Taxpayer operated a Schedule C medical marijuana dispensary in San Francisco known as The Vapor Room. The IRS disallowed all Cost of Goods Sold (COGS) for lack of substantiation, and disallowed other reported expenses for lack of substantiation and for contravening IRC Sec. 280E , which disallows deductions from trafficking in a controlled substance. The Tax Court accepted an expert's opinion that average COGS for a medical marijuana dispensary is 75.16%, but adjusted that percentage for inventory given away or personally consumed. Wwhile the IRS and the Tax Court will "accept a taxpayer's characterization of several undertakings either as a single activity or as separate activities," there was no support for treating part of the dispensary's activities as caregiving services exempt from the disallowance rule in IRC Sec. 280E . A footnote states that the parties agreed, without further explanation, that IRC Sec. 280E disallows deductions for the dispensary's expenses, but not for COGS. Martin Olive , 139 TC No. 2 (Tax Ct.).
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