In general, the Oregon income tax laws are based on the federal income tax laws. In other words, Oregon is generally tied to the Internal Revenue Code for purposes of income taxation. As a consequence, we generally look to the federal definition of taxable income as a precursor for purposes of determining Oregon taxable income.
What does this mean to taxpayers in the trade or business of selling recreational or medical marijuana in Oregon?
Currently, it appears these taxpayers are stuck with the federal tax laws. Consequently, unless the Oregon legislature statutorily disconnects from IRC § 280E, for Oregon income tax purposes, all deductions relating to the trade or business of selling medical or recreational marijuana will be disallowed.
I suspect the result of IRC § 280E and its impact on Oregon income taxation will be that many taxpayers in this industry will go to lengthy efforts to capitalize expenses and add them to the cost of goods sold. Caution is advised. The taxing authorities will likely closely scrutinize this issue.
As a general rule, in accordance with IRC § 162(a), taxpayers are allowed to deduct, for federal income tax purposes, all of the ordinary and necessary expenses they paid or incurred during the taxable year in carrying on a trade or business. There are, however, numerous exceptions to this general rule. One exception is found in IRC § 280E. It provides:
“No deduction or credit shall be allowed for any payment 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.”
I would like to invite you to NYU 74th Institute on Federal Taxation taking place in New York, New York on October 25-30, 2015, and in San Francisco, California on November 15-20, 2015.
The NYU Tax Institute is one of our country’s most pre-eminent tax conferences for CPAs and attorneys. I am proud to be a presenter on the closely-held business panel of the program on Oct. 29 and Nov. 19. This is my third time speaking at the Institute. This year, I will present a newly-written white paper on qualified subchapter S subsidiaries.
As reported in previous blog posts (January 17, 2014, January 21, 2014, and January 20, 2015), federal budget setbacks continue to severely impact the Internal Revenue Service (“IRS”) and its ability to carry out its lofty mission:
“[T]o provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”
Senator Ron Wyden (D-OR), Ranking Member of the United States Senate Committee on Finance, understands the critical role the IRS plays in maintaining our tax system. In a letter to IRS Commissioner John Koskinen, dated September 2, 2015, Senator Wyden professionally, but directly, questions the agency’s reallocation of IRS limited resources away from information technology (“IT”), enforcement and collection.
Background
Actual or constructive receipt of the exchange funds during a deferred exchange under IRC Section 1031 totally kills an exchange and any tax deferral opportunity. Treasury Regulation Section 1031(k)-1(f)(1) tells us that actual or constructive receipt of the exchange proceeds or other property (non-like-kind property) before receiving the like-kind replacement property causes the exchange to be treated as a taxable sale or exchange. This is the case even if the taxpayer later receives the like-kind replacement property. In accordance with Treasury Regulation 1.1031(k)-1(f)(2), a taxpayer is in constructive receipt of money or property if it is credited to his, her or its account; set apart for the taxpayer’s use; or otherwise made available to the taxpayer.
On May 11, 2015, after serving as Director of the Office of Professional Responsibility (“OPR”) for approximately six (6) years, Ms. Karen Hawkins announced her intention to step-down and retire, effective July 11, 2015.
The OPR is responsible for interpreting and applying the Treasury Regulations governing practice before the Internal Revenue Service (commonly known as “Circular 230”). It has exclusive responsibility for overseeing practitioner conduct and implementing discipline. For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service.
Under Code Section 1031(a), the relinquished property must have been held by the taxpayer for productive use in a trade or business, or held for investment. Likewise, the replacement property, at the time of the exchange, must be intended to be held by the taxpayer for productive use in a trade or business, or for investment.
As you know, it is ok to exchange trade or business property for investment property, and vice versa. At least two (2) recent tax court cases look at this issue.
Some of the most popular posts from Larry’s Tax Law are now available on a new “Top Posts” page (to view the Top Posts, click on the button at the top of the page). Since 2014, Larry’s Tax Law has been listed numerous times on LexBlog’s Top 10 in Law Blogs. The list is a weekly round-up of the U.S. top legal blogs. The criteria for selection includes topic relevance, reader engagement and originality in terms of insight and analysis.
If there are other blog posts from Larry’s Tax Law that you would like to added to “Top Posts,” please contact us.
The goodwill of a business can never be exchanged for the goodwill of another business. Goodwill is not like kind property. Treasury Regulation 1.1031(a)-2(c)(2) makes that crystal clear, providing:
The goodwill or going concern value of a business is not of a like kind to the goodwill or going concern value of another business.
I would like to invite you to the 15th Annual Oregon Tax Institute scheduled for June 4 & 5 in Portland, Oregon, at the downtown Embassy Suites Hotel. The OTI has grown from a local tax forum into a preeminent tax institute for both tax attorneys and CPAs. Our topic coverage and faculty this year are fabulous and each one of our speakers is a nationally recognized expert in tax law. This year’s OTI will be on par with the best tax institutes in the country.
I hope you will join us, and I encourage you to sign up for OTI immediately. It’s not too late! Also, please feel free to share this information with your colleagues. Click here to register.
Seminar Description:
The 15th Annual Tax Institute offers an outstanding faculty on hot topics for tax practitioners. Federal income tax developments will be covered in depth, and you will hear about significant national and Oregon SALT developments. Learn the latest about partnership workouts, FATCA compliance issues, sophisticated choice of entity planning, and acquisitions of privately-held companies by private equity firms. Finally, we will have a discussion about ethical issues facing tax practitioners.
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Larry J. Brant
Editor
Larry J. Brant is a Shareholder and the Chair of the Tax & Benefits practice group at Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; Tulsa, Oklahoma; and Beijing, China. Mr. Brant is licensed to practice in Oregon and Washington. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
