Question

Facts:  Highcare, Inc. is a calendar year entity that began business this year. Highcare provides nursing services to cancer patients. The services it provides are both based in traditional science and holistic medicine. To support the nursing services, Highcare purchases and dispenses medical marijuana to its patients.

Also, Highcare purchases and sells a line of recreational marijuana products for its patients and their families at its facility’s store. Highcare capitalizes only the costs associated with acquiring marijuana in its inventory costs. No other costs are capitalized into inventory. For tax purposes, Highcare's inventory capitalization and COGS are properly determined.

In Highcare’s state (California), selling medical and recreational marijuana is legal. This year, Highcare’s general financial results for each of its business lines were as follows:

	Total	Nursing	Dispensary	Store
Revenue	$1,550,000	$1,000,000	$300,000	$250,000
COGS	$325,000	$0	$200,000	$125,000
Salaries	$680,000	$600,000	$50,000	$30,000
Administrative Costs	$275,000	$250,000	$20,000	$5,000
Total	$270,000	$150,000	$30,000	$90,000

Highcare’s management recently learned that, although medical and recreational marijuana are legal enterprises in California, they are not under federal law because marijuana is a controlled substance within the meaning of schedule I and II of the Controlled Substances Act (21 U.S.C. ch. 13 § 801 et seq.) . It is uncertain about how to compute its federal taxable income. Specifically, Highcare is concerned that its marijuana-related deductions, which are generally allowable under Code section 162, may be prohibited by federal law.

Issue: Based on the financial data provided, what will Highcare’s taxable income be for this year?

Required: Download this template.  R1 Research List.xlsx. Do the research and upload a completed list (remember that this is not a writing assignment, simple explanations only).

Only the cost of obtaining product is included. In other words, do not review the inventory capitalization / COGS numbers. Do not address capitalization (Code sections 263(a) or 263A).

Only primary authorities (Code and applicable Regs, cases or Rulings) are to be listed. I started the list with a sample of what I want to see. My goal is to be able to review the research to see if you're headed in the right direction.

Please DO NOT provide your process or any secondary sources.

Issues / Observations: Note the issue or item that the authority you are using addresses	Authorities: List SEPARATELY the PRIMARY authority that you plan to use	Comments: Provide a brief outline of why this authority is relevant / how you will use it in your paper
Define taxable income	Code section 63	The issue presented is to determine taxable income. Starting with Code section 63 to define.

Answer 1

Required: Upload a document with the following information:

There are two areas that you must consider in your answer - Marijuana Business COGS and Dual Purpose Businesses. You must identify applicable Code and Regs (if any) and at least one case for each the areas noted.

1) Provide a brief answer to the Issue posed (this can be informal - this is not a writing assignment).

2) List the PRIMARY sources on which you will be relying (provide name, citation and a brief description as to how you plan to use those sources to make your arguments) addressing:

2a) the general Code and Regs (if any) that are at issue.

2b) the treatment of marijuana business COGS

2c) whether the expenses of the non-marijuana activities are deductible (Dual purpose business).