Californians Helping To Alleviate Medical Problems, Inc. v. Commissioner

128 T.C. 173 (2007)

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Nature of the Case

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Facts

P was organized pursuant to the California Nonprofit Public Benefit Corporation Law. 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.' P did not have Federal tax-exempt status. P operated as a break-even community center for members with debilitating diseases. Approximately 47 percent of P's members suffered from Acquired Immune Deficiency Syndrome (AIDS); the remainder suffered from cancer, multiple sclerosis, and other serious illnesses. P's 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. P required that each 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. P's members were not allowed to resell or redistribute the medical marijuana received from P. The members paid P a membership fee in consideration for the right to receive caregiving services and medical marijuana. P's staff held various weekly or biweekly support group sessions that could be attended only by members. P provided its low-income members with daily lunches consisting of salads, fruit, water, soda, and hot food. P also made available hygiene supplies such as toothbrushes, toothpaste, feminine hygiene products, combs, and bottles of bleach. P 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 masseuse services. P 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. P also coordinated monthly field trips to locations such as beaches, museums, or parks. P instructed its members on yoga and on topics such as how to participate in social services at P's facilities and how to follow member guidelines. P provided its members with online computer access and delivered informational services through its Web site. P encouraged its members to participate in political activities. The membership fee covered both the cost of caregiving services and the cost of the medical marijuana that P supplied to its members. P charged its members no additional fee. Members received a set amount of medical marijuana; they were not entitled to unlimited supplies. On May 6, 2002, P decided that it would henceforth discontinue all of its activities. Based on its final return D disallowed all of P's deductions and costs of goods sold, determining that those items were 'Expenditures in Connection with the Illegal Sale of Drugs' within the meaning of section 280E. D held the position that medical marijuana was not approved by the federal government despite California’s legalization. According to D, P had a single trade or business of trafficking in medical marijuana. P claimed it was involved in both medical marijuana and caregiving and that the caregiving services were still deductible. P petitioned the Tax Court