A Closer Look at IRC 280E (And Where We Stand)

At Calyx CPA, we believe that a taxpayer is entitled to challenge the IRS's interpretation of the law - including positions related to IRC Section 280E. This is not a fringe view. It is grounded in established tax law and regulatory guidance that has existed for decades.

The Reasonable Basis Standard

Under Treasury Regulation 1.6662-3(b)(3), a taxpayer may take a position on a return so long as it meets the "reasonable basis" standard. This threshold is not particularly high - it generally requires that there be approximately a 20% likelihood that the position would be sustained on its merits. The hierarchy of tax position standards runs as follows:

• Frivolous - no legal support whatsoever
• Reasonable basis - approximately 20% chance of success
• Substantial authority - approximately 40% chance of success
• More likely than not - greater than 50% chance of success

A position does not need to be a guaranteed winner to be legitimate. It simply needs to have a reasonable basis in law - and our position regarding 280E clears that bar with considerable room to spare.

Penalty Considerations

For disclosed positions - meaning those where the taxpayer transparently communicates their position to the IRS - the standard is even more favorable. When a position is adequately disclosed (typically via Form 8275 or 8275-R), the taxpayer only needs to meet the reasonable basis standard to avoid accuracy-related penalties under Section 6662. For undisclosed positions, the standard rises to substantial authority.

This is an important distinction. By disclosing our position and the legal reasoning behind it, we are operating well within the bounds of the law. We are not hiding anything. We are making a transparent, good-faith legal argument and inviting the IRS to evaluate it on its merits.

Taxpayer Rights

The Taxpayer Bill of Rights, codified under IRC Section 7803(a)(3), affirms the right of every taxpayer to challenge the IRS's position and to be heard. This includes the right to contest penalties and the right to appeal IRS determinations through established administrative and judicial channels.

When we take a position on a client's return, we do so with full confidence that it is legally supportable. If the IRS disagrees, the taxpayer has the right to contest that determination - and we stand behind the work we do.

Where Calyx Stands

We follow the rules, even when "breaking" them. That may sound contradictory, but it is precisely the point. The tax code provides mechanisms for taxpayers to take aggressive - but defensible - positions. The rules themselves allow for disagreement with the IRS. When we challenge 280E, we are not operating outside the system. We are using the system as it was designed to be used.

Our approach is grounded in legal authority, supported by regulatory guidance, and executed with full transparency. We believe the current application of 280E is ripe for challenge, and we have the confidence and the legal basis to back that belief up.