                                                                                 FILED
                                                                     United States Court of Appeals
                                      PUBLISH                                Tenth Circuit

                      UNITED STATES COURT OF APPEALS                          July 3, 2018

                                                                          Elisabeth A. Shumaker
                             FOR THE TENTH CIRCUIT                            Clerk of Court
                         _________________________________

ALPENGLOW BOTANICALS, LLC, a
Colorado Limited Liability Company;
CHARLES WILLIAMS; JUSTIN
WILLIAMS,
                                                            No. 17-1223
      Plaintiffs - Appellants,

v.

UNITED STATES OF AMERICA,

      Defendant - Appellee.
                      _________________________________

                     Appeal from the United States District Court
                             for the District of Colorado
                        (D.C. No. 1:16-CV-00258-RM-CBS)
                       _________________________________

James D. Thorburn (Richard Walker with him on the briefs), Thorburn Walker LLC,
Greenwood Village, Colorado, for Plaintiffs - Appellants.

Patrick J. Urda, Attorney, Tax Division (Gilbert S. Rothenberg and Michael J. Haungs,
Attorneys, Tax Division, and Counsel Robert C. Troyer, United States Attorney, with
him on the brief), Department of Justice, Washington, D.C., for Defendant - Appellee.
                        _________________________________

Before HARTZ, MURPHY, and McHUGH, Circuit Judges.
                  _________________________________

McHUGH, Circuit Judge.
                    _________________________________
      Alpenglow Botanicals, LLC (“Alpenglow”) sued the Internal Revenue Service

(“IRS”) for a tax refund, alleging the IRS exceeded its statutory and constitutional

authority by denying Alpenglow’s business tax deductions under 26 U.S.C. § 280E.

The district court dismissed Alpenglow’s suit under Federal Rule of Civil Procedure

12(b)(6) for failure to state a claim upon which relief could be granted, and denied

Alpenglow’s subsequent motion under Federal Rule of Civil Procedure 59(e) to

reconsider the judgment. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm.

                               I.     BACKGROUND

      Although twenty-eight states and Washington, D.C. have legalized medical or

recreational marijuana use, the federal government classifies marijuana as a

“controlled substance” under schedule I of the Controlled Substances Act (“CSA”).

Green Sol. Retail, Inc. v. United States, 855 F.3d 1111, 1113 (10th Cir. 2017); see 21

U.S.C. § 812(c), Schedule I(c)(10); 21 C.F.R. § 1308.11(d)(23). The CSA makes it

unlawful to knowingly or intentionally “manufacture, distribute, or dispense . . . a

controlled substance.” 21 U.S.C. § 841(a)(1). Under former President Obama, the

Justice Department had declined to enforce § 841(a)(1) against marijuana businesses

acting in accordance with state law,1 but the IRS has shown no similar inclination to


      1
        This policy encouraging federal prosecutors not to prosecute these cases was
implemented through memoranda of the prior Attorneys General. See, e.g.,
Memorandum from David W. Ogden, Deputy Att’y Gen., U.S. Dep’t of Justice for
Selected U.S. Att’ys (Oct. 19, 2009), revised by Memorandum from James M. Cole,
Deputy Att’y Gen., U.S. Dep't of Justice for all U.S. Att’ys (Aug. 29, 2013). The
current Attorney General has since rescinded this policy. Memorandum from
Jefferson B. Sessions, Att’y Gen., U.S. Dep’t of Justice for all U.S. Att’ys (Jan. 4,
2018).
                                           2
“overlook federal marijuana distribution crimes.” Feinberg v. Comm’r, 808 F.3d 813,

814 (10th Cir. 2015). Instead, the IRS consistently denies business deductions to

state-sanctioned marijuana dispensaries under 26 U.S.C. § 280E,2 which prohibits

any “deduction or credit” for any business that “consists of trafficking in controlled

substances (within the meaning of . . . the Controlled Substances Act).” E.g., id.;

Olive v. Comm’r, 792 F.3d 1146, 1147 (9th Cir. 2015).

      This appeal is the product of the clash between these state and federal policies.

Alpenglow is a medical marijuana business owned and operated by Charles Williams

and Justin Williams, doing business legally in Colorado. See Alpenglow Botanicals,

LLC v. United States (Alpenglow I), No. 16-cv-00258-RM-CBS, 2016 WL 7856477,

at *2 (D. Colo. 2016) (unpublished). After an audit of Alpenglow’s 2010, 2011, and

2012 tax returns, however, the IRS issued a Notice of Deficiency concluding that

Alpenglow had “committed the crime of trafficking in a controlled substance in

violation of the CSA” and denying a variety of Alpenglow’s claimed business

deductions under § 280E. Id. Alpenglow’s income and resultant tax liability were

increased based on the denial of these deductions. Because Alpenglow is a “pass


      2
          26 U.S.C. § 280E states in full:

      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.

                                             3
through” entity, the increased tax liability was passed on to Charles Williams and

Justin Williams. As a result, Charles Williams owed the IRS an additional $24,133 in

taxes and Justin Williams owed an additional $28,961. The two men paid the

increased tax liability under protest and filed for a refund, which the IRS denied. Id.

      The men then filed a complaint in the United States District Court for the

District of Colorado seeking to overturn the IRS’s decision. Id. at *1. The United

States filed a Motion to Dismiss the Complaint under Federal Rule of Civil Procedure

12(b)(6) for failure to state a claim upon which relief can be granted (“Motion to

Dismiss”). In its Motion to Dismiss, the United States identified four claims raised by

Alpenglow, three of which are relevant to this appeal: (1) the IRS does not have the

authority to disallow deductions under 26 U.S.C. § 280E without a criminal

conviction; (2) § 280E violates the Sixteenth Amendment’s definition of gross

income; and (3) § 280E is an excessive fine that violates the Eighth Amendment.3

      Following oral argument on the Motion to Dismiss, Alpenglow filed a Motion

to Amend the Complaint “to allege further detail as to the specific deductions that the

IRS denied.” Id. The Amended Complaint alleged “the deductions denied were: rent

for where the business was conducted; costs of labor; compensation of officers;


      3
         The Motion to Dismiss also asserted that the district court did not have
subject matter jurisdiction to issue the injunctive relief requested by Alpenglow in
the complaint. Alpenglow Botanicals, LLC v. United States (Alpenglow I), No. 16-cv-
00258-RM-CBS, 2016 WL 7856477, at *1 (D. Colo. 2016) (unpublished). The
district court denied Alpenglow’s request for injunctive relief without addressing the
subject matter jurisdiction argument, id. at *6 n.3, and Alpenglow does not challenge
this ruling on appeal. Thus, the jurisdictional issue, which was limited to the
injunction claim, is not before us.
                                           4
advertising; taxes and licenses for doing business; depreciation; and other wages and

salaries.” Id. at *2. Alpenglow also filed a Motion for Partial Summary Judgment

Refund Claim (“Motion for Partial Summary Judgment”). In addition to the claims

identified in the Motion to Dismiss, Alpenglow’s Motion for Partial Summary

Judgment asserted two new claims: (1) the IRS’s decision to apply § 280E was

arbitrary because it had no evidence Alpenglow trafficked in a controlled substance;

and (2) the IRS incorrectly disallowed exclusions for Alpenglow’s costs of goods

sold under 26 U.S.C. § 263A.4 In its December 1, 2016 Opinion and Order, the

district court granted Alpenglow’s Motion to Amend the Complaint, granted the

United States’ Motion to Dismiss, and denied Alpenglow’s Motion for Partial

Summary Judgment (“Rule 12(b)(6) Dismissal”).5 Id. at *8.

      Twenty-eight days after the entry of final judgment, Alpenglow filed a Motion

to Alter or Amend the Judgment pursuant to Federal Rule of Civil Procedure 59(e)

(“Rule 59(e) Motion”). Alpenglow Botanicals, LLC v. United States (Alpenglow II),

No. 16-cv-00258-RM-CBS, 2017 WL 1545659, at *1 (D. Colo. 2017) (unpublished).

The motion contained a proposed Second Amended Complaint and asserted that the

      4
         In the Amended Complaint and Motion for Partial Summary Judgment
briefing, Alpenglow also raised a Fifth Amendment claim, “alleg[ing] that the IRS
should have informed plaintiffs that they were under investigation for violating the
CSA.” Alpenglow I, 2016 WL 7856477, at *6. The district court denied this claim,
id., and Alpenglow does not raise it on appeal.
      5
         Alpenglow also filed a Motion for Order to Certify Question of
Constitutionality of Colorado’s Medical Marijuana Laws to Colorado State Attorney
General Pursuant to 28 U.S.C. § 2403(b). Alpenglow I, 2016 WL 7856477, at *1. The
district court denied this motion, id. at *8, and Alpenglow does not challenge that
ruling on appeal.
                                          5
district court “misapprehended controlling law” by failing to consider the three new

claims Alpenglow raised as a request to amend the complaint—specifically, that

(1) the IRS improperly disallowed costs of goods sold; (2) the IRS produced no

evidence of trafficking; and (3) § 280E violates the Eighth Amendment. Id.

Alpenglow argued the district court should grant leave to amend because the United

States would not be prejudiced by allowing Alpenglow to file the Second Amended

Complaint. Id. The district court denied the motion, concluding it was not required to

consider arguments not alleged in the Amended Complaint and Alpenglow was not

entitled to amend because the request was untimely. Id. at *1–3.

       Alpenglow appeals both the Rule 12(b)(6) Dismissal and the court’s denial of

its Rule 59(e) Motion. We address each order in turn, beginning with the Rule

12(b)(6) Dismissal.

                                   II.    DISCUSSION

                A. Federal Rule of Civil Procedure 12(b)(6) Dismissal

       “We review a district court’s dismissal under Federal Rule of Civil Procedure

12(b)(6) de novo.” Khalik v. United Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012).

“Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain ‘a short and

plain statement of the claim showing that the pleader is entitled to relief.’” Id. While

“the pleading standard Rule 8 announces does not require ‘detailed factual

allegations,’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 555 (2007)), the “complaint must contain enough allegations

of fact, taken as true, ‘to state a claim to relief that is plausible on its face,’” Khalik,

                                              6
671 F.3d at 1190 (quoting Twombly, 550 U.S. at 570). “A claim has facial plausibility

when the plaintiff pleads factual content that allows the court to draw the reasonable

inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S.

at 678.

      Under the Twombly/Iqbal pleading standard, courts take a two-prong approach

to evaluating the sufficiency of a complaint. Iqbal, 556 U.S. at 678–79. The first

prong of the test requires the court to identify which pleadings “are not entitled to the

assumption of truth.” Id. at 679. This includes “legal conclusions” as well as

“[t]hreadbare recitals of the elements of a cause of action, supported by mere

conclusory statements.” Id. at 678. The second prong of the test requires the court to

“assume th[e] veracity” of the well-pleaded factual allegations “and then determine

whether they plausibly give rise to an entitlement to relief.” Id. at 679. “Accordingly,

in examining a complaint under Rule 12(b)(6), we will disregard conclusory

statements and look only to whether the remaining, factual allegations plausibly

suggest the defendant is liable.” Khalik, 671 F.3d at 1191.

      Alpenglow argues it raised three legal theories that plausibly stated a claim

and therefore precluded the district court’s dismissal of the Amended Complaint

under Rule 12(b)(6). First, Alpenglow asserts the IRS lacks the general authority to

investigate and deny tax deductions under § 280E without a criminal conviction, and

that, even if it had such authority, the IRS has insufficient evidence of trafficking to

apply § 280E in this case. Second, Alpenglow claims the IRS’s calculation of

Alpenglow’s income violates the Sixteenth Amendment. Third, Alpenglow contends

                                            7
§ 280E violates the Eighth Amendment.6 We now explain why none of these

arguments supports a conclusion that the district court erred in dismissing the

complaint, beginning with the IRS’s application of § 280E.

1. Denial of Deductions Under 26 U.S.C. § 280E

      As indicated, Alpenglow raises two arguments relating to the IRS’s denial of

its business deductions under § 280E: the IRS (1) lacks the authority to investigate

whether Alpenglow trafficked in controlled substances because such a determination

requires the IRS to conclude that the business violated federal drug laws and

(2) acted in an arbitrary manner because it did not have any evidence that Alpenglow

trafficked in controlled substances.

      a. Authority to investigate

      Alpenglow claims the IRS could not use § 280E to deny the deductions in the

absence of a conviction from a criminal court that its owners had violated federal

drug trafficking laws. At the core of Alpenglow’s argument is the assumption that a

determination a person trafficked in controlled substances under tax law is essentially

the same as a determination the person trafficked in controlled substances under

criminal law. Because Alpenglow sees the two as inextricably linked, it contends the

IRS lacks the authority to apply § 280E until after a federal prosecutor has


      6
        Although the district court based its dismissal of these claims on the United
States’ Motion to Dismiss, it also denied Alpenglow’s Motion for Partial Summary
Judgment under Federal Rule of Civil Procedure 56 “with respect to whether the IRS
improperly denied the cost of goods sold, whether the IRS has authority to apply
§ 280E, and whether the application of § 280E violates the Sixteenth Amendment.”
Alpenglow I, 2016 WL 7856477, at *7.
                                           8
investigated and charged the taxpayer with violating federal criminal law and a judge

or jury in a criminal proceeding has issued a verdict of guilty.

      We recently rejected this argument in Green Solution, 855 F.3d at 1120–21.

There, Green Solution sued to enjoin the IRS from investigating Green Solution’s

business records in connection with an audit focused on whether certain business

expenses should be denied under § 280E. We concluded the Anti-Injunction Act

(“AIA”) prevented the court from exercising jurisdiction over Green Solution’s “suit

for the purpose of restraining the assessment or collection of any tax.” Id. at 1119

(quoting 26 U.S.C. § 7421(a)). In an attempt to avoid that conclusion, Green Solution

argued the AIA did not preclude the action because a determination of “whether [it]

trafficked in a controlled substance . . . is a criminal investigation properly carried

out by the United States Attorney,” id. at 1120, and thus “a determination of whether

a taxpayer violated the CSA is not within the authority of the IRS,” id. at 1121

(internal quotation marks omitted). In rejecting this argument, we noted that “§ 280E

has no requirement that the Department of Justice conduct a criminal investigation or

obtain a conviction before § 280E applies.” Id. at 1121. And we noted that under 26

U.S.C. § 6201(a), “the IRS’s obligation to determine whether and when to deny

deductions under § 280E[] falls squarely within its authority under the Tax Code.” Id.

But because our analysis was limited to determining that the AIA precluded Green

Solution’s suit, we lacked subject matter jurisdiction to address the merits of the

claim that “the IRS exceeded its authority under the Internal Revenue Code.” Id.



                                            9
at 1121 & n.8. Instead, we decided “only that the IRS’s efforts to assess taxes based

on the application of § 280E fall within the scope of the AIA.” Id. at 1121 n.8.

      Although not directly on point, our analysis in Green Solution is persuasive.

Alpenglow offers no reason why we should conclude the IRS has the authority to

assess taxes under § 280E, but cannot impose excess tax liability under § 280E.

There is also no evidence that Congress intended to limit the IRS’s investigatory

power. Indeed, the Tax Code contains other instances where the applicability of

deductions or tax liability turns on whether illegal conduct has occurred. See 26

U.S.C. § 162(c)(2) (denying deductions for illegal bribes, kickbacks, etc.); id. § 6663

(imposing civil tax penalty for fraud); id. § 165(e) (allowing deduction for theft loss).

And other courts have upheld tax deficiencies against state-sanctioned marijuana

dispensaries based on application of § 280E, without questioning the IRS’s authority

on this issue. See Olive, 792 F.3d at 1151; Beck v. Comm’r, 110 T.C.M. (CCH) 141,

*5–6 (2015); Canna Care, Inc. v. Comm’r, 110 T.C.M. (CCH) 408, *3–4 (2015),

aff'd, 694 F. App’x 570 (9th Cir. 2017); Californians Helping to Alleviate Med.

Problems, Inc. v. Comm’r (C.H.A.M.P.), 128 T.C. 173, 181–82 (2007).

      Nonetheless, Alpenglow argues that because Congress has not expressly

delegated the IRS authority to investigate violations of federal drug laws, the IRS

cannot make the predicate finding necessary for a denial of deductions under § 280E.

In support of this proposition, Alpenglow points to a series of cases from the

Supreme Court striking regulations involving the taxation of illegal conduct: Leary v.

United States, 395 U.S. 6 (1969); Grosso v. United States, 390 U.S. 62 (1968);

                                           10
Haynes v. United States, 390 U.S. 85 (1968); and Marchetti v. United States, 390

U.S. 39 (1968). But these cases concern the invocation of the privilege against self-

incrimination where the IRS investigation involved gambling, marijuana, or, in

Haynes, possession of an unregistered firearm. See Leary, 395 U.S. at 13. Critically,

these cases struck down IRS regulations that required the taxpayers to disclose

information such as the names and addresses of the sellers and buyers, their

registration numbers, and the quantity of the products sold. See id. at 15; see also

Marchetti, 390 U.S. at 42–49. The Supreme Court concluded these tax provisions

violated the Fifth Amendment due to the “substantial and ‘real’ . . . hazards of

incrimination.” Marchetti, 390 U.S. at 53 (quoting Rogers v. United States, 340 U.S.

367, 374 (1951)); Leary, 395 U.S. at 15. For example, in Marchetti, the Court noted

that the regulation in question required the taxpayer to obtain a tax stamp, which

necessarily “declar[ed] . . . a present intent” to violate gambling laws, and that

federal and state courts had consistently relied on payment of the tax in subsequent

criminal cases against the taxpayer. Marchetti, 390 U.S. at 47–48, 53. Indeed, some

states and municipalities criminalized the mere possession of a tax stamp, making it

impossible to comply with both laws. Id. at 48 n.10.

      Alpenglow’s case is easily distinguishable from these cases. First, Alpenglow

has not raised a Fifth Amendment challenge on appeal and is instead citing these

cases for the IRS’s authority to tax based on its conclusion that the taxpayer is

engaged in illegal conduct. But the Supreme Court has repeatedly asserted, including

in the cited opinions, that “the unlawfulness of an activity does not prevent its

                                           11
taxation.” Id. at 44. The cases cited by Alpenglow were challenges to “the methods

employed by Congress” in enforcing these statutes, id. (emphasis added), not the

authority of the IRS to investigate and tax illegal activity. Second, these statutes

involved the imposition of a tax for specific illegal conduct, not the denial of a tax

deduction. Third, the tax information at issue in the cited cases was routinely shared

with the Department of Justice and frequently used to support criminal charges,

creating a tax provision that served as a proxy for a criminal investigation. Here,

Alpenglow has failed to cite a single case in which the government relied on a denial

of deductions under § 280E as evidence of guilt in a criminal trial. Accordingly, these

decisions do not prohibit the IRS from applying § 280E to deny Alpenglow’s

deductions.

      In summary, it is within the IRS’s statutory authority to determine, as a matter

of civil tax law, whether taxpayers have trafficked in controlled substances. Thus, the

IRS did not exceed its authority in denying Alpenglow’s business deductions under

§ 280E.




                                           12
         b. Evidence of trafficking7

         Alpenglow also contends the IRS’s denial of its deductions was arbitrary

because the IRS had no proof Alpenglow trafficked in a controlled substance. But in

an action to recover taxes paid to the IRS, the “taxpayer has the burden to show not

merely that the IRS’s assessment was erroneous, but also the amount of the refund to

which the taxpayer is entitled.” Dye v. United States, 121 F.3d 1399, 1408 (10th Cir.

1997). Under this rule, the burden falls on Alpenglow to show error, not on the IRS

to prove trafficking. See Green Sol., 855 F.3d at 1121; Feinberg, 808 F.3d at 815.

Alpenglow has not satisfied this burden. As the district court noted, the “Amended

Complaint contains no allegations related to the IRS’[s] lack of evidence for

disallowing plaintiffs’ business expenses” and is instead “entirely premised upon the

IRS’[s] alleged lack of authority to disallow” them. Alpenglow I, 2016 WL 7856477,

at *7.

         Rather than challenge the district court’s conclusion, Alpenglow relies on

26 U.S.C. § 7491 and argues that once it raised the allegation that the IRS lacked


         7
         Unlike Alpenglow’s other arguments, the district court dismissed this claim
solely within the context of Alpenglow’s Motion for Partial Summary Judgment. See
Alpenglow I, 2016 WL 7856477, at *7 (“The only argument . . . remaining in the
motion for summary judgment is whether the IRS has failed to produce sufficient
evidence that plaintiffs trafficked in a controlled substance.”). “We review a district
court’s grant of summary judgment de novo.” Amparan v. Lake Powell Car Rental
Cos., 882 F.3d 943, 947 (10th Cir. 2018). “Summary judgment is appropriate ‘if the
movant shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.’” Id. (quoting Fed. R. Civ. P. 56(a)). “On
appeal, we examine the record and all reasonable inferences that might be drawn
from it in the light most favorable to the non-moving party.” Id. (internal quotation
marks omitted).
                                            13
evidence of Alpenglow’s purported trafficking, “the burden shifted to the

Government as a matter of law to show it actually had the evidence.” Aplt. Br. at 29

(citing 26 U.S.C. § 7491). But § 7491 states:

      If, in any court proceeding, a taxpayer introduces credible evidence
      with respect to any factual issue relevant to ascertaining the liability of
      the taxpayer . . . , the Secretary shall have the burden of proof with
      respect to such issue.

26 U.S.C. § 7491(a)(1) (emphasis added).

      Alpenglow did not make an arbitrariness argument in the Amended Complaint

or allege any “credible evidence” that it is not engaged in marijuana trafficking.

Thus, even if we assume the burden shifts to the IRS to prove its action was not

arbitrary, Alpenglow is not relieved of its initial obligation to provide “credible

evidence” that it does not traffic in a controlled substance. By choosing not to

advance this theory, or allegations supporting it, in the Amended Complaint,

Alpenglow has waived the claim. See J.V. v. Albuquerque Pub. Sch., 813 F.3d 1289,

1299 (10th Cir. 2016) (holding that “Appellants waived [a disparate impact] basis for

ADA liability by omitting it from their complaint”).

2. Taxable Income Under the Sixteenth Amendment

      Alpenglow next raises a Sixteenth Amendment claim consisting of two

arguments: (1) under the constitutional definition of income, ordinary and necessary

business expenses must be excluded from gross income calculations; and (2) the IRS

improperly disallowed Alpenglow “costs of goods sold” exclusions under § 263A.




                                           14
       a. Ordinary and necessary business expenses

       The Sixteenth Amendment grants Congress the power “to lay and collect taxes

on incomes, from whatever source derived, without apportionment among the several

States, and without regard to any census or enumeration.” For purposes of calculating

tax liability, the Internal Revenue Code includes two types of income: “gross

income” and “taxable income.”

       The Tax Code codified the Sixteenth Amendment’s definition of income by

defining gross income as “all income from whatever source derived, including . . .

[g]ross income derived from business.” 26 U.S.C. § 61(a); see Comm’r v. Glenshaw

Glass Co., 348 U.S. 426, 432 n.11 (1955) (Section 61(a) “is based upon the 16th

Amendment and the word ‘income’ is used in its constitutional sense.” (internal

quotation marks omitted)); Samples v. Comm’r, 98 T.C.M. (CCH) 27, *3 (2009)

(“26 U.S.C. section 61(a) is in full accordance with Congressional authority under the

Sixteenth Amendment to the Constitution to impose taxes on income without

apportionment among the states.” (quoting Perkins v. Comm’r, 746 F.2d 1187, 1188 (6th

Cir. 1984))). “The starting point in the determination of the scope of ‘gross income’ is the

cardinal principle that Congress in creating the income tax intended to use the full

measure of its taxing power.” Comm’r v. Kowalski, 434 U.S. 77, 82 (1977) (internal

quotation marks omitted). To that end, Congress has the unquestioned constitutional and

statutory authority to tax gross income. New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934). To ensure taxation of income rather than sales, the “cost of goods sold” is a

mandatory exclusion from the calculation of a taxpayer’s gross income. See Max

                                            15
Sobel Wholesale Liquors v. Comm’r, 630 F.2d 670, 671 (9th Cir. 1980); Sullenger v.

Comm’r, 11 T.C. 1076, 1077 (1948); 26 C.F.R. § 1.61-3(a) (“‘[G]ross income’ means

the total sales, less the cost of goods sold . . . .”). Treasury Regulations include

“inventory price,” “transportation or other necessary charges incurred in acquiring

possession of the goods,” “cost of raw materials and supplies,” “direct labor” costs,

and “indirect production costs” as some of the mandatory exclusions to gross income.

26 C.F.R. § 1.471-3.8



       8
           Cost means:

       (a) In the case of merchandise on hand at the beginning of the taxable year,
       the inventory price of such goods.
       (b) In the case of merchandise purchased since the beginning of the taxable
       year, the invoice price less trade or other discounts, except strictly cash
       discounts approximating a fair interest rate, which may be deducted or not
       at the option of the taxpayer, provided a consistent course is followed. To
       this net invoice price should be added transportation or other necessary
       charges incurred in acquiring possession of the goods. For taxpayers
       acquiring merchandise for resale that are subject to the provisions of
       section 263A, see §§ 1.263A–1 and 1.263A–3 for additional amounts that
       must be included in inventory costs.
       (c) In the case of merchandise produced by the taxpayer since the beginning
       of the taxable year, (1) the cost of raw materials and supplies entering into
       or consumed in connection with the product, (2) expenditures for direct
       labor, and (3) indirect production costs incident to and necessary for the
       production of the particular article, including in such indirect production
       costs an appropriate portion of management expenses, but not including
       any cost of selling or return on capital, whether by way of interest or profit.
       See §§ 1.263A–1 and 1.263A–2 for more specific rules regarding the
       treatment of production costs.

26 C.F.R. § 1.471-3. “Treasury regulations must be sustained unless unreasonable and
plainly inconsistent with the revenue statutes . . . .” Comm’r v. S. Tex. Lumber Co., 333
U.S. 496, 501 (1948).

                                             16
      In contrast, taxable income is the taxpayer’s “gross income minus the

deductions allowed” by statute. 26 U.S.C. § 63(a). Deductions under § 162(a) are

matters of “legislative grace” specifically authorized by statute, see Commodore

Mining Co. v. Comm’r, 111 F.2d 131, 134 (10th Cir. 1940), and “Congress has

unquestioned power to condition, limit, or deny deductions from gross income in

arriving at the net which is to be taxed,” id. at 133 (citing Helvering v. Indep. Life

Ins. Co., 292 U.S. 371, 381 (1934)). One such statutorily-authorized deduction

“allows a business to deduct from its gross income ‘all the ordinary and necessary

expenses paid or incurred during the taxable year in carrying on the trade or

business.’” Olive, 792 F.3d at 1148 (quoting 26 U.S.C. § 162(a)). The Supreme Court

has defined “ordinary and necessary expenses” as those expenses that are

“‘appropriate and helpful’ to ‘the development of the (taxpayer’s) business,’” Colo.

Springs Nat’l Bank v. United States, 505 F.2d 1185, 1191 (10th Cir. 1974) (quoting

Comm’r v. Tellier, 383 U.S. 687, 689 (1966)), and “normal[] in the particular business,”

id. at 1193 (quoting Deputy v. du Pont, 308 U.S. 488, 496 (1940)). However, § 162(a)

prohibits certain deductions, such as “when the ‘amount paid or incurred during the

taxable year’ is for the purpose of ‘carrying on any trade or business consisting of

trafficking in controlled substances.’” Olive, 792 F.3d at 1148 (quoting 26 U.S.C.

§ 280E).

      Alpenglow does not challenge Congress’s authority to limit or deny

deductions. Nor does Alpenglow contest that the IRS specifically enumerates nearly

all of the challenged expenses listed in the Amended Complaint as “Deductions.”

                                           17
Instead, Alpenglow argues that, despite being listed in the Tax Code as deductions,

“certain necessary items like . . . ordinary and necessary [business] expenses” are

actually exclusions that, like the cost of goods sold, must be subtracted from the

calculation of a business’s gross income. See Davis v. United States, 87 F.2d 323,

324 (2d Cir. 1937). Consequently, Alpenglow claims § 280E violates the Sixteenth

Amendment because it “prevent[s] the deduction of expenses that a business could

not avoid incurring.” See Aplt. Br. at 25; Alpenglow I, 2016 WL 7856477, at *4.

      Although there can be similarity between expenses that qualify as cost of

goods sold and ordinary and necessary business expenses (such as labor),9 the cost of

goods sold relates to acquisition or creation of the taxpayer’s product, while ordinary

and necessary business expenses are those incurred in the operation of day-to-day

business activities. The cost of goods sold is a well-recognized exclusion from the

calculation of gross income, while ordinary and necessary business expenses are

deductions. Indeed, while the Tax Code has statutorily excluded certain expenses

from the calculation of gross income, only the cost of goods sold is mandatorily

excluded by “[t]he very definition of ‘gross income’ . . . even in the absence of

specific statutory authority for such exclusion.” See Max Sobel, 630 F.2d at 671. In

contrast, ordinary and necessary business expenses have been repeatedly recognized

as statutorily-authorized deductions. See, e.g., Woolford Realty Co. v. Rose, 286 U.S.

      9
         For example, while the cost of labor is typically considered “a subtractable
cost of goods sold,” Congress has the constitutional authority to “limit[] the amount
which may be subtracted for income tax purposes, on account of salaries and labor,
from the selling price of goods to a ‘reasonable allowance’ for salaries and wages.”
See Pedone v. United States, 138 Ct. Cl. 233, 239–40 (1957).
                                          18
319, 328 (1932); Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363 (1931); United

States v. Akin, 248 F.2d 742, 743–44 (10th Cir. 1957). Although the Supreme Court

has never been confronted with the exact argument Alpenglow makes—that

necessary business expenses are actually exclusions—the Court has indicated that

Congress has the authority to disallow the types of unavoidable expenses Alpenglow

identifies.

       For example, prior to the enactment of 26 U.S.C. § 280E, the Supreme Court

refused the IRS’s attempt to deny the cost of rent and wages as ordinary and

necessary business expense deductions for a gambling business operating in violation

of state law. Comm’r v. Sullivan, 356 U.S. 27, 28 (1958). The Court held that, to

deny the business “the normal deductions of the rent and wages necessary to operate

it” would “come close to making this type of business taxable on the basis of its

gross receipts, while all other businesses would be taxable on the basis of net income.

If that choice is to be made, Congress should do it.” Id. at 29 (emphasis added); see

also Tellier, 383 U.S. at 692, 693 (“Deduction of expenses falling within the general

definition of § 162(a) may, to be sure, be disallowed by specific legislation, since

deductions are a matter of grace and Congress can, of course, disallow them as it

chooses.” (internal quotation marks omitted)). And, in passing 26 U.S.C. § 280E,

Congress did exactly that by denying ordinary and necessary business expenses

incurred by businesses engaged in drug trafficking. Where the Supreme Court

proposed that Congress make the choice whether to deny such deductions, we find it

difficult to conclude Congress acted unconstitutionally in doing so. It would be

                                           19
strange indeed for the Supreme Court to invite Congress to pass legislation violating

the Constitution. It follows then that the business expenses here are deductions, not

costs of goods sold. Indeed, the United States Tax Court has expressly reached that

same conclusion.

      In Californians Helping to Alleviate Medical Problems, the United States Tax

Court analyzed § 280E and concluded that the ordinary and necessary business

expenses associated with operating a medical marijuana business were deniable

deductions. C.H.A.M.P., 128 T.C. at 181–82. The tax court noted that the legislative

history of § 280E indicates the statute was enacted “as a direct reaction to the

outcome of a case in which [the tax] [c]ourt allowed a taxpayer to deduct expenses

incurred in an illegal drug trade.” Id. at 181. That case, Edmondson v. Comm’r,

permitted the taxpayer to deduct not only the cost of goods sold, but also his

“ordinary and necessary” business expenses. 42 T.C.M. (CCH) 1533 (1981),

superseded by statute, 26 U.S.C. § 280E. In its report discussing the enactment of

§ 280E, the Senate Finance Committee cited Edmonson as the impetus for the

provision and explained that § 280E was designed to disallow “[a]ll deductions and

credits for amounts paid or incurred in the illegal trafficking in drugs.” C.H.A.M.P.,

128 T.C. at 182 (citation omitted). Tellingly, the report’s next sentence stated: “[t]o

preclude possible challenges on constitutional grounds, the adjustment to gross

receipts with respect to effective costs of goods sold is not affected by this provision

of the bill.” Id. (citation omitted); see Peyton v. Comm’r, 85 T.C.M. (CCH) 1345, *5



                                           20
(2003) (“[S]ection 280E disallows deductions and credits (but not costs of goods sold)

with respect to the sale of controlled substances.”).

       Alpenglow also argues that, by refusing to allow deductions for unavoidable

business expenses, Congress is permitting the IRS to tax its gross receipts rather than

its income. But, “it is [not] a violation of due process to impose a tax on gross receipts

regardless of the fact that expenditures exceed the receipts. . . . The mere fact of intake

being less than outgo does not relieve the taxpayer of an otherwise lawfully imposed

tax.” Penn Mut. Indem. Co. v. Comm’r, 277 F.2d 16, 20 (3d Cir. 1960).

       The Internal Revenue Code and United States Tax Court have characterized

ordinary and necessary business expenses as discretionary deductions—not

mandatory exclusions—to gross income calculations. Congress’s choice to limit or

deny deductions for these expenses under § 280E does not violate the Sixteenth

Amendment.

       b. Costs of goods sold

       Alpenglow also claims the IRS improperly denied it an exclusion from income

for costs of goods sold. Although Alpenglow did not make this argument until its

Motion for Partial Summary Judgment, the district court treated it as part of

Alpenglow’s Sixteenth Amendment claim and dismissed it under Rule 12(b)(6). The

court concluded Alpenglow did not “plausibly allege[] a claim that the IRS

improperly disallowed the cost of goods sold [because] the Amended Complaint

neither raises such a claim nor alleges any facts in that regard.” Alpenglow I, 2016

WL 7856477, at *5. We agree.

                                             21
      In its Amended Complaint, Alpenglow alleges the IRS issued a Notice of

Deficiency “denying all ordinary and necessary business deductions and increasing

the income of Alpenglow.” See Aplt. App. vol. 1, at 197 (emphasis added). The

Amended Complaint does not include “costs of goods sold” as one of the denied

deductions and nowhere in the Amended Complaint does Alpenglow claim, or allege

facts to support, that the IRS’s characterization of the denied expenses as

deductions—rather than costs of goods sold—was erroneous.

3. Eighth Amendment

      Alpenglow’s third assertion is that § 280E is a penalty and enforcing it violates

the Eighth Amendment. Our recent decision in Green Solution, 855 F.3d 1111,

forecloses this argument. Green Solution held that “Section 280E is not a penalty,”

because “[t]he disallowance of a deduction is not an exaction imposed as a

punishment. Deductions are not a matter of right. Neither do they turn upon equitable

considerations. They are a matter of legislative grace.” Id. at 1121 (internal quotation

marks omitted). Alpenglow contends this conclusion in Green Solution is non-

binding dicta. We are not convinced.

      In Green Solution, the taxpayer argued the district court could assert subject

matter jurisdiction over its injunction action against the IRS because § 280E is a

penalty, not a tax subject to the AIA. Id. We rejected that argument, concluding

instead that the attempt to enjoin the IRS’s investigation into the applicability of

§ 280E fell squarely within the jurisdiction-stripping provision of the AIA. Id.

Because the panel’s holding in Green Solution that § 280E is not a penalty was

                                           22
necessary to its disposition of the case, that holding was not dicta. See Bishop v.

Smith, 760 F.3d 1070, 1083 (10th Cir. 2014) (“Statements which appear in an opinion

but which are unnecessary for its disposition are dicta.”). And although Green

Solution assessed whether § 280E was a penalty under the Anti-Injunction Act,

Alpenglow has offered no reason why the result should be different under the Eighth

Amendment. We remain convinced that § 280E is not a penalty.

                                          ***

      Alpenglow has failed to state a claim entitling it to relief because § 280E does

not violate the Eighth or Sixteenth Amendments and the IRS did not exceed its

statutory authority in applying it to deny Alpenglow’s business deductions. We

therefore affirm the district court’s Rule 12(b)(6) Dismissal.

                       B. Federal Rule of Civil Procedure 59(e) Motion

      We turn now to the denial of Alpenglow’s Motion to Alter or Amend the

Judgment pursuant to Federal Rule of Civil Procedure 59(e). “We review Rule 59(e)

decisions for abuse of discretion.” Etherton v. Owners Ins. Co., 829 F.3d 1209, 1228

(10th Cir. 2016). “An abuse of discretion is defined in this circuit as judicial action

which is arbitrary, capricious, or whimsical.” United States v. Pacheco, 884 F.3d

1031, 1047 (10th Cir. 2018) (quotation marks omitted). Grounds warranting a motion

to alter or amend the judgment pursuant to Rule 59(e) “include (1) an intervening

change in the controlling law, (2) new evidence previously unavailable, and (3) the

need to correct clear error or prevent manifest injustice.” Servants of the Paraclete v.

Does, 204 F.3d 1005, 1012 (10th Cir. 2000). “Thus, a motion for reconsideration is

                                           23
appropriate where the court has misapprehended the facts, a party’s position, or the

controlling law.” Id. “It is not appropriate to revisit issues already addressed or

advance arguments that could have been raised in prior briefing.” Id. To reverse the

district court’s denial of a Rule 59(e) motion, “we must have a definite and firm

conviction that the lower court made a clear error of judgment or exceeded the

bounds of permissible choice in the circumstances.” Etherton, 829 F.3d at 1228

(internal quotation marks omitted).

1. Motion to Amend the Complaint

      “An issue raised for the first time in a motion for summary judgment may

properly be considered [as] a request to amend the complaint, pursuant to Federal

Rule of Civil Procedure 15.” Pater v. City of Casper, 646 F.3d 1290, 1299 (10th Cir.

2011). “We therefore construe the district court’s refusal to address the new issue as

a denial of plaintiffs’ request.” Id. “Although leave to amend shall be freely given

when justice so requires,” Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893

F.2d 1182, 1185 (10th Cir. 1990) (internal quotation marks omitted), “[t]he decision

to grant leave to amend the pleadings is within the discretion of the trial court, and

we will not reverse the court’s decision absent an abuse of discretion,” Pater, 646

F.3d at 1299 (internal quotation marks omitted).

      In light of our liberalized pleading rules, plaintiffs generally “should not be

prevented from pursuing a claim merely because the claim did not appear in the

initial complaint.” Id. at 1299. But plaintiffs cannot “wait until the last minute to

ascertain and refine the theories on which they intend to build their case.” Id.

                                           24
(quotation marks omitted). We have repeatedly held that, “untimeliness alone is a

sufficient reason to deny leave to amend when the party filing the motion has no

adequate explanation for the delay.” Id. (quotation marks omitted); see Las Vegas Ice

& Cold Storage Co., 893 F.2d at 1185. And, “[w]here the party seeking amendment

knows or should have known of the facts upon which the proposed amendment is

based but fails to include them in the original complaint, the motion to amend is

subject to denial.” Las Vegas Ice & Cold Storage Co., 893 F.2d at 1185 (quotation

marks omitted).

      In its Rule 59(e) Motion, Alpenglow challenges the district court’s Rule

12(b)(6) Dismissal Order and asserts that three of its claims should have been

permitted to be advanced in a Second Amended Complaint: (1) the IRS incorrectly

disallowed deductions for costs of goods sold under § 263A; (2) the IRS failed to

provide any evidence of trafficking to support its denial of Alpenglow’s deductions

under § 280E; and (3) § 280E violates the Eighth Amendment. Alpenglow II, 2017

WL 1545659, at *1–3. Alpenglow claimed the court “misapprehended controlling

law” by dismissing these claims for failure to sufficiently raise and/or support them

in its Amended Complaint rather than treating them as a request to further amend the

complaint. Id. at *1. Alpenglow also asserted that the district court relied on an

erroneous public policy announcement to support its dismissal of Alpenglow’s claim.

      The district court noted that, although it had the ability to consider the

arguments as a request to further amend the complaint, it was not required to do so.

Id. The court also indicated that, even if it elected to consider Alpenglow’s request to

                                           25
amend the complaint, it would deny the motion as untimely because Alpenglow had

sufficient facts to raise all three arguments in its original or Amended Complaint. Id.

at *2. And the court noted that it did not make a public policy analysis and would not

consider Alpenglow’s newly raised “Dead Letter Rule” argument on untimeliness

grounds. On appeal, Alpenglow argues this decision was an abuse of the district

court’s discretion. We have reviewed the district court’s decision on each of these

claims above and concluded the court did not err in dismissing them for failure to

state a claim. We now conclude the district court did not abuse its discretion in

refusing to allow Alpenglow to amend its complaint to address the relevant

deficiencies.

      a. Costs of goods sold

      Alpenglow first argues the district court abused its discretion in refusing to

grant it leave to amend the complaint to include a claim that the IRS improperly

included Alpenglow’s cost of goods sold in calculating its tax liability. As discussed

above, the district court denied this claim because Alpenglow’s Amended Complaint

failed to plausibly allege it. To address this deficiency, Alpenglow attached a

proposed Second Amended Complaint to its Rule 59(e) Motion. The critical

difference between the two complaints is that Alpenglow’s proposed Second

Amended Complaint asserts the IRS “den[ied] all ordinary and necessary business

deductions, including the cost of goods sold,” whereas the Amended Complaint made

“[t]he same allegation (minus reference to cost of goods sold).” Id. (emphasis added).



                                          26
      The district court denied the motion to amend the complaint on untimeliness

grounds because, despite having all the necessary facts, Alpenglow failed to raise the

claim earlier. As discussed above, Alpenglow failed to include the IRS’s alleged

denial of its cost of goods sold expenses in its Amended Complaint or to challenge

the IRS’s characterization of its denied expenses as deductions, despite having

received the Notice of Deficiency and the United States’ Motion to Dismiss—both of

which claimed the denied deductions excluded costs of goods sold. Under these

circumstances, the district court’s determination that Alpenglow had the facts

necessary to raise this argument sooner is not “a clear error of judgment.” See

Etherton, 829 F.3d at 1228 (quotation marks omitted).

      b. Evidence of trafficking

      Alpenglow concedes it did not raise the IRS’s alleged lack of trafficking

evidence in the Amended Complaint, but claims it could not have done so because

“the fact that the IRS did not have any evidence of purported trafficking came about

due to the representations made by the IRS in its response to the Plaintiff’s Motion

for Summary Judgment.” Aplt. Br. at 33. But, in its Motion for Partial Summary

Judgment on this issue, Alpenglow cites the IRS’s failure to make factual findings

establishing the purported trafficking conduct in the Notice of Deficiency as evidence

of the arbitrariness of the IRS’s decision. Because Alpenglow received the Notice of

Deficiency before it filed its initial complaint, as well as its Amended Complaint, the

district court’s conclusion that Alpenglow had all the necessary facts to argue this



                                          27
claim sooner is not “a clear error of judgment.” See Etherton, 829 F.3d at 1228

(quotation marks omitted).

      c. Eighth Amendment

      Unlike its other arguments on appeal, Alpenglow’s claim that § 280E violates

the Eighth Amendment was raised in the Amended Complaint and dismissed by the

district court under Federal Rule of Civil Procedure 12(b)(6). See Alpenglow II, 2017

WL 1545659, at *2. The district court held Alpenglow did not raise a plausible

Eighth Amendment claim because “[t]he Amended Complaint is entirely devoid of

any allegations pertaining to the effect that § 280E has had on plaintiffs’ ability to do

business.” Alpenglow I, 2016 WL 7856477, at *6. Although Alpenglow argues the

district court should have allowed it to amend the complaint to allege sufficient

factual allegations to support its Eighth Amendment argument, we have concluded

that § 280E is not a penalty and thus does not violate the Eighth Amendment. So any

amendment to the complaint would be legally futile and the district court did not

abuse its discretion by denying the motion. See United States v. Greer, 881 F.3d

1241, 1244 (10th Cir. 2018), petition for cert. filed, 17-8775 (May 4, 2018). (“We are

not bound by the district court’s reasoning and may affirm on any ground adequately

supported by the record.” (internal quotation marks omitted)).

2. Public Policy/Dead Letter Rule

      Alpenglow raises two distinct but related policy arguments to support its claim

that the IRS should not be permitted to apply § 280E to tax the gross income, rather

than the net income, of marijuana dispensaries operating in accordance with state

                                           28
law. For the reasons discussed below, we reject both arguments and conclude the

district court acted well within its discretion in denying Alpenglow’s Rule 59(e)

Motion with respect to this claim.

       First, Alpenglow asserts that, in its order granting the United States’ Motion to

Dismiss, the district court conducted an inaccurate analysis regarding the “public

policy exception” to the requirement that taxpayers be taxed on net income and that

“the court relied upon this analysis, at least in part, in its rulings.” Aplt. Br. at 34. In

support, Alpenglow quotes the district court’s statement: “[i]t is at least arguable

whether allowing a taxpayer to deduct from its gross income expenses incurred in

allegedly selling marijuana to the public frustrates the policy of the CSA.” Alpenglow

I, 2016 WL 7856477, at *5 n.2. According to Alpenglow, this comment shows the

district court conducted a public policy analysis and concluded the state-approved

sale of medical marijuana frustrates a sharply-defined public policy. Alpenglow takes

issue with this inferred conclusion, but we need not address it here. The district court

clarified in its order denying the Rule 59(e) Motion that the public policy discussion

was “entirely irrelevant to the [c]ourt’s ultimate finding,” Alpenglow II, 2017 WL

1545659, at *3, and “had nothing to do with resolving the issue before the [c]ourt:

plaintiffs’ argument that the Constitution forbids including in gross income the cost

of ordinary and necessary business expenses,” id. at *4.

       Second, Alpenglow relies on Sterling Distributors, Inc. v. Patterson, to claim

there is a “generally accepted” Dead Letter Rule prohibiting the IRS from denying

deductions under a law “[w]hen there is a public policy of non-enforcement of the

                                             29
law.” Aplt. Br. at 39, 40 (citing 236 F. Supp. 479, 483–84 (N.D. Ala. 1964)). First,

Alpenglow has failed to demonstrate any widespread acceptance or adoption of the

“Dead Letter Rule” announced in Sterling Distributors. To the contrary, the Supreme

Court has held that a public policy analysis on the disallowance of deductions under

the Tax Code is only appropriate “where Congress has been wholly silent,” Tellier,

383 U.S. at 693, because “[d]eduction of expenses falling within the general definition

of § 162(a) may, to be sure, be disallowed by specific legislation, since deductions ‘are a

matter of grace and Congress can, of course, disallow them as it chooses,’” id. (quoting

Sullivan, 356 U.S. at 28). See also Sullivan, 356 U.S. at 29 (“If th[e] choice [to tax illegal

business on the basis of gross income] is to be made, Congress should do it.”). Congress

has not been silent here; by enacting § 280E, Congress has spoken expressly on its intent

to prohibit the deduction of business expenses related to drug trafficking illegal under

federal law.

       Second, even assuming the existence of a Dead Letter Rule, Alpenglow cannot

succeed on such a theory. The district court refused to consider this argument

because Alpenglow “failed to raise it when [it] could have done so at any time during

the parties’ pre-Judgment briefing.” Alpenglow II, 2017 WL 1545659, at *3 n.4. The

district court did not abuse its discretion in failing to consider this untimely

argument. See Las Vegas Ice & Cold Storage Co., 893 F.2d at 1185. Furthermore, the

Department of Justice has specifically rescinded its former policy of non-prosecution

for marijuana dispensaries complying with state law, evidencing governmental intent

to enforce this law. See Memorandum from Jefferson B. Sessions, Att’y Gen., U.S.

                                             30
Dep’t of Justice for all U.S. Att’ys (Jan. 4, 2018). As such, § 280E would not

constitute a Dead Letter Rule, even if such a rule existed.

                                         ***

      The district court was not “arbitrary, capricious, or whimsical” in holding that

Alpenglow’s request to amend the complaint was untimely. See Pacheco, 884 F.3d

at 1047. Therefore, the court did not abuse its discretion in denying Alpenglow’s

Rule 59(e) Motion.

                                III.   CONCLUSION

      We AFFIRM the dismissal of Alpenglow’s suit under Federal Rule of Civil

Procedure 12(b)(6) and the denial of Alpenglow’s Motion to Alter or Amend the

Judgment pursuant to Federal Rule of Civil Procedure 59(e).




                                          31
