                        128 T.C. No. 14



                 UNITED STATES TAX COURT



CALIFORNIANS HELPING TO ALLEVIATE MEDICAL PROBLEMS, INC.,
                       Petitioner v.
       COMMISSIONER OF INTERNAL REVENUE, Respondent



 Docket No. 20795-05.               Filed May 15, 2007.



      P provided counseling and other caregiving services
 (collectively, caregiving services) to its members, who were
 individuals with debilitating diseases. P also provided its
 members with medical marijuana pursuant to the California
 Compassionate Use Act of 1996, codified at Cal. Health &
 Safety Code sec. 11362.5 (West Supp. 2007). P charged its
 members a membership fee that generally reimbursed P for its
 costs of the caregiving services and its costs of the
 medical marijuana. R determined that all of P’s expenses
 were nondeductible under sec. 280E, I.R.C., because, R
 determined, the expenses were incurred in connection with
 the trafficking of a controlled substance.
      Held: Sec. 280E, I.R.C., precludes P from
 deducting its expenses attributable to its provision of
 medical marijuana.
      Held, further, P’s provision of its caregiving
 services and its provision of medical marijuana were
 separate trades or businesses for purposes of sec.
 280E, I.R.C.; thus, sec. 280E, I.R.C., does not
                               - 2 -

     preclude P from deducting the expenses attributable to
     the caregiving services.



     Matthew Kumin, Henry G. Wykowski, and Willian G. Panzer, for

petitioner.

     Margaret A. Martin, for respondent.



     LARO, Judge:   Respondent determined a $355,056 deficiency in

petitioner’s 2002 Federal income tax and a $71,011 accuracy-

related penalty under section 6662(a).1    Following concessions by

respondent, including a concession that petitioner is not liable

for the determined accuracy-related penalty, we decide whether

section 280E precludes petitioner from deducting the ordinary and

necessary expenses attributable to its provision of medical

marijuana pursuant to the California Compassionate Use Act of

1996, codified at Cal. Health & Safety Code sec. 11362.5 (West




     1
       Unless otherwise indicated, section, subchapter, and
chapter references are to the applicable versions of the Internal
Revenue Code, and Rule references are to the Tax Court Rules of
Practice and Procedure.
                                - 3 -

Supp. 2007).2   We hold that those deductions are precluded.   We

also decide whether section 280E precludes petitioner from

deducting the ordinary and necessary expenses attributable to its

provision of counseling and other caregiving services

(collectively, caregiving services).    We hold that those

deductions are not precluded.

                         FINDINGS OF FACT

     Certain facts were stipulated and are so found.    The

stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.    When the petition was

filed, petitioner was an inactive California corporation whose

mailing address was in San Francisco, California.

     Petitioner was organized on December 24, 1996, pursuant to

the California Nonprofit Public Benefit Corporation Law, Cal.


     2
       At a general election held on Nov. 5, 1996, the California
electors approved an initiative statute designated on the ballot
as Proposition 215 and entitled “Medical Use of Marijuana”. See
People v. Mower, 49 P.3d 1067, 1070 (Cal. 2002). The statute,
the California Compassionate Use Act of 1996, codified at Cal.
Health & Safety Code sec. 11362.5 (West Supp. 2007), was intended

     To ensure that seriously ill Californians have the
     right to obtain and use marijuana for medical purposes
     where that medical use is deemed appropriate and has
     been recommended by a physician who has determined that
     the person’s health would benefit from the use of
     marijuana in the treatment of * * * any * * * illness
     for which marijuana provides relief.

Id. sec. 11362.5(b)(1)(A); see also People v. Mower, supra at
1070. We use the term “medical marijuana” to refer to marijuana
provided pursuant to the statute.
                               - 4 -

Corp. Code secs. 5110-6910. (West 1990).3    Its articles of

incorporation stated that it “is organized and operated

exclusively for charitable, educational and scientific purposes”

and “The property of this corporation is irrevocably dedicated to

charitable purposes”.   Petitioner did not have Federal tax-exempt

status, and it operated as an approximately break-even (i.e., the

amount of its income approximated the amount of its expenses)

community center for members with debilitating diseases.

Approximately 47 percent of petitioner’s members suffered from

Acquired Immune Deficiency Syndrome (AIDS); the remainder

suffered from cancer, multiple sclerosis, and other serious

illnesses.   Before joining petitioner, petitioner’s executive

director had 13 years of experience in health services as a

coordinator of a statewide program that trained outreach workers

in AIDS prevention work.

     Petitioner operated with a dual purpose.    Its primary

purpose was to provide caregiving services to its members.     Its

secondary purpose was to provide its members with medical

marijuana pursuant to the California Compassionate Use Act of

1996 and to instruct those individuals on how to use medical

marijuana to benefit their health.     Petitioner required that each

     3
       Under California law, public benefit corporations are
organized for a public or charitable purpose; they are not
operated for the mutual benefit of their members but for a
broader good. See Knapp v. Palisades Charter High School,
53 Cal. Rptr. 3d 182, 186 n.5 (Ct. App. 2007).
                                - 5 -

member have a doctor’s letter recommending marijuana as part of

his or her therapy and an unexpired photo identification card

from the California Department of Public Health verifying the

authenticity of the doctor’s letter.    Petitioner required that

its members not resell or redistribute the medical marijuana

received from petitioner, and petitioner considered any violation

of this requirement to be grounds to expel the violator from

membership in petitioner’s organization.

     Each of petitioner’s members paid petitioner a membership

fee in consideration for the right to receive caregiving services

and medical marijuana from petitioner.    Petitioner’s caregiving

services were extensive.   First, petitioner’s staff held various

weekly or biweekly support group sessions that could be attended

only by petitioner’s members.   The “wellness group” discussed

healing techniques and occasionally hosted a guest speaker; the

HIV/AIDS group addressed issues of practical and emotional

support; the women’s group focused on women-specific issues in

medical struggles; the “Phoenix” group helped elderly patients

with lifelong addiction problems; the “Force” group focused on

spiritual and emotional development.    Second, petitioner provided

its low-income members with daily lunches consisting of salads,

fruit, water, soda, and hot food.   Petitioner also made available

to its members hygiene supplies such as toothbrushes, toothpaste,

feminine hygiene products, combs, and bottles of bleach.    Third,
                               - 6 -

petitioner allowed its members to consult one-on-one with a

counselor about benefits, health, housing, safety, and legal

issues.   Petitioner also provided its members with biweekly

massage services.   Fourth, petitioner coordinated for its members

weekend social events including a Friday night movie or guest

speaker and a Saturday night social with live music and a hot

meal.   Petitioner also coordinated for its members monthly field

trips to locations such as beaches, museums, or parks.    Fifth,

petitioner instructed its members on yoga and on topics such as

how to participate in social services at petitioner’s facilities

and how to follow member guidelines.   Sixth, petitioner provided

its members with online computer access and delivered to them

informational services through its Web site.   Seventh, petitioner

encouraged its members to participate in political activities.

     Petitioner furnished its services at its main facility in

San Francisco, California, and at an office in a community church

in San Francisco.   The main facility was approximately 1,350

square feet and was the site of the daily lunches, distribution

of hygiene supplies, benefits counseling, Friday and Saturday

night social events and dinners, and computer access.    This

location also was the site where petitioner’s members received

their distribution of medical marijuana; the medical marijuana

was dispensed at a counter of the main room of the facility,

taking up approximately 10 percent of the main facility.    The
                                 - 7 -

peer group meetings and yoga classes were usually held at the

church, where petitioner rented space.    Pursuant to the rules of

the church, petitioner’s members were prohibited from bringing

any marijuana into the church.    Petitioner also maintained a

storage unit at a third location in San Francisco.    Petitioner

used the storage unit to store confidential medical records; no

medical marijuana was distributed or used there.

       Petitioner paid for the services it provided to its members

by charging a membership fee that covered, and in the judgment of

petitioner’s management approximated, both the cost of

petitioner’s caregiving services and the cost of the medical

marijuana that petitioner supplied to its members.    Petitioner

notified its members that the membership fee covered both of

these costs, and petitioner charged its members no additional

fee.    Members received from petitioner a set amount of medical

marijuana; they were not entitled to unlimited supplies.

       On May 6, 2002, petitioner’s board of directors decided that

petitioner would henceforth discontinue all of its activities.

Petitioner thus ceased conducting any activity and filed a “Final

Return” (Form 1120, U.S. Corporation Income Tax Return) for 2002.

This return reported the following items on the basis of an

accrual method of accounting:
                                    - 8 -
     Gross receipts or sales                           $1,056,833
     Less returns and allowances                            8,802
     Balance                                            1,048,031
     Cost of goods sold:
       Inventory at beginning
         of year                             $12,551
       Purchases                             575,317
       Cost of labor                         203,661
       Other costs:
         Cash (over/under)          $1,680
         Operating supplies         29,077
         Program costs              13,026
           Total other costs        43,783    43,783
       Inventory at end of year
         of year                               -0-
         Total cost of goods sold            835,312       835,312
     Gross profit                                         212,719
     Deductions:
       Compensation of officers               14,914
       Salaries and wages                     44,799
       Repairs and maintenance                 1,456
       Rents                                  25,161
       Taxes and licenses                     28,201
       Depreciation                            8,409
       Advertising                               200
       Employee benefit programs              24,453
       Other deductions:
         Accounting                  5,086
         Auto and truck                308
         Bank charges                1,097
         Computer expense              961
         Dues and subscriptions         20
         Employee development
           training                  1,940
         Insurance                   7,727
         Internet service
           provider                  2,238
         Janitorial                  1,409
         Laundry and
           cleaning                    105
         Legal and
           professional              5,500
         Meals and
           entertainment               402
         Miscellaneous                 269
         Office expense              4,533
         Outside services            4,421
         Parking and toll              120
         Security                    2,185
         Supplies                      660
         Telephone                   7,870
         Utilities                  18,514
           Total other deductions   65,365    65,365
       Total deductions                      212,958       212,958
       Taxable loss                                            239

     In a notice of deficiency mailed to petitioner on August 4,

2005, respondent disallowed all of petitioner’s deductions and

costs of goods sold, determining that those items were
                                - 9 -

“Expenditures in Connection with the Illegal Sale of Drugs”

within the meaning of section 280E.     Respondent has since

conceded this determination except to the extent that it relates

to the “Total deductions” of $212,958.4    Respondent has also

conceded that the expenses underlying the $212,958 of total

deductions are substantiated.

     The “Total deductions” were ordinary, necessary, and

reasonable expenses petitioner incurred in running its operations

during the subject year.   The specific expenses underlying those

deductions are as follows:

     !         The $14,914 deducted for compensation of

          officers reflects the salary of petitioner’s

          executive director.   The executive director worked

          50 hours a week for 17 weeks.     The executive

          director directed petitioner’s overall operations

          and was not directly engaged in petitioner’s

          provision of medical marijuana.

     !         The $44,799 deducted for salaries and wages

          reflects the compensation of petitioner’s 24 other

          employees.   Seven of the 24 employees were

     4
       In other words, respondent concedes that the disallowance
of sec. 280E does not apply to costs of goods sold, a concession
that is consistent with the caselaw on that subject and the
legislative history underlying sec. 280E. See Peyton v.
Commissioner, T.C. Memo. 2003-146; Franklin v. Commissioner, T.C.
Memo. 1993-184; Vasta v. Commissioner, T.C. Memo. 1989-531; see
also S. Rept. 97-494 (Vol. 1), at 309 (1982).
                        - 10 -

    involved in petitioner’s provision of medical

    marijuana.   The other 17 employees were involved

    with petitioner’s provision of caregiving

    services.

!        The $1,456 deducted for repairs and

    maintenance reflects expenses petitioner incurred

    to repair and maintain its main facility.

!        The $25,161 deducted for rents reflects

    $15,000 of rent for the main facility, $5,700 of

    rent for the use of the church, and $4,461 of rent

    for the storage unit and a photocopier.

!        The $28,201 deducted for payroll taxes

    reflects petitioner’s liability for the payment of

    payroll taxes.

!        The $8,409 deducted for depreciation reflects

    depreciation of petitioner’s property.

!        The $200 deducted for advertising reflects

    the cost of advertising by petitioner, including a

    $150 expense for the rental of a booth where

    petitioner distributed literature.

!        The $24,453 deducted for employee benefit

    programs reflects the cost of a health insurance

    policy that petitioner maintained for its

    employees.
                         - 11 -

!        The $5,086 deducted for accounting reflects

    the fees of petitioner’s accountant.

!        The $308 deducted for auto and truck reflects

    repairs made to a van used to transport members.

!        The $1,097 deducted for bank charges reflects

    bank service charges petitioner incurred.

!        The $961 deducted for computer expense

    reflects the cost of purchasing and maintaining

    computers petitioner used in its operations.

!        The $20 deducted for dues and subscriptions

    reflects dues petitioner paid to an association

    comprising persons performing functions similar to

    those of petitioner.

!        The $1,940 deducted for employee development

    training reflects costs petitioner incurred to

    train its bookkeeper and management team.

!        The $7,727 deducted for insurance reflects

    the cost of petitioner’s liability insurance.

!        The $2,238 deducted for Internet service

    provider reflects the cost of petitioner’s

    Internet services.

!        The $1,409 deducted for janitorial reflects

    the cost of petitioner’s garbage services.
                        - 12 -

!        The $105 deducted for laundry and cleaning

    reflects costs petitioner incurred to clean and

    launder napkins used in its food distribution.

!        The $5,500 deducted for legal and

    professional reflects the fees of petitioner’s

    attorney.   None of these fees involved any defense

    for criminal prosecution.

!        The $402 deducted for meals and entertainment

    reflects costs that petitioner incurred for meals

    furnished to its employees who worked late or long

    hours.

!        The $269 deducted for miscellaneous reflects

    miscellaneous expenses petitioner incurred.

!        The $4,533 deducted for office expenses

    reflects costs petitioner incurred for office

    supplies such as paper and printer toner.

!        The $4,421 deducted for outside services

    reflects the cost of petitioner’s payroll service

    company.

!        The $120 deducted for parking and toll

    reflects petitioner’s reimbursement to its

    employees who paid parking fees and tolls on

    behalf of petitioner.
                              - 13 -

     !          The $2,185 deducted for security reflects the

           cost of security at the main facility, including

           the costs of an alarm company and medical service.

     !          The $660 deducted for supplies reflects the

           costs petitioner incurred to buy various supplies.

     !          The $7,870 deducted for telephone reflects

           the cost petitioner incurred for its telephone

           service.

     !          The $18,514 deducted for utilities reflects

           the cost of the gas and electricity petitioner

           used at its main facility.

                              OPINION

     The parties agree that during the subject year petitioner

had at least one trade or business for purposes of section 280E.

According to respondent, petitioner had a single trade or

business of trafficking in medical marijuana.   Petitioner argues

that it engaged in two trades or businesses.    Petitioner asserts

that its primary trade or business was the provision of

caregiving services.   Petitioner asserts that its secondary trade

or business was the supplying of medical marijuana to its

members.   As to its trades or businesses, petitioner argues, the

deductions for those trades or businesses are not precluded by

section 280E in that the trades or businesses did not involve

“trafficking” in a controlled substance.   Respondent argues that
                               - 14 -

section 280E precludes petitioner from benefiting from any of its

deductions.

     Accrual method taxpayers such as petitioner may generally

deduct the ordinary and necessary expenses incurred in carrying

on a trade or business.   See sec. 162(a).   Items specified in

section 162(a) are allowed as deductions, subject to exceptions

listed in section 261.    See sec. 161.   Section 261 provides that

“no deduction shall in any case be allowed in respect of the

items specified in this part.”    The phrase “this part” refers to

part IX of subchapter B of chapter 1, entitled “Items Not

Deductible”.   “Expenditures in Connection With the Illegal Sale

of Drugs” is an item specified in part IX.    Section 280E

provides:

          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.

In the context of section 280E, marijuana is a schedule I

controlled substance.    See, e.g., Sundel v. Commissioner, T.C.

Memo. 1998-78, affd. without published opinion 201 F.3d 428

(1st Cir. 1999).   Such is so even when the marijuana is medical

marijuana recommended by a physician as appropriate to benefit
                              - 15 -

the health of the user.   See United States v. Oakland Cannabis

Buyers’ Coop., 532 U.S. 483 (2001).

     Respondent argues that petitioner, because it trafficked in

a controlled substance, is not permitted by section 280E to

deduct any of its expenses.   We disagree.   Our analysis begins

with the text of the statute, which we must apply in accordance

with its ordinary, everyday usage.     See Conn. Natl. Bank v.

Germain, 503 U.S. 249, 253-254 (1992).    We interpret that text

with reference to its legislative history primarily to learn the

purpose of the statute.   See Commissioner v. Soliman, 506 U.S.

168, 174 (1993); United States v. Am. Trucking Associations,

Inc., 310 U.S. 534, 543-544 (1940); Venture Funding, Ltd. v.

Commissioner, 110 T.C. 236, 241-242 (1998), affd. without

published opinion 198 F.3d 248 (6th Cir. 1999); Trans City Life

Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996).

     Congress enacted section 280E as a direct reaction to the

outcome of a case in which this Court allowed a taxpayer to

deduct expenses incurred in an illegal drug trade.    See S. Rept.

97-494 (Vol. 1), at 309 (1982).   In that case, Edmondson v.

Commissioner, T.C. Memo. 1981-623, the Court found that the

taxpayer was self-employed in a trade or business of selling

amphetamines, cocaine, and marijuana.    The Court allowed the

taxpayer to deduct his business expenses because they “were made

in connection with * * * [the taxpayer’s] trade or business and
                              - 16 -

were both ordinary and necessary.”     Id.   In discussing the case

in the context of the then-current law, the Senate Finance

Committee stated in its report:

          Ordinary and necessary trade or business expenses
     are generally deductible in computing taxable income.
     A recent U.S. Tax Court case allowed deductions for
     telephone, auto, and rental expense incurred in the
     illegal drug trade. In that case, the Internal Revenue
     Service challenged the amount of the taxpayer’s
     deduction for cost of goods (illegal drugs) sold, but
     did not challenge the principle that such amounts were
     deductible.

          On public policy grounds, the Code makes certain
     otherwise ordinary and necessary expenses incurred in a
     trade or business nondeductible in computing taxable
     income. These nondeductible expenses include fines,
     illegal bribes and kickbacks, and certain other illegal
     payments. [S. Rept. 97-494 (Vol. 1), supra at 309.]

The report then expressed the following reasons the committee

intended to change the law:

          There is a sharply defined public policy against
     drug dealing. To allow drug dealers the benefit of
     business expense deductions at the same time that the
     U.S. and its citizens are losing billions of dollars
     per year to such persons is not compelled by the fact
     that such deductions are allowed to other, legal,
     enterprises. Such deductions must be disallowed on
     public policy grounds. [Id.]

The report explained that the enactment of section 280E has the

following effect:

          All deductions and credits for amounts paid or
     incurred in the illegal trafficking in drugs listed in
     the Controlled Substances Act are disallowed. To
     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.]
                               - 17 -

     Section 280E and its legislative history express a

congressional intent to disallow deductions attributable to a

trade or business of trafficking in controlled substances.     They

do not express an intent to deny the deduction of all of a

taxpayer’s business expenses simply because the taxpayer was

involved in trafficking in a controlled substance.   We hold that

section 280E does not preclude petitioner from deducting expenses

attributable to a trade or business other than that of illegal

trafficking in controlled substances simply because petitioner

also is involved in the trafficking in a controlled substance.

     Petitioner argues that its supplying of medical marijuana to

its members was not “trafficking” within the meaning of section

280E.   We disagree.   We define and apply the gerund “trafficking”

by reference to the verb “traffic”, which as relevant herein

denotes “to engage in commercial activity: buy and sell

regularly”.   Webster’s Third New International Dictionary 2423

(2002).   Petitioner’s supplying of medical marijuana to its

members is within that definition in that petitioner regularly

bought and sold the marijuana, such sales occurring when

petitioner distributed the medical marijuana to its members in
                              - 18 -

exchange for part of their membership fees.5   Accord United

States v. Oakland Cannabis Buyers’ Coop., supra at 489.

     We now turn to analyze whether petitioner’s furnishing of

its caregiving services is a trade or business that is separate

from its trade or business of providing medical marijuana.

Taxpayers may be involved in more than one trade or business,

see, e.g., Hoye v. Commissioner, T.C. Memo. 1990-57, and whether

an activity is a trade or business separate from another trade or

business is a question of fact that depends on (among other

things) the degree of economic interrelationship between the two

undertakings, see Collins v. Commissioner, 34 T.C. 592 (1960);

sec. 1.183-1(d)(1), Income Tax Regs.   The Commissioner generally

accepts a taxpayer’s characterization of two or more undertakings

as separate activities unless the characterization is artificial

or unreasonable.   See sec. 1.183-1(d)(1), Income Tax Regs.

     We do not believe it to have been artificial or unreasonable

for petitioner to have characterized as separate activities its

provision of caregiving services and its provision of medical


     5
       In support of its position, petitioner relies upon Raich
v. Ashcroft, 352 F.3d 1222, 1228 (9th Cir. 2003), vacated and
remanded sub nom. Gonzales v. Raich, 545 U.S. 1 (2005), where the
Court of Appeals for the Ninth Circuit reasoned that the use of
medical marijuana is “different in kind from drug trafficking”.
Petitioner’s reliance on that reasoning is mistaken. The U.S.
Supreme Court rejected the reasoning in Gonzales v. Raich, supra
at 26-28, 31-33, holding that the Controlled Substances Act
applied to individuals within the purview of California’s medical
marijuana law.
                              - 19 -

marijuana.   Petitioner was regularly and extensively involved in

the provision of caregiving services, and those services are

substantially different from petitioner’s provision of medical

marijuana.   By conducting its recurring discussion groups,

regularly distributing food and hygiene supplies, advertising and

making available the services of personal counselors,

coordinating social events and field trips, hosting educational

classes, and providing other social services, petitioner’s

caregiving business stood on its own, separate and apart from

petitioner’s provision of medical marijuana.   On the basis of all

of the facts and circumstances of this case, we hold that

petitioner’s provision of caregiving services was a trade or

business separate and apart from its provision of medical

marijuana.

     Respondent argues that the “evidence indicates that

petitioner’s principal purpose was to provide access to

marijuana, that petitioner’s principal activity was providing

access to marijuana, and that the principal service that

petitioner provided was access to marijuana * * * and that all of

petitioner’s activities were merely incidental to petitioner’s

activity of trafficking in marijuana.”   We disagree.

Petitioner’s executive director testified credibly and without

contradiction that petitioner’s primary purpose was to provide

caregiving services for terminally ill patients.   He stated:
                              - 20 -

“Right from the start we considered our primary function as being

a community center for seriously ill patients in San Francisco.

And only secondarily as a place where they could access their

medicine.”   The evidence suggests that petitioner’s operations

were conducted with that primary function in mind, not with the

principal purpose of providing marijuana to members.

     As stated by the Board of Tax Appeals in Alverson v.

Commissioner, 35 B.T.A. 482, 488 (1937):    “The statute is not so

restricted as to confine deductions to a single business or

principal business of the taxpayer.    A taxpayer may carry on more

than one trade or business at the same time.”   Moreover, as the

Supreme Court has observed in the context of illegal,

nondeductible expenditures:   “It has never been thought * * *

that the mere fact that an expenditure bears a remote relation to

an illegal act makes it non-deductible.”    Commissioner v.

Heininger, 320 U.S. 467, 474 (1943).

     Respondent relies heavily on his assertion that

“Petitioner’s only income was from marijuana-related matters,

except for a couple of small donations”.   The record does not

support that assertion, and we decline to find it as a fact.

Indeed, the record leads us to make the contrary finding that

petitioner’s caregiving services generated income attributable to

those services.   In making this finding, we rely on the testimony

of petitioner’s executive director, whom we had an opportunity to
                               - 21 -

hear and view at trial.    We found his testimony to be coherent

and credible, as well as supported by the record.    He testified

that petitioner’s members paid their membership fees as

consideration for both caregiving services and medical marijuana,

and respondent opted not to challenge the substance of that

testimony.    While a member may have acquired, in return for his

or her payment of a membership fee, access to all of petitioner’s

goods and services without further charge and without explicit

differentiation as to the portion of the fee that was paid for

goods versus services, we do not believe that such a fact

establishes that petitioner’s operations were simply one trade or

business.    As the record reveals, and as we find as a fact,

petitioner’s management set the total amount of the membership

fees as the amount that management consciously and reasonably

judged equaled petitioner’s costs of the caregiving services and

the costs of the medical marijuana.

     Given petitioner’s separate trades or businesses, we are

required to apportion its overall expenses accordingly.

Respondent argues that “petitioner failed to justify any

particular allocation and failed to present evidence as to how

* * * [petitioner’s expenses] should be allocated between

marijuana trafficking and other activities.”    We disagree.

Respondent concedes that many of petitioner’s activities are

legal and unrelated to petitioner’s provision of medical
                                - 22 -

marijuana.   The evidence at hand permits an allocation of

expenses to those activities.    Although the record may not lend

itself to a perfect allocation with pinpoint accuracy, the record

permits us with sufficient confidence to allocate petitioner’s

expenses between its two trades or businesses on the basis of the

number of petitioner’s employees and the portion of its

facilities devoted to each business.     Accordingly, in a manner

that is most consistent with petitioner’s breakdown of the

disputed expenses, we allocate to petitioner’s caregiving

services 18/25 of the expenses for salaries, wages, payroll

taxes, employee benefits, employee development training, meals

and entertainment, and parking and tolls (18 of petitioner’s 25

employees did not work directly in petitioner’s provision of

medical marijuana), all expenses incurred in renting facilities

at the church (petitioner did not use the church to any extent to

provide medical marijuana), all expenses incurred for “truck and

auto” and “laundry and cleaning” (those expenses did not relate

to any extent to petitioner’s provision of medical marijuana),

and 9/10 of the remaining expenses (90 percent of the square

footage of petitioner’s main facility was not used in

petitioner’s provision of medical marijuana).6    We disagree with

     6
       While we apportion most of the $212,958 in “Total
deductions” to petitioner’s caregiving services, we note that the
costs of petitioner’s medical marijuana business included the
$203,661 in labor and $43,783 in other costs respondent conceded
                                                   (continued...)
                               - 23 -

respondent that petitioner must further justify the allocation of

its expenses, reluctant to substitute our judgment for the

judgment of petitioner’s management as to its understanding of

the expenses that petitioner incurred as to each of its trades or

businesses.    Cf. Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096

(9th Cir. 1999), revg. T.C. Memo. 1997-445.

     All arguments by the parties have been considered.   We have

rejected those arguments not discussed herein as without merit.

Accordingly,


                                          Decision will be entered

                                     under Rule 155.




     6
      (...continued)
to have been properly reported on petitioner’s tax return as
attributable to cost of goods sold in the medical marijuana
business.
