Mission Organic Center, Inc. v. Commissioner

Cannabis Dispensary Wins Remand After IRS 'Abuse of Discretion'

A cannabis dispensary, facing the heavy tax burden imposed by Section 280E—which disallows deductions for businesses trafficking in controlled substances—sought to settle its tax debts with the IRS. Mission Organic Center, Inc., with over $16 million in revenue, found itself unable to pay a tax bill inflated by the disallowance of roughly $3.5 million in deductions and offered to compromise for $65,000. In Mission Organic Center, Inc. v. Commissioner, Judge Holmes, writing for the Tax Court, remanded the case, finding that the IRS Independent Office of Appeals committed an abuse of discretion. The court found that the IRS Appeals officer made "blatant mistakes" and was "just plain wrong" in rejecting the offer.

The $3.5 Million Disallowance and the $65,000 Offer

Mission Organic Center, Inc., with over $16 million in revenue, found itself unable to pay a tax bill inflated by the disallowance of roughly $3.5 million in deductions and offered to compromise for $65,000. In Mission Organic Center, Inc. v. Commissioner, Judge Holmes, writing for the Tax Court, remanded the case, finding that the IRS Independent Office of Appeals committed an abuse of discretion. The court found that the IRS Appeals officer made "blatant mistakes" and was "just plain wrong" in rejecting the offer.

The dispute stemmed from Mission Organic Center’s 2021 tax year. The company reported gross receipts exceeding $16 million and cost of goods sold (COGS) of over $14 million. However, the IRS disallowed nearly $3.5 million in claimed expenses under Section 280E. Section 280E disallows deductions and credits for businesses trafficking in controlled substances, which, due to marijuana's federal status, impacts state-legal cannabis businesses. This disallowance resulted in a tax bill of $331,517. Unable to pay this amount, Mission Organic Center submitted an offer-in-compromise (OIC) to the IRS, seeking to settle its tax debts for all years from 2016 through 2021 for $65,000. Like all such offers, it was initially processed by the Centralized Offer in Compromise Unit (COIC). While the OIC was under consideration by COIC, the IRS sent Mission three notices of intent to levy, one each for the tax years 2016-19, 2019-20, and 2021. In response, Mission requested a Collection Due Process (CDP) hearing under Section 6330 for the 2021 tax bill. Section 6330 provides taxpayers with the right to a hearing before the IRS can levy their property. Mission requested that the IRS either place the debt in currently-not-collectible status or grant the OIC covering all years. The IRS Appeals officer held Mission’s CDP hearing for the 2021 tax year in late 2023.

A Notice of Determination 'Quite Unlike' the Others

...s of intent to levy, one each for the tax years 2016-19, 2019-20, and 2021. In response, Mission requested a Collection Due Process (CDP) hearing under Section 6330 for the 2021 tax bill. Section 6330 provides taxpayers with the right to a hearing before the IRS can levy their property. Mission requested that the IRS either place the debt in currently-not-collectible status or grant the OIC covering all years. The IRS Appeals officer held Mission’s CDP hearing for the 2021 tax year in late 2023.

The Appeals officer then issued a notice of determination that was, according to the Tax Court, "quite unlike" the determinations for prior years. In its request for a CDP hearing, Mission did not check the box stating that it wanted to challenge its underlying tax liability for 2021. Instead, it checked the boxes stating that it could not pay because of financial hardship and that it would like a collection alternative, such as an offer in compromise (OIC). The Appeals officer, however, made several "blatant mistakes." She incorrectly stated that Mission's attorney had asked for an installment agreement, and not just an OIC or currently-not-collectible status. The Tax Court noted that the Appeals officer determined that Mission could not challenge its tax liability for 2021 because Section 280E "disallows all expenses related to the operation of a medical marijuana dispensary deemed legal under State but not Federal law.” Section 280E disallows deductions or credits for businesses trafficking in controlled substances illegal under federal law, which includes state-legal cannabis businesses. The Appeals officer then added that Mission didn’t qualify for any collection alternative because it hadn’t submitted “the requisite financial information necessary to facilitate a determination of your ability to pay,” and also “noted” that Mission was not current with its estimated-tax payments, despite the IRS already having this financial information via the COIC.

Judge Holmes: The IRS Got It 'Just Plain Wrong'

The Tax Court's review in collection due process (CDP) cases is generally limited to whether the IRS abused its discretion. Under Section 6330, the IRS must provide taxpayers with notice and an opportunity for a hearing before levying their property. Abuse of discretion, the court explained, occurs when an agency decision rests on "an erroneous view of the law or a clearly erroneous assessment of the facts." Judge Holmes, writing for the court, stated that this standard applies only to the rationale the agency used in its notice of determination. This principle is rooted in SEC v. Chenery Corp., a Supreme Court case establishing that a reviewing court can only uphold an agency's decision based on the grounds the agency actually relied upon.

Judge Holmes found that the Appeals officer's reasoning was flawed on multiple fronts. The Appeals officer stated that Mission was challenging the underlying tax liability. However, the court found this to be demonstrably false. The court noted that Mission "specifically did not check the box that would’ve indicated it was challenging its liability." The court observed that Mission's attorney made it clear that the case was about "the computation of his client’s reasonable collection potential." The court concluded, "Misinterpreting a taxpayer’s argument means the Appeals officer was not considering an issue raised by the taxpayer. This is an abuse of discretion all by itself."

The court also expressed skepticism regarding the Appeals officer's claim that Mission failed to provide necessary financial documents. Judge Holmes pointed out that the IRS's Collection Offer in Compromise (COIC) division had already conducted a financial analysis using the same documents the Appeals officer requested. "Those financial records are actually in the administrative record that we have and would seem to be current, even as defined by the Commissioner himself," the court stated, citing Internal Revenue Manual (IRM) guidelines deeming financial information current if less than 12 months old. This discrepancy led the court to "doubt the veracity" of the case-activity record and its impact on the denial of Mission’s offer in compromise for the 2021 tax year.

Ultimately, the court concluded that the Appeals officer abused her discretion by failing to address the arguments Mission actually raised. The court ordered a remand for a supplemental hearing to rectify the errors.

Impact: Procedural Rights Stand Even Under Section 280E

Even cannabis businesses operating under the shadow of Section 280E, which disallows deductions and credits for businesses trafficking in controlled substances, are entitled to a fair Collection Due Process (CDP) hearing under Section 6330. Section 6330 provides procedural safeguards before the IRS can levy a taxpayer's property, ensuring an independent review by the IRS Independent Office of Appeals. This case underscores that the IRS must address a taxpayer's actual arguments in a CDP hearing, and a rejection based on demonstrably false premises – such as claiming documents are missing when they were, in fact, provided – will not withstand Tax Court scrutiny. The court's decision to remand emphasizes that procedural rights remain paramount, even when a business faces the restrictions of Section 280E.