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.