TAX RESEARCH PROJECT

You meet with your new client, Sam and Dave Dooby. Their business is Dooby Brothers LLC, which is a marijuana dispensary. They have all permits and approvals. The sale of medical marijuana is legal in the state. Their estimated 2016 financial information is as follows:

Gross Receipts                                  $1,000,000

Cost of Goods Sold                               450,000

State Excise Tax                                   100,000

Rent                                                     70,000

Utilities                                                 45,000

Security                                                100,000

Salaries                                                60,000

Payroll Taxes                                        25,000

Supplies                                               12,000

Equipment                                           20,000

Marketing Expenses                            35,000

Before you begin preparing the return, you recall there are some special rules for marijuana dispensaries under the Internal Revenue Code. They have been told by other accountants that the entire $1,000,000 is taxable. They have agreed to pay your fee for a research memo discussing applicable section(s) of the Internal Revenue Code and applicable law explaining what is deductible and what is not deductible.

This is a written communication to a client. It should:

1. Identify the issue(s),

2. Identify the rules (Code section, regulations, case authority, administrative rulings (if any))

3. Analyze the rules in 2 and how they apply to this situation

4. Provide a conclusion as to the likely treatment