Harborside has new tax lawyers. Harborside’s 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.

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
- State excise taxes
- Storage of cannabis
- Purchasing cannabis
- Depreciation of cannabis
- 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—
- 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.
- a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—