§280E Examination Defense & Appeals Memo
| Entity | EIN (example) | License type | Role in exam |
|---|---|---|---|
| Cascade Coast Cannabis LLC | 88-0000010 | Adult-use cultivation + manufacturing | Under examination — plant-touching |
| Cascade Coast Holdings LLC | 88-0000011 | — (no cannabis license) | Ancillary — not under exam |
Engagement routing. Tier: Active examination — representation · Posture: Adult-use (full §280E) · Active IRS matter: Yes — §7602 examination · Services indicated: §471-11 / §280E COGS Review (to support positions) · §471(c) / 8275-R Return Disclosure (go-forward)
Prepared for the named operator under a representation engagement (Form 2848). This example is illustrative and does not constitute tax or legal advice to any reader; no client relationship is created by viewing it, and it does not describe a real examination or IRS position. An examination is defended on its own record; nothing here is a promised outcome. Positions are supported with contemporaneous records and current authority, and penalty defenses are asserted where the procedural and substantive facts support them.
Control the record, support every position
Cascade Coast is under a §7602 examination of its §280E returns for two years. As an adult-use operator, the whole business is within §280E, so the exam turns on COGS: which production costs were properly inventoried under §1.471-11, whether the method holds, and whether the accuracy-related penalty under §6662 is sustainable. The engagement manages the IDR process, builds an issue-by-issue support file, asserts the available penalty defenses, and preserves the path to the IRS Independent Office of Appeals and, if needed, the Tax Court.
The strongest position is that legitimate indirect production costs belong in COGS under §1.471-11; the strongest procedural lever is the §6751(b) written-supervisory-approval requirement for penalties. Exposure bands are illustrative — the real number turns on the record, and settlement value at Appeals reflects the hazards of litigation, not a promise.
The examination, as it stands
Facts below are fabricated for illustration; a real matter is built from the actual notice, IDRs, and produced records.
Audit notice summary
Examination opened by IRS letter for two tax years; classified issue is the §280E computation and the COGS claimed on the cultivation/manufacturing returns. Form 2848 filed; all contact routed through the representative.
Years & issues under exam
- COGS composition — whether indirect production costs were properly inventoried under §1.471-11.
- Method consistency — whether the costing method was applied consistently across the years.
- §280E disallowance — deductions below the COGS line disallowed; confirming none were mislabeled.
- Accuracy-related penalty — §6662 asserted in the examiner's preliminary position.
Facts by issue
Each issue is reduced to the facts that decide it: for COGS, the production-cost ledger and the §1.471-11 category mapping; for method consistency, the prior-year workpapers; for the penalty, the return-preparation record and any disclosure. Facts are tied to source documents in the response index.
Requested records
The examiner's Information Document Requests (Form 4564) seek the general ledger, production-cost detail, bank records, and the COGS workpapers (see Exhibit A — IDR log). Requests are answered precisely — responsive, complete, and no more.
Documents produced
Production is tracked in a response index (Exhibit B): each item is Bates-referenced to the IDR it answers, dated, and logged, so the record of what was provided — and when — is unambiguous.
Document gaps
Where records are incomplete (e.g., a period of missing utility invoices), the gap is identified, reconstructed where defensible, and disclosed rather than papered over — an examiner-credible file beats an aggressive one.
Defending the positions
Position support
For each issue, the support memo states the taxpayer position, the controlling authority, and the record that proves it. On COGS, the position is full-absorption inventorying under Treas. Reg. §1.471-11 — and, defensively, the point that §263A does not expand a §280E operator's COGS (so the position is built on §471, not an assertion the examiner will defeat with Harborside).
Risk assessment
Each issue is scored on likelihood and impact (Exhibit E is the risk table). The COGS composition issue is defensible with records; the penalty is contestable on both substance (§6664 reasonable cause and good-faith reliance) and procedure (§6751(b) written supervisory approval). Weak spots are flagged honestly so the strategy is built on the real record.
Response strategy
Answer IDRs precisely and on time; concede nothing that is defensible and correct nothing that is not in error; document every position contemporaneously. If the examiner proposes adjustments, respond to the 30-day letter with a written protest to the IRS Independent Office of Appeals. Preserve the deficiency track: a §6212 notice of deficiency starts the §6213 90-day clock to petition the Tax Court, which is never allowed to lapse.
Posture drives the defense. Cascade Coast is adult-use, so the entire business is within §280E and there is no medical/non-§280E allocation to argue — the exam is a pure COGS and method case. A mixed operator would add allocation defenses; an operator with an ancillary business would add a CHAMP separate-business argument.
Transition where it affects positions under exam: a move to Schedule III would not retroactively cure the years under examination — §280E applied in those years. It can shape go-forward positions and inform the hazards-of-litigation posture at Appeals, but it is never argued as retroactive relief for the exam years.
Appeal posture
If unresolved at exam, the matter goes to Appeals on a written protest, where settlement reflects the hazards of litigation on each issue. The penalty is often the most movable item — a clean §6751(b) or §6664 record can take it off the table. The Tax Court petition right (§6213) is preserved throughout as leverage and backstop.
Issue-by-issue register
Each issue lists the examiner's position, our position, and the controlling authority. Conclusions are illustrative and not asserted; a real matter turns on its record. Exposure bands are order-of-magnitude illustrations.
| Issue | Controlling authority | Illustrative exposure band | Posture |
|---|---|---|---|
| COGS composition — indirect production costs | Treas. Reg. §1.471-11; IRC §471 | Primary dollars at issue | Defensible |
| §280E disallowance of below-line deductions | IRC §280E | Largely conceded (settled law) | Concede |
| Any §263A-based COGS expansion | IRC §263A; Harborside | Not asserted — would fail | Avoid |
| Method-consistency adjustment | IRC §446; §481(a) | Timing / procedural | Contest |
| Accuracy-related penalty (substance) | IRC §6662; §6664 reasonable cause | 20% of understatement | Contest |
| Accuracy-related penalty (procedure) | IRC §6751(b) supervisory approval | Penalty voided if unapproved | Contest |
Response actions, with owner and deadline
Owners and targets are placeholders; real deadlines are set by the IDR and letter dates.
| Action | Why | Owner | Target |
|---|---|---|---|
| Respond to outstanding IDRs (Form 4564) | Control the record; meet the examiner's deadline | J. Williams, EA | [per IDR date] |
| Build issue-by-issue support memo | Tie every position to authority + record | J. Williams, EA | [+21 days] |
| Request §6751(b) penalty-approval documentation | Test whether the penalty was properly approved | J. Williams, EA | [+14 days] |
| Prepare §6664 reasonable-cause statement | Substance defense to the accuracy penalty | EA + client | [+30 days] |
| Draft protest to Appeals (if 30-day letter issues) | Preserve settlement + hazards-of-litigation posture | J. Williams, EA | [within 30 days of letter] |
| Calendar the §6213 90-day petition deadline | Preserve Tax Court right if a notice of deficiency issues | J. Williams, EA | [on §6212 notice] |
Supporting shells
Exhibit A — IDR log
| IDR # | Date received | Items requested | Due | Status |
|---|---|---|---|---|
| IDR-01 | [date] | General ledger, trial balance | [date] | Responded |
| IDR-02 | [date] | Production-cost detail, COGS workpapers | [date] | In progress |
| IDR-03 | [date] | Bank statements, deposit records | [date] | Open |
Exhibit B — Response index
| Response # | Answers IDR | Documents produced | Date |
|---|---|---|---|
| R-01 | IDR-01 | GL + TB (Bates 0001–0120) | [date] |
| R-02 | IDR-02 (partial) | COGS workpapers (Bates 0121–0180) | [date] |
Exhibit C — Issue-by-issue memo
| Issue | Examiner position | Taxpayer position | Authority |
|---|---|---|---|
| Indirect costs in COGS | Disallow — period costs | Inventoriable production costs | §1.471-11(c) |
| Penalty | Assert §6662 (20%) | Reasonable cause; approval defect | §6664; §6751(b) |
Exhibit D — Supporting schedules
- COGS recomputation schedule (ties to §1.471-11 category mapping)
- Production-cost ledger with source-document references
- Method-consistency comparison across the exam years
- Reasonable-cause / good-faith reliance statement (§6664)
Exhibit E — Meeting notes & risk table
| Issue | Likelihood | Impact | Posture |
|---|---|---|---|
| COGS composition | Medium | High | Support + settle |
| §6662 penalty (substance) | Medium | Medium | Contest |
| §6751(b) approval defect | Low | High | Contest hard |
| §280E below-line disallowance | High | Low | Concede |
Meeting notes: examiner conference [date] — agenda, positions exchanged, next deadlines — logged with attendees and outcomes.
Findings, actions, and what's open
- Exam is a pure §280E COGS and method case (adult-use — no allocation to argue).
- COGS composition is defensible with production-cost records.
- Penalty is contestable on §6664 substance and §6751(b) procedure.
- Rescheduling does not cure the exam years.
- Respond to open IDRs; complete the response index.
- Request §6751(b) approval documentation.
- Prepare §6664 reasonable-cause statement.
- Ready the Appeals protest.
- IDR response due dates — do not slip.
- 30-day letter → protest window.
- §6213 90-day petition clock on any §6212 notice.
- Missing utility invoices for the gap period.
- Prior-year COGS workpapers for method consistency.
- Return-preparation record for the penalty defense.
Under a §280E audit? Get represented
A licensed Enrolled Agent takes over the IDR process, builds the issue-by-issue support file, asserts your penalty defenses, and preserves your path to Appeals and the Tax Court — on Form 2848, so the IRS talks to your representative, not you. Start with a consult.
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