Cpt Banjo wrote:I agree that as it's currently written, 280E doesn't ban a deduction for COGS, including whatever expenses are properly allocable to inventory cost. But if Congress really wanted to disallow even a COGS deduction I think it could do so by amending 280E to provide that gross income includes the gross receipts from the sale of illegal drugs....
I believe that if a taxpayer were to challenge such a provision in court, the provision would probably be thrown out as unconstitutional. The IRS Chief Counsel, in the December 10, 2014 memorandum linked above, seems to have the same concern. Under current case law, it appears (in my view) that Congress cannot disallow a cost of goods sold offset against gross receipts (at least, as the IRS memo notes, for a taxpayer properly using an inventory method to capitalize the cost of inventory).
...My point was that from a purely tax law standpoint I don't see the constitutional issue the drafters of 280E were worried about, unless they thought the only way to prohibit the deduction of COGS would be to impose a separate gross receipts tax on illegal drug sales, which would have implicated the self-incrimination protection of the 5th Amendment under the Leary rationale.
I believe the drafters were concerned about the line of Supreme Court cases where the Court either held -- or stated in very strong dicta -- that income means gross receipts less cost of goods sold from a constitutional standpoint. If such is indeed the case, Congress might not be able to change that by statute in the way you described.
The Leary case did not involve the Federal income tax or a federal income tax return, if I recall correctly. This is a key difference. The very act of filing the kind of report involved in Leary was much more likely to involve self-incrimination than the filing of a federal income tax return. The situation was similar in Marchetti as well. The holdings in those two cases cannot really be applied to federal income taxes. In the case of the federal income tax, the courts have indicated that the mere filing of the return itself does not have a material self-incriminating aspect (I'm just using my own terms, here), so (based on a reading of the U.S. Supreme Court cases like United States v. Sullivan, 274 U.S. 259 (1927) and Garner v. United States, 424 U.S. 648 (1976)) an individual cannot generally use the Fifth Amendment to refuse to report the amount of his income on a federal INCOME tax return, even if it is illegal income.
In other words, if Congress can constitutionally include something in gross interest income that by no stretch of the imagination is income (i.e., imputed interest under Section 7872)....
I'm not sure whether I agree or disagree that imputed interest is not real income, but maybe that's a discussion for another thread....
.....it should be able to constitutionally include something else in gross income that isn't income (i.e., gross receipts) but that arises from a transaction that can be subjected to an excise (i.e., the sale of drugs).
And that's why I'm not completely 100% confident about the apparent rule that the taxpayer MUST be allowed to offset cost of goods sold against the gross receipts in a sale transaction. We do have that statement from the Court of Appeals in the Penn Mutual case that I cited earlier:
[. . . ] Congress has the power to impose taxes generally, and if the particular imposition does not run afoul of any constitutional restrictions then the tax is lawful, call it what you will.
--Penn Mutual Indemnity Co. v. Commissioner, 277 F.2d 16 (3d Cir. 1960).