. 6662 “substantial understatement” penalties do not apply ended with the publication of CCM 201504011.  The methodology that Harborside utilized for the years 2007-2012 is not acceptable for years after 2014.

The situation becomes particularly grim for California dispensaries beginning after 2017.  California’s Bureau of Cannabis Control adopted regulations beginning in 2018 that require Retailers to purchase cannabis


[3] (3) Applicable financial statement For purposes of this subsection, the term “applicable financial statement” means—


  • a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—


(i) a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission,

(ii)an audited financial statement of the taxpayer which is used for—


(I)credit purposes,

(II)reporting to shareholders, partners, or other proprietors, or to beneficiaries, or

(III)any other substantial nontax purpose, but only if there is no statement of the taxpayer described in clause (i), or


(iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),


(B)a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or

(C) a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).


[4] On March 30, 2020, the Treasury Inspector General for Tax Administration issued a report titled “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.” The 53-page report discussed several different topics, including that the IRS should conduct more audits under Section 280E, and this discussion focuses on Section 471(c).

The report states that certain qualifying cannabis taxpayers, who would otherwise be subject to business expenses being disallowed under Section 280E, could potentially account for their inventory under Section 471(c) using a method that would classify most or all of their expenditures as inventoriable costs and avoid Section 280E’s disallowance of such expenditures. Accordingly, as all the costs would be capitalized into inventory, they would then reduce taxable income as the inventory was sold. In other words, expenditures previously disallowed under Section 280E would be part of the cost of goods sold and allowed as a reduction of gross receipts. There was no public comment from the IRS in the report on the potential that 471(c) may eliminate 280E.

Before continuing to provide our additional comments, it is important to mention the impact of Section 471(c) on Section 280E has not been reviewed by the Courts and the Inspector General also stated that necessary guidance addressing 471(c) is lacking from the IRS. As such, the impact cannot be stated in certain terms. 

The curse of Section 280E on the cannabis industry cannot be overstated – some businesses actually end up paying more in tax than they make and Section 280E can turn an economic loss into a taxable gain. This seemingly unconstitutional result has been justified by the courts and IRS under a very old principle of taxation that “deductions are a matter of legislative grace.” New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) Legislative grace, according to these authorities, means the legislature has the power to deny all deductions, if they so choose, and it should be said that the limitation of such grace, under the 16th Amendment to the US Constitution, is that 280E cannot disallow costs of goods sold. With Section 471(c), however, legislative grace appears to be on the side of the cannabis industry because, as discussed below, Congress created Section 471(c) and it appears to allow inclusion of deductions into the cost of goods sold where they can’t be disallowed under Section 280E. 

The Code states that Section 471(c) allows a small taxpayer, one with less than $25 million in revenues, who is not a tax shelter or public company to account for inventory according to their applicable financial statements, or absent applicable financial statements, according to the actual books and records of the taxpayer. For a qualifying business that doesn’t have applicable financial statements, if their books and records include deductions in COGS, then these deductions may not be subject to 280E.


Kaitlin DomangueKaitlin DomangueJune 8, 2020


Leading cannabis manufacturer in California, Procan Labs, announced its victory in a monumental lawsuit against the state of California. 

The Los Angeles Times reported on February 14th, 2020 that Santa Barbara County law enforcement confiscated over $2.6 million in cannabis oil as well as over $620,000 in cash from Barry Brand, a well-known local businessman, and cannabis operator. Brand is a longtime Gerbera daisy grower and shifted to cannabis. Brand is a prominent advocate in the cannabis community dedicated to helping develop marijuana policy, even hiring lawyers, lobbyists, and communication firms to support his efforts. Brand maintained his position that he was operating legally, but the District Attorney highlighted technical noncompliance problems that ignited the belief that Brand was acting criminally. 

The litigation lasted for three months, and Judge T. Anderele ruled in the state of California that criminal laws such as the state Controlled Substances Act do not apply to licensed commercial cannabis activities, such as Brand’s operation. It was also confirmed that there were no illegal cannabis oils of any kind. All substances and products found on the premises were correctly identified with METRC RFID tags and in the system prior to shipment and seizure. 

John Armstrong representing Horwitz+ Armstrong law firm was lead counsel for Eagle Bay Enterprises (d.b.a. Procan Labs). He said, “With millions of dollars at stake, licensed cannabis operators should not be at risk of losing their business because police mistake lawful cannabis operations for illegal black market activities. California established the Bureau of Cannabis Control (BCC) and empowered it to support and regulate legal cannabis activities, to the exclusion of heavy-handed law enforcement regulating such activities. This decision shows that our courts will side with the cannabis industry when provided evidence of good faith efforts to comply with state regulations. We would like to thank CREC Compliance for its assistance in verifying legal compliance by Procan. CREC’s help was invaluable in securing the eventual positive result.”

Many cannabis brands came to the defense of Procan, namely longtime distribution leader, HARDCAR. “Mark Unterbach, CEO of Procan Labs, remarked, “HARDCAR’s assistance was instrumental in assisting us maneuver through the legal roadblocks that had been placed in the way of our efforts to simply secure the return of our inventory.”

This is a big win for cannabis businesses not only in California but nationwide. 

Sean HockingSean HockingJune 5, 2020


Republished with permission from Cannabis Law Report:

Social equity programs, a recent innovation of the cannabis industry, are programs that seek to remediate and help individuals, Read More…

Social equity programs, a recent innovation of the cannabis industry, are programs that seek to remediate and help individuals, families, and communities harmed by the War on Drugs. In
2017 I began researching social equity programs and to my dismay found there was little if any, research available on social equity programs and how they’re created. Consequently, the lack of guidance or any information on why social equity programs succeed or fail has led many programs to repeat the same mistakes of their predecessors and severely weakened those program’s chances of survival.

I developed the Social Equity Assessment Tool (S.E.A.T.) in 2018 and began using it in 2019 to
better understand programs. My first case study was Los Angeles’ social equity program. It
concluded that the program would fail because of possible corruption, lack of transparency,
and a severely under-resourced agency tasked with creating, implementing, and enforcing their
social equity program. Since then, I have been able to speak with regulators and advocates
across the country about designing and implementing social equity programs.
My experience with the general lack of knowledge about social equity programs was further
validated when I started asking other major thought leaders and organizations about their
views on how social equity programs are faring. Collectively, we agree they can be improved by
educating regulators and policymakers. Our goal is not to implement change overnight, but
rather, to start a larger conversation about social equity. We believe by collectively bearing our
thoughts on social equity programs we can be a resource and reference for drafters of social
equity programs.

Our goal can further be defined into four objectives:
● Educate regulators on what social equity programs are and their importance.
● Why certain criteria should be used to define social equity applicant eligibility.
● An analysis of prior social equity programs.
● Key factors for social equity programs.

Understanding Social Equity is a compilation of viewpoints from various authors with diverse
backgrounds. From attorneys, policy analysts, and journalists to advocates, business owners,
and social equity applicants, my goal was to provide as many perspectives as possible – some of
which may conflict with other authors to provide regulators a wide range of respected opinions
about social equity programs. Together, we believe this compilation can be used as a guide for
drafters and regulators when determining minute details about how they would like to create
or improve their social equity program. The authors of this compilation only represent
viewpoints expressed in their individual work.


Down load the full pdf at

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