Internal Revenue Code, Section 280E

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Internal Revenue Service

I just finished reading the opening brief in Patients Mutual Assistance Collective D.B.A. Harborside Health Center v. Commissioner of Internal Revenue, No. 19-73078 (9th Cir., May 26, 2020).

Harborside claims the tax penalty the Internal Revenue Service (IRS) is applying violates the Sixteenth Amendment to the U.S. Constitution and that IRS has failed to include the cost of processing (comparing it to beef processing in a grocery store) to Cost of Goods Sold (COGS) in determining taxable income.

26 U.S.C. §280E reads as follows:

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.

Although none of the parties in the case have raised the doctrine of constitutional avoidance, section 280E does not violate the Sixteenth Amendment for a very simple reason.  Harborside has failed to apply for an exemption from schedule I of the federal controlled substances act.  Such an application exists in 21 C.F.R. §1307.03 and such an exemption from federal schedule I has already been recognized in 21 C.F.R. §1307.31

Last Resort Rule:
The Court will not pass upon a constitutional question although properly presented by the record, if there is also present some other ground upon which the case may be disposed of.
Constitutional Avoidance Canon:
When the validity of an act of the Congress is drawn in question, and even if a serious doubt of constitutionality is raised, it is a cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided.

Ashwander v. TVA, 297 U.S. 288, 345-48 (Brandeis, J., concurring) (1936).

At first blush, it might appear that Harborside has caused its own injury and must accept the consequences.  However, the IRS hasn’t raised the issue of federal exemption from schedule I.  Since neither of the parties has raised the issue of constitutional avoidance, it seems like the case must proceed and the court must decide it on constitutional grounds.

One has to wonder if there is a constitutional mandate that courts raise issues the parties seek to avoid.  Both parties have a conflict of interest here.  Harborside does not want to withdraw its claim that the statute is unconstitutional.  And IRS does not want to give up a federal tax windfall for the government.

Do the rest of us have to stand idly by while these vested interests shred the constitution?  At least I can write about it.