For tax practitioners representing cannabis clients, the intersection of I.R.C. § 280E and collection alternatives has long been a contentious battlefield. On December 16, 2025, the United States Tax Court issued two opinions regarding Mission Organic Center, Inc.—a reviewed opinion covering tax years 2016 through 2020, and a memorandum opinion covering tax year 2021.

These decisions provide critical guidance on how the Internal Revenue Service (IRS) calculates Reasonable Collection Potential (RCP) for marijuana businesses and underscores the procedural requirements Settlement Officers must follow to avoid an abuse of discretion. While the Tax Court upheld the Service’s harsh policy of disregarding § 280E-disallowed expenses when calculating RCP in the reviewed opinion, it simultaneously remanded the 2021 case due to the Appeals Officer’s failure to properly review the administrative record.

Factual Background and the Offer-in-Compromise

Mission Organic Center, Inc. (Mission) is a state-legal marijuana dispensary based in California. For the years at issue, the corporation generated significant gross receipts, ranging from approximately $2 million to over $16 million. However, due to the application of § 280E, Mission was precluded from deducting ordinary and necessary business expenses such as rent, wages, and utilities, resulting in substantial tax liabilities.

Facing liabilities for 2016 through 2020, and subsequently 2021, Mission submitted an Offer-in-Compromise (OIC) based on "Doubt as to Collectibility." Mission proposed a global settlement of $65,000 for all years. In its financial disclosures, Mission listed total business expenses of $1,490,236, which included items disallowed by § 280E. The core of Mission’s argument was economic reality: despite the tax code disallowing deductions, the expenses were real cash outflows that reduced its actual ability to pay.

The Reviewed Opinion: Upholding the Service’s RCP Policy

In Mission Organic Center, Inc. v. Commissioner, 165 T.C. No. 13, the Court addressed the rejection of the OIC for tax years 2016–2020. The Centralized Offer in Compromise Unit (COIC) assigned a Revenue Officer to calculate Mission’s RCP.

The Revenue Officer utilized the Internal Revenue Manual (IRM), specifically the provisions regarding marijuana businesses. The calculation of future income resulted in a staggering disparity between the taxpayer’s view and the IRS’s view. The Revenue Officer determined Mission’s future income to be $57,821,293. This figure was derived by taking the projected gross monthly income and subtracting only the cost of goods sold, while disallowing operating expenses "b/c of business 280e cannabis business".

Consequently, the RCP was calculated at over $57.8 million, substantially exceeding the liability of $5.2 million and the offer of $65,000. The IRS rejected the offer, stating, "The revenue officer did not allow all other operating expenses per Section 280e [sic] – you are involved in cannabis business, which is considered an illegal business activity for federal purposes".

Court’s Analysis of Law and Policy

The primary legal question was whether the Commissioner abused his discretion by excluding expenses disallowed by § 280E from the calculation of RCP. Mission argued that § 280E applies to the computation of taxable income, not collection potential or solvency.

The Court acknowledged two "plausible readings" of the Service’s determination. First, if the IRS believed § 280E statutorily mandated the disallowance of expenses in RCP calculations, that would be an error of law. As the Court noted, § 280E "disallows deductions or credits for any amount paid or incurred in carrying on the trade or business of trafficking in controlled substances; it does not address what expenses may or may not be considered for the purpose of calculating a taxpayer’s reasonable collection potential".

However, the Court adopted the second reading: that the IRS disallowed the expenses "as a policy matter, relying on section 280E as the foundation for establishing that policy and the IRM as the articulation of that policy".

The Court cited IRM 5.8.5.25.2, which explicitly instructs officers to "[l]imit allowable expenses consistent with Internal Revenue Code 280E" when calculating future income for marijuana businesses. The Court held that relying on the IRM is generally not an abuse of discretion. Furthermore, the Court validated the policy itself, stating that "[b]y disallowing these same items for purposes of calculating a taxpayer’s reasonable collection potential, the Commissioner is adhering to the public policy underlying the enactment of section 280E".

The Court concluded that "it is not an abuse of discretion in the light of congressional action" for the Commissioner to adopt guidelines that mirror the severity of § 280E in the collection context. Thus, the rejection of the OIC for 2016–2020 was sustained.

The Memorandum Opinion: Abuse of Discretion in 2021

While the legal theory regarding RCP was settled in favor of the IRS in the reviewed opinion, the Memorandum Opinion, Mission Organic Center, Inc. v. Commissioner, T.C. Memo. 2025-130, yielded a different result for the 2021 tax year due to procedural failures.

For the 2021 liability, the Appeals Officer (AO) issued a Notice of Determination that contained what the Court described as "blatant mistakes". The AO rejected the OIC on two grounds:

Mission could not challenge its underlying tax liability (citing § 280E).
Mission failed to submit "the requisite financial information necessary to facilitate a determination of your ability to pay".

Judicial Scrutiny of Administrative Review

The Court found the AO’s reasoning to be factually incorrect and an abuse of discretion. First, Mission was not challenging the underlying liability (the tax assessment itself) but was challenging the collectibility (the computation of RCP). The Court noted, "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".

Second, regarding the alleged failure to provide financial information, the Court found that the administrative record actually contained the necessary profit-and-loss statements and bank records, which had been submitted to the COIC. The Court observed, "This leads us to doubt the veracity of the case-activity record’s statement that there was ‘no financial information included w/admin file’".

Because the AO failed to address the arguments Mission actually made and relied on demonstrably false assertions regarding the record, the Court remanded the 2021 case for a supplemental hearing.

Distinguishing the Two Outcomes

The dichotomy between these two opinions offers vital lessons for practitioners. The differentiating factors are found not in the financial facts—which were largely consistent across all years—but in the administrative processing of the claims.

In the reviewed opinion (2016–2020), the Settlement Officer correctly identified the issue (calculation of RCP), applied the relevant internal guidance (IRM 5.8.5.25.2), and rejected the offer based on a policy decision that the Tax Court found to be a valid exercise of discretion under § 7122(d). The Court held that "the settlement officer’s rejection of Mission’s offer-in-compromise was consistent with the procedures adopted by the Commissioner".

In contrast, the memorandum opinion (2021) highlights that even if the IRS has a valid policy to reject an offer, it must arrive at that conclusion through a proper review of the record. The AO in the 2021 case incorrectly categorized the taxpayer’s collection defense as a liability challenge and falsely claimed documents were missing. As Judge Holmes noted, "Our analysis of that last determination is different from that for its earlier tax years, and much easier". The differentiation lies in the "reasoning used" by the AO; the Court emphasized, "We apply this standard only to the rationale the agency used in its notice of determination".

Conclusion

The Mission Organic Center decisions solidify the IRS’s authority to use the "phantom income" created by § 280E when determining a cannabis business’s ability to pay in an OIC context. Practitioners should advise clients that the IRS policy to "[l]imit allowable expenses consistent with Internal Revenue Code 280E" for RCP calculations is now supported by judicial precedent.

However, the remand of the 2021 tax year serves as a reminder that the Service remains bound by the Chenery doctrine. The Tax Court will "reject an agency’s decisions that adopt ‘an erroneous view of the law or a clearly erroneous assessment of the facts’". While the policy against marijuana businesses is strict, the Service must still accurately review the administrative record and address the specific arguments raised by the taxpayer.

Prepared with assistance from NotebookLM.