California Cannabis Shop Calls IRS Tax Penalty Unconstitutional

A Los Angeles-based cannabis company sued the IRS over $4 million in taxes and penalties after the IRS disallowed tax deductions citing a tax code provision related to controlled substances.

California Organic Treatment Center filed a petition before the US Tax Court after the IRS determined it wasn’t entitled to deduct about $15.9 million in cost of goods sold in 2021. The IRS imposed $3.3 million in unpaid taxes and a $668,000 penalty, according to the Sept. 16 petition.

The agency reached the determination under the IRC Section 208E—a provision that blocks deductions for businesses that consist of trafficking ...