In an unlikely and unusual dissenting opinion, Judge Gustafson appeared to be cribbing from the writings of the late tax protester, Irwin Schiff. You can find the dissent here: NCSBA, Inc. v CIR,153 T.C. No. 4
The case is about a law that disallows ALL tax deductions to legal, state licensed cannabis vendors. The chief judge thought the case was important enough to have the entire court review it, rather than just the trial judge. (See I.R.C. § 7460(b))
The statute is I.R.C. § 280E. It says that violators of federal “controlled substance” laws must pay income tax on their gross revenues, no deductions allowed, not even the Cost of Goods for Resale (COGS). This particular tax law regards legal, licensed medical cannabis dispensaries operating under state law and collecting state taxes no differently than a street gangs selling smack and crystal meth.
Not surpisingly, the Court found in favor of its creator, sponsor, and client the United States government. No, the majority said, denying all deductions to businesses that violate federal “controlled substance” laws, even if done legally under state law and involving no interstate commerce, was not a punishment. It was a revenue raising tax though it applies exclusively to a small subset of law breaking taxpayers.
This case was unusual in that the entire panel of TC judges were in on the opinion rather than just one. Remarkably, there was a dissent on “constitutional” grounds.
The excitement, and the reason for this post, is that three of the judges dissented from the Court’s otherwise predictable pro-government opinion. They dissented using words that puzzled, charmed, delighted, and astonished me, including the practically forbidden “C” word.
The leader of the rebels, Judge Gustafson, a stickler for procedure and a skilled legal writer, in language and citations more familiar to what I call the Tax Honesty Movement, and what the Tax Court calls “tax protesters” and “tax defiers,” clearly laid out the reasons he believed the majority was mistaken and that I.R.C. § 280E is unconstitutional.
There were places in his opinion where I thought Hizzoner was channeling the late, great founding father of the Tax Honesty Movement, Irwin Schiff. Judge Gus disagreees with the majority, and talks about the U.S. Constitution right out loud!
Having a judge mention the “C” word in an Tax Court opinion is among the rarest of events. For taxpayers, the U.S. Tax Court uniformly labels “constitutional” arguments “frivolous.” The IRS lumps “constitutional” arguments in with “moral, religious, political, conscientious, or similar grounds” in every warning it issues against taking “frivolous” positions. The IRS routinely ignores or punishes constitutional arguments it receives from citizens. Normally, there is no place for the constitution in tax law and procedure.
A Tax Court judge arguing for constituional limits to the income tax is a like physicist arguing against the law of gravity. But that’s just what Judge Gustafson does. His analysis could have been cribbed from one of Irwing Schiff’s many books. He cited the same cases Schiff did. And though Judge Gustafson is more “judicious” in his prose than Mr. Schiff, they clearly agree on many issues, for example:
Judge Gustafson: “Whatever prerogative Congress has to extend or deny “legislative grace” in the taxation of income is limited by the Constitution.” (153 T.C. No. 4, Opinion, pg. 23) The phrase “limited by the Constitution” is practically unknown in Tax Court opinions.
Irwin Schiff: “The U.S. Constitution simply does not authorize the U.S. government to tax Americans for anything and everything that vote-seeking politicians and free spending Washington lobbyists want them to pay for.” (Irwin A. Schiff, “The Great Income Tax Hoax,” pg. 217, Freedom Books, Hampden Connecticut, copyright 1885)
Gustafson: “Under the income tax as Congress has enacted it, a taxpayer is entitled to deduct business expenses from his gross income, and any resulting profit is then
subject to tax.” (Ibid. pg. 23)
Schiff: “When the [Eisner v McComber] Court used the word “income” it ws referring to “profits” or “gains” separated from their sources, not income in the ordinary sense of the word (meaning money that comes in).” (Ibid. pg. 217)
Gustafson:”The taxation of “income” must take account of the “basis” in a capital asset and of the COGS of inventory–not merely as an exercise of “legislative grace” but as mandatory under the Sixteenth Amendment of the Constitution.” (Ibid. pg. 27)
Astonishingly, Judge G cites “Eisner v. Macomber, 252 U.S. 189, 206-207 (1920) (quoting Doyle v. Mitchell Bros. Co., 247 U.S. 179, 185 (1918)).”
He quotes the famous Eisner definition of income: “Income may be defined as the gain derived from capital, from labor, or from both combined” * * *.” (Opinion Ibid. pg. 27, 28)
Irwin Schiff whole heartedly agrees. “Note that ‘income’ is not ‘everything that comes in’ but by the Supreme Court’s definition is a ‘gain.'” (Ibid. pg. 211)
Gustafson talks about the “mandatory exclusion” of Cost of Goods Sold (COGS) citing Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1199 (10th Cir. 2018), aff’g No. 16-CV-00258-RM-CBS, 2016 WL 7856477 (D. Colo. Dec. 1, 2016).
“Thus, these “mandatory exclusion[s]” of basis and COGS, which the Court
of Appeals acknowledged in Alpenglow, arise not from any express constitutional
rule about COGS or basis but rather from the very meaning of the “incomes” that
the Sixteenth Amendment permits Congress to tax.” (Opinion Ibid, pg. 28, emphasis added)
Gustafson appears to be arguing, counter to every case decided against wage earning tax protesters, that “income” is definitely not “all that comes in,” and that the 16th Amendment simply doesn’t permit Congress to tax “all that comes in” under any circumstances.
Judge G cites Eisner: ” “[T]he essential matter * * * [is] a gain, a profit”. Eisner v. Macomber, 252 U.S. at 207; see also Doyle, 247 U.S. at 184-189 (“‘income’ * * * convey[s] * * * the idea of gain or increase arising from corporate activities”).” (Opinion, Ibid, pg. 28)
He also expands on the idea: “Congress taxes something other than a taxpayer’s “income” when it taxes gross receipts without accounting for basis or COGS–and, I would hold, when it taxes gross receipts without accounting for the ordinary and necessary expenses that are incurred in the course of business and must be paid before one can be said to have gain” (Opinion, Ibid. pg. 29)
And while I expect that none of this will open the door for the Tax Court to closely examine the nature of the “income” they find that wage earners must declare as taxable income, I am looking forward to citations to Judge Gustafson’s dissent in future troublesome briefs on the issue.