Dude, Who Moved My Deductions?

They didn't cover this in Corporate Tax 101:

The federal government has found a new weapon in its war on marijuana — the tax man.

A San Francisco Bay area medical marijuana dispensary that promotes itself as the world's largest has been hit with a $2.4 million tax bill following an audit by the Internal Revenue Service, the dispensary founder said Tuesday.

The back taxes, penalties and interest levied against Harborside Health Center came after the IRS examined its returns for 2007 and 2008 and determined a 1982 tax code prohibiting cost deductions for businesses that traffic in illegal drugs applies to the dispensary.

Harborside is a spa-like fixture on Oakland's waterfront with 94,114 registered customers and 84 full-time employees that offers an average of 30 varieties of medical marijuana every day and has $22 million in annual sales.

One nice thing about life as a tax professional. You learn something new every day. I had no idea that someone had developed 30 varieties of medical marijuana. Does the development work qualify for R&D tax credits? Are they keeping the R&D work in the United States? Or outsourcing to a 16-year old with a second-grade education, earning pennies a day to get stoned in some foreign country?

Paul Caron at TaxProf Blog added some additional color on the pending IRS controversy.

I just keep imagining Jeff Spicoli's reaction to an aggressive IRS audit. (Parental warning: PG-13 content) Classic.