Tax Court in Brief: Lord v. Comm’r—Marijuana and COGS

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The Tax Court in Brief – February 28th-March 4th, 2022

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Tax Litigation:  The Week of February 28, 2022, through March 4, 2022

Lord v. Comm’r, T.C. Memo. 2022-14 | March 4, 2022 | Kerrigan, J. | Dkt. No. 19224-18


Short Summary:  In 2012, Mr. Lord owned interests in a limited liability company and an S corporation, both of which were formed in the State of Colorado and both of which were licensed by that state to cultivate, process, and distribute medical marijuana.  The businesses did not have audited financial statements for 2012 and were not otherwise required to maintain books and records or financial reports in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  The businesses calculated the depreciation included in their cost of goods sold (“COGS”) for the year by using the accelerated cost recovery method in section 168(a), and they claimed bonus depreciation under section 168(k).  The businesses used methods under section 168(a) and (k) that did not conform with GAAP.

Mr. and Mrs. Lord (“Petitioners”) timely filed a joint Form 1040 for 2012.  In a notice of deficiency for that year, the Commissioner determined adjustments to the depreciation deductions that the businesses had claimed.  The adjustments reflected the Commissioner’s position that section 263A should not have been relied upon for the calculation of inventory and the determination of COGS.

Key Issues

Primary Holdings

Key Points of Law

Insights: This case illustrates the continuing difficulties that state-sanctioned marijuana businesses face in obtaining an even playing field with other types of businesses under the federal income tax as well as the Tax Court’s continued resistance to entertaining end-runs around section 280E in the absence of legislation by Congress.