Patients Mutual Assistance v. Cir ( 2021 )


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  •                      FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    PATIENTS MUTUAL ASSISTANCE                         No. 19-73078
    COLLECTIVE CORPORATION, DBA
    Harborside Health Center,                           Tax Ct. Nos.
    Petitioner-Appellant,                 29212-11
    30851-12
    v.                              14776-14
    COMMISSIONER OF INTERNAL
    REVENUE,                                             OPINION
    Respondent-Appellee.
    Appeal from a Decision of the
    United States Tax Court
    Argued and Submitted February 9, 2021
    San Francisco, California
    Filed April 22, 2021
    Before: Andrew D. Hurwitz and Daniel A. Bress, Circuit
    Judges, and Clifton L. Corker, * District Judge.
    Opinion by Judge Bress
    *
    The Honorable Clifton L. Corker, United States District Judge for
    the Eastern District of Tennessee, sitting by designation.
    2   PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    SUMMARY **
    Tax
    The panel affirmed the Tax Court’s decision on a petition
    for redetermination of federal income tax deficiencies that
    turned on whether a cannabis dispensary that purchases the
    marijuana it resells and values its inventory using the cost
    method of accounting must account for its inventory cost in
    accordance with Treasury Regulation § 1.471-3(b).
    Patients Mutual Assistance Collective Corporation, dba
    Harborside Health Center (“Harborside”), is one of the
    largest marijuana dispensaries in the country. For the years
    at issue, Harborside was a not-for-profit corporation and
    medicinal cannabis collective that operated a retail cannabis
    dispensary under California state law. Harborside claimed
    tens of millions of dollars in exclusions. The Commissioner
    of Internal Revenue disallowed nearly all of them, then
    issued notices of deficiency. On a petition for
    redetermination of the deficiencies, the Tax Court ruled in
    favor of the Commissioner, and this appeal followed.
    Most corporations can claim deductions for “ordinary
    and necessary expenses” that are “paid or incurred during the
    taxable year in carrying on any trade or business.” I.R.C.
    § 162(a). However, otherwise allowed deductions are not
    available to taxpayers who engage in certain activities that
    Congress regards as unlawful, I.R.C. § 280E, including
    trafficking in controlled substances like marijuana. The
    panel first declined to consider the constitutional claim, not
    **
    This summary constitutes no part of the opinion of the court. It
    has been prepared by court staff for the convenience of the reader.
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR            3
    raised in the Tax Court, that § 280E violates the Sixteenth
    Amendment.
    Harborside next argued that some of its expenditures,
    even if they cannot be deducted under § 280E, can be
    excluded from income as part of its inventory cost under
    general inventory tax accounting rules. Rejecting
    Harborside’s arguments that would have made more of its
    costs excludible for tax purposes, the panel held that the Tax
    Court did not err in concluding that Harborside’s inventory
    cost is determined by 
    Treas. Reg. § 1.471-3
    (b), which
    applies to a purchaser and reseller of the products it sells.
    The panel declined to consider Harborside’s argument,
    not raised before the Tax Court, that the Tax Court should
    have allowed at least some of Harborside’s claimed
    exclusions as “necessary charges incurred in acquiring
    possession of the goods” under 
    Treas. Reg. § 1.471-3
    (b).
    The panel therefore expressed no opinion on whether any of
    Harborside’s claimed exclusions may have been properly
    regarded as inventory costs under § 1.471-3(b), nor did it
    address arguments made by amici curiae that Harborside did
    not advance on appeal.
    COUNSEL
    James B. Mann (argued), Brooklyn, New York, for
    Petitioner-Appellant.
    Nathaniel S. Pollock (argued), Francesca Ugolini, and
    Michael J. Haungs, Attorneys; T. Joshua Wu, Deputy
    Assistant Attorney General; Richard E. Zuckerman,
    Principal Deputy Assistant Attorney General; Tax Division,
    United States Department of Justice, Washington, D.C.; for
    Respondent-Appellee.
    4   PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    Charles C. Sipos and Lauren Watts Staniar, Perkins Coie
    LLP, Seattle, Washington; Barak Cohen and Tre A.
    Holloway, Perkins Coie LLP, Washington, D.C.; for Amicus
    Curiae National Cannabis Industry Association.
    Jennifer E. Benda, Hall Estill Hardwick Gable Golden &
    Nelson P.C., Denver, Colorado, for Amici Curiae Marijuana
    Industry Group and Cannabis Trade Federation Action.
    OPINION
    BRESS, Circuit Judge:
    On its face, this tax case presents the technical issue
    whether a cannabis dispensary that purchases the marijuana
    it resells and that values its inventory using the cost method
    must account for its inventory cost in accordance with
    section 1.471-3(b) of the Treasury Regulations. But at its
    core, this dispute reflects the latest attempt by a medical
    marijuana retailer to ameliorate the significant tax
    consequences Congress has prescribed for businesses that
    Congress regards as trafficking in controlled substances.
    Under federal law, those prohibited substances include
    marijuana, even though some states have more recently
    legalized its sale. This disharmony between federal and state
    law produces the multi-million-dollar tax controversy before
    us. Ultimately, we hold that the taxpayer’s arguments either
    are without merit or were not preserved for our review. We
    therefore affirm the Tax Court.
    I
    The taxpayer is Patients Mutual Assistance Collective
    Corporation, one of the largest marijuana dispensaries in the
    United States. It is a C corporation under federal tax law that
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR             5
    does business as Harborside Health Center. We refer to it as
    “Harborside.” This appeal concerns Harborside’s corporate
    income tax liabilities for its tax years ending July 31, 2007
    through July 31, 2012. To understand Harborside’s
    arguments, it is necessary to have some understanding of its
    business.
    Harborside operates a retail cannabis dispensary. For the
    years at issue, Harborside was a not-for-profit corporation
    and medicinal cannabis collective operating under
    California laws governing medical marijuana operations.
    See 
    Cal. Health & Safety Code §§ 11362.765
    (a), 11362.768.
    Consistent with California law, Harborside sold products
    only to individuals who possessed a physician’s written
    recommendation for medical marijuana.               See 
    id.
    § 11362.5(d). Prospective members also had to sign a
    cultivation agreement permitting other Harborside members
    to grow marijuana on their behalf as part of the Harborside
    collective.
    Harborside sold several categories of products, including
    “buds,” or cannabis flowers. Harborside purchased buds
    from its patients-growers and did not grow any itself.
    Would-be sellers brought buds to Harborside’s purchasing
    office, where a Harborside employee would inspect and test
    the buds for quality. If the buds were acceptable, the
    employee negotiated a purchase price. Once Harborside
    purchased the buds, it stored them in a secure vault and sent
    a sample for third-party laboratory testing. If the results
    were satisfactory, employees would reinspect, trim, weigh,
    package, and label the buds in preparation for resale.
    Harborside also purchased from nurseries marijuana
    “clones,” i.e., “cuttings from a female cannabis plant that can
    be transplanted and used to cultivate marijuana.” After
    acquiring clones, Harborside stored, cared for, and
    6   PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    repackaged them before sale. Additionally, Harborside
    purchased and resold other marijuana-containing products,
    such as extracts and oils, which it purchased from other
    marijuana collectives, as well as non-marijuana products
    such as branded shirts and various marijuana-related
    paraphernalia. As a C corporation, Harborside pays
    corporate income tax on its “taxable income.” I.R.C.
    § 11(a);      see     also     id.   § 1361(a)(2)    (defining
    “C corporation”). 1 Taxable income is determined through a
    multi-step process. A taxpayer first computes its “gross
    income.” I.R.C. § 63(a). For a “merchandising” business
    such as Harborside, gross income includes the business’s
    “total sales, less the cost of goods sold.” 
    Treas. Reg. § 1.61
    -
    3(a). That “cost” is said to be “excluded” from the
    taxpayer’s income. See Max Sobel Wholesale Liquors v.
    Comm’r, 
    630 F.2d 670
    , 671 (9th Cir. 1980); see also 
    Treas. Reg. § 1.162-1
    (a) (providing that “[t]he cost of goods
    purchased for resale” is treated as an exclusion from gross
    receipts).
    Once a taxpayer has calculated its gross income, it
    subtracts any “deductions,” such as ordinary and necessary
    business expenses, to which it is entitled. I.R.C. §§ 63(a),
    161; see, e.g., id. § 162(a). The remaining amount is the
    taxpayer’s “taxable income.” Id. § 63(a). The regulations
    further provide that no item shall be treated as a deductible
    business expense “to the extent that it is used by the taxpayer
    in computing the cost of property included in its inventory,”
    1
    Unless otherwise specified, all statutory and regulatory references
    are to the Internal Revenue Code or the Treasury Regulations,
    respectively codified as Title 26 of the United States Code and Title 26
    of the Code of Federal Regulations.
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR             7
    because in that case the item is properly treated as an
    exclusion. 
    Treas. Reg. § 1.162-1
    (a).
    A stylized example may be helpful to show how these
    concepts work in practice. If a corporation purchased
    100 domino sets for $6 each and resold them for $8 each, its
    gross sales would be $800. It would then exclude cost of
    goods sold of $600, resulting in gross income of $200. If the
    corporation also paid wages of $50 and rent of $25, it would
    seek to deduct those expenses under section 162(a), resulting
    in taxable income of $125.
    The tax consequences are markedly different, however,
    if one is in the business of selling marijuana. Most
    corporations can claim deductions for “ordinary and
    necessary expenses,” such as employee salaries, rent, and
    license fees, “paid or incurred during the taxable year in
    carrying on any trade or business.” I.R.C. § 162(a). But
    taxpayers may not take the otherwise allowed deductions
    when they engage in certain activities that Congress regards
    as unlawful. See, e.g., Max Sobel, 
    630 F.2d at 671
    . That
    includes trafficking in controlled substances.
    Section 280E is the relevant provision, and it states:
    No deduction or credit shall be allowed for
    any amount paid or incurred during the
    taxable year in carrying on any trade or
    business if such trade or business (or the
    activities which comprise such trade or
    business) consists of trafficking in controlled
    substances (within the meaning of schedule I
    and II of the Controlled Substances Act)
    which is prohibited by Federal law or the law
    of any State in which such trade or business
    is conducted.
    8   PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    I.R.C. § 280E. Under federal law, marijuana is such a
    controlled substance. See 
    21 U.S.C. § 812
    (c), sch. I(c)(10);
    
    21 C.F.R. § 1308.11
    (d)(23); Olive v. Comm’r, 
    792 F.3d 1146
    , 1148 (9th Cir. 2015).
    Harborside concedes it is subject to section 280E.
    Nevertheless, on its tax returns for the years at issue,
    Harborside claimed tens of millions of dollars in exclusions
    for cost of goods sold and business expense deductions. The
    Commissioner of Internal Revenue disallowed nearly all
    those exclusions and deductions and issued Harborside
    notices of deficiency showing over $29 million in tax
    deficiencies for those years. Harborside petitioned the Tax
    Court for redetermination of the deficiencies. After
    Harborside provided additional substantiation of its costs,
    the Commissioner agreed that amounts Harborside paid its
    suppliers to purchase goods were excludible. But he
    continued to deny Harborside’s other claimed exclusions
    and all its claimed deductions.
    After a three-day trial, the Tax Court ruled in favor of the
    Commissioner. Patients Mut. Assistance Collective Corp. v.
    Comm’r, 
    151 T.C. 176
     (2018). That decision addressed a
    range of issues, many of which Harborside does not raise on
    appeal. The parties then agreed to stipulated decisions under
    Tax Court Rule of Practice and Procedure 155 that identified
    approximately $11 million in agreed-upon deficiencies.
    According to the government, roughly $1 million of that
    amount corresponds to the disallowed exclusions, with the
    remainder due to the denied deductions.
    This timely appeal followed. We have jurisdiction to
    review the Tax Court’s decisions under I.R.C. § 7482.
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR            9
    II
    On appeal, Harborside’s strategy is twofold: take out
    section 280E as unconstitutional under the Sixteenth
    Amendment and, if that fails, seek a more favorable ruling
    on its exclusions, so that some of what it cannot deduct under
    section 280E might instead be treated as cost of goods sold
    excludible from gross receipts.           We conclude that
    Harborside’s various arguments must be rejected.
    A
    We begin with its constitutional challenge. In recent
    years, cannabis businesses have tried to secure rulings
    invalidating section 280E as unconstitutional. These efforts
    have not been successful. The Tax Court recently rejected
    the argument that section 280E violates the Eighth
    Amendment’s Excessive Fines Clause. N. Cal. Small Bus.
    Assistants Inc. v. Comm’r, 
    153 T.C. 65
    , 72 (2019) (reviewed
    opinion). And the Tenth Circuit recently upheld section
    280E against a Sixteenth Amendment challenge. Alpenglow
    Botanicals, LLC v. United States, 
    894 F.3d 1187
    , 1201 (10th
    Cir. 2018).
    Reprising an argument similar to the one the Tenth
    Circuit turned down, Harborside argues that the corporate
    income tax, as modified by section 280E, is a “direct tax”
    that taxes more than “incomes,” in violation of the Sixteenth
    Amendment. The most immediate problem, however, is that
    Harborside did not raise this constitutional challenge in the
    Tax Court.
    Although Harborside did mention the Sixteenth
    Amendment in its Tax Court briefing, it did so only as part
    of an unrelated constitutional avoidance argument.
    Specifically, Harborside argued that the Commissioner’s
    10 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    denial of exclusions under the uniform capitalization, or
    UNICAP, rules of section 263A could render those rules
    unconstitutional given that section 280E also disallows
    deductions for those amounts. Before this court, however,
    Harborside explicitly abandoned its section 263A argument,
    and it points to no other occasion when it raised the Sixteenth
    Amendment before the Tax Court. Nor did the Tax Court in
    its extensive opinion address the Sixteenth Amendment
    argument that Harborside asserts here.
    “Absent exceptional circumstances, this court will not
    consider an argument that was not first raised in the Tax
    Court.” Sparkman v. Comm’r, 
    509 F.3d 1149
    , 1158 (9th Cir.
    2007). In a previous case challenging section 280E on
    constitutional grounds, we declined to consider the argument
    because the taxpayer had not raised its challenge in the Tax
    Court. See Canna Care, Inc. v. Comm’r, 694 F. App’x 570,
    571 (9th Cir. 2017). Harborside provides no basis to treat
    this case any differently. We therefore decline to consider
    Harborside’s constitutional claim.
    B
    1
    But just because Harborside is unentitled to deductions
    does not necessarily mean it cannot take exclusions for some
    of the amounts at issue. Section 280E does not purport to
    deny to those taxpayers within its scope the ability to seek
    exclusions that are available to other businesses. Patients
    Mutual, 151 T.C. at 204; Alterman v. Comm’r, 
    115 T.C.M. (CCH) 1452
    , 1460 (2018); Olive v. Comm’r, 139 T.C 19, 32,
    38 (2012). Harborside therefore argues that some of its
    expenditures, if they cannot be deducted, are actually part of
    its inventory cost under the general inventory tax accounting
    rules of section 471.
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 11
    We pause to note the peculiarity of Harborside’s
    position, which is a function of the world that section 280E
    creates. As the Tax Court explained, all else being equal,
    taxpayers generally prefer deductions over exclusions.
    Patients Mutual, 151 T.C. at 205 & n.23, 207. This is
    because a taxpayer generally can avail itself of the benefit of
    a deduction—decreased taxable income, and thus lowered
    taxes—in the same tax year in which it paid or incurred the
    corresponding amount. Id. at 205; see, e.g., I.R.C. § 461(a).
    In contrast, a merchandising taxpayer typically receives the
    tax benefit from an exclusion in the year in which it sells (or
    otherwise disposes of) the product associated with that
    exclusion (which may be years into the future). Patients
    Mutual, 151 T.C. at 205; see, e.g., I.R.C. § 451(a). 2 But
    although exclusions generally are not as good as deductions,
    they are better than nothing. So contrary to taxpayers’ usual
    preferences, and in an evident attempt to alleviate the effect
    of section 280E, Harborside takes the otherwise sub-optimal
    position that various expenditures it incurred in the course of
    purchasing and processing the marijuana it resold are in fact
    2
    Taxpayers engaged in merchandising businesses often are subject
    to the UNICAP rules under section 263A, under which they must
    capitalize the costs of inventory acquired for resale, including certain
    “indirect costs . . . which are allocable to” the inventory. I.R.C.
    § 263A(a)(2)(B); 
    Treas. Reg. § 1
    .263A-1(c)(1). Taxpayers subject to
    section 263A would recover those costs as they sell or otherwise dispose
    of items in their inventories. See Mertens Law of Federal Income
    Taxation § 16.41, Westlaw (Mar. 2021 Update). However, section 263A
    expressly prohibits the capitalization of “[a]ny cost which (but for [the
    UNICAP rules]) may not be taken into account in computing taxable
    income for any taxable year.” 
    Treas. Reg. § 1
    .263A-1(c)(2); see also
    I.R.C. § 263A(a) (flush language). In other words, if a cost is not
    deductible, it cannot be capitalized under section 263A. On that basis,
    the Tax Court determined that the UNICAP rules were inapplicable to
    Harborside, Patients Mutual, 151 T.C. at 209, a determination that
    Harborside does not dispute on appeal.
    12 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    excludible costs. These expenditures total over $7 million
    and include, for instance, employee compensation relating to
    the negotiation of bud purchases and the cost of laboratory
    testing of marijuana.          Because Harborside is a
    merchandising business that must maintain an inventory,
    resolving this issue requires determining which inventory
    tax accounting provisions apply. In other words, we are
    tasked with resolving the valuation rules Harborside must
    use to determine the expenditures allocable to Harborside’s
    cost of goods sold. We know those amounts include the
    purchase prices Harborside paid to buy marijuana. No one
    disputes that. But are any other items included as well? This
    question is a legal one involving the interpretation of the
    Internal Revenue Code and the Treasury Regulations, and
    our review therefore is de novo. See Estate of Saunders v.
    Comm’r, 
    745 F.3d 953
    , 957 (9th Cir. 2014). “Although a
    presumption exists that the Tax Court correctly applied the
    law, no special deference is given to the Tax Court’s
    decisions.” Knudsen v. Comm’r, 
    793 F.3d 1030
    , 1033 (9th
    Cir. 2015) (quotations omitted).
    To answer the question presented, we begin with the
    Code’s notion of inventory. Inventory generally refers to the
    goods owned by the taxpayer that are intended for sale to
    purchasers or that will physically become part of the product
    sold to purchasers. See 
    Treas. Reg. § 1.471-1
    . A winery, for
    instance, would include in its inventory not only the grapes
    it purchases to make wine, but also the bottles, corks, and
    labels it uses to package that wine for sale. See Internal
    Revenue Serv., The Wine Industry Audit Technique Guide
    21 (Mar. 2011).
    Section 471 prescribes that whenever a taxpayer is
    required to maintain an inventory, such inventory “shall be
    taken by such taxpayer on such basis as the Secretary [of the
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 13
    Treasury or his delegate] may prescribe as conforming as
    nearly as may be to the best accounting practice in the trade
    or business and as most clearly reflecting the income.”
    I.R.C. § 471(a); see id. § 7701(a)(11)(B). In Thor Power
    Tool Co. v. Commissioner, 
    439 U.S. 522
     (1978), the
    Supreme Court recognized that the second test—the clear
    reflection of income requirement—is “paramount,”
    emphasizing that the Treasury Regulations “state[]
    categorically that ‘no method of accounting is acceptable
    unless, in the opinion of the Commissioner, it clearly reflects
    income.’” 
    Id. at 540
     (quoting 
    Treas. Reg. § 1.446-1
    (a)(2)).
    Thus, “the Code and Regulations give the Commissioner
    broad discretion to set aside the taxpayer’s method if, ‘in
    [his] opinion,’ it does not reflect income clearly.” 
    Id.
    (alteration in original).
    Under the authority of section 471(a), the Internal
    Revenue Service has promulgated sections 1.471-1 through
    1.471-11 of the Treasury Regulations, which contain
    detailed rules governing how taxpayers must account for
    their inventories, including valuation methods. See Thor
    Power Tool, 439 U.S. at 532–33. Under these rules,
    taxpayers generally calculate the value of inventory using
    one of two methods: “cost” or “cost or market, whichever is
    lower.” 
    Treas. Reg. § 1.471-2
    (c). Regulations for each
    method are provided in sections 1.471-3 and 1.471-4,
    respectively. A taxpayer electing to use the “cost” method
    therefore must apply the definition of “cost” contained in
    section 1.471-3. See 
    id.
     § 1.471-2(b).
    Under section 1.471-3, the definition of “cost” is keyed
    to whether a taxpayer “purchased” or “produced” a given
    product.    Id. § 1.471-3(b)–(c).      For a taxpayer that
    “produced” the product it sells, “cost” includes not only “the
    cost of raw materials and supplies entering into or consumed
    14 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    in connection with the product,” but also “expenditures for
    direct labor” and “indirect production costs incident to and
    necessary for the production of the particular article.” Id.
    § 1.471-3(c). In contrast, taxpayers reselling products that
    they “purchased” are entitled to include as cost only “the
    invoice price,” less certain discounts not relevant here, as
    well as “transportation or other necessary charges incurred
    in acquiring possession of the goods.” Id. § 1.471-3(b).
    Harborside does not dispute that as a merchandising
    business, it must maintain its inventory in accordance with
    the regulatory scheme of section 471. See 
    Treas. Reg. §§ 1.471-1
    , 1.471-2(b). Nor does Harborside dispute that it
    elected to use the “cost” method to account for its inventory.
    
    Id.
     §§ 1.471-2(c), 1.471-3.        Harborside does dispute,
    however, which cost-method rules it is subject to for the
    years at issue. Before the Tax Court, Harborside argued that
    it had “produced” the products it sold and therefore should
    calculate the corresponding costs under section 1.471-3(c).
    The Tax Court rejected this argument and found that
    Harborside had “purchased,” not “produced,” the products it
    resold. Patients Mutual, 151 T.C. at 210–13. Harborside
    does not contest that determination on appeal. It therefore
    follows that Harborside’s excludible cost relating to those
    products must be determined under section 1.471-3(b),
    applicable to purchasers, i.e., resellers. See 151 T.C. at 213.
    2
    Resisting this straightforward conclusion, Harborside
    proffers various arguments as to why section 1.471-3(b)
    supposedly does not apply to it. In essence, section 1.471-
    3(b) defines (and thereby limits) the types of outlays
    associated with purchased merchandise that a taxpayer can
    treat as inventory costs. Harborside wants to dump more
    such expenditures into its excludible costs than section
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 15
    1.471-3(b) would otherwise allow, largely because section
    280E does not allow corresponding deductions (and because
    section 263A’s UNICAP rules are therefore inapplicable).
    Hence Harborside argues it is outside section 1.471-3(b)
    altogether. But Harborside’s arguments are not persuasive.
    First, Harborside asserts that it satisfied the general
    requirements of section 471—the “best accounting practice”
    and “clear reflection of income” rules—when it included the
    disputed exclusions within its inventory cost. See I.R.C.
    § 471(a); 
    Treas. Reg. § 1.471-2
    (a). Harborside argues that
    because the Commissioner does not directly assert that
    Harborside’s inventory methods fail either of these general
    requirements, he could not force the company to comply
    with the specific rules of section 1.471-3. But this argument
    misapprehends the statute and its implementing regulations.
    As discussed, section 471(a) mandates that “inventories
    shall be taken by [a] taxpayer on such basis as the Secretary
    may prescribe as conforming as nearly as may be to the best
    accounting practice in the trade or business and as most
    clearly reflecting the income.” I.R.C. § 471(a) (emphasis
    added). Under this authority, the Service has promulgated
    detailed regulations, the validity of which Harborside does
    not question, governing how taxpayers are to compute their
    inventories. See 
    Treas. Reg. §§ 1.471-1
     to -11. The
    Treasury Regulations echo the section 471(a) requirement,
    providing that “the inventory practice of a taxpayer should
    be consistent from year to year, and greater weight is to be
    given to consistency than to any particular method of
    inventorying or basis of valuation so long as the method or
    basis used is in accord with §§1.471-1 through 1.471.11.”
    Id. § 1.471-2(b) (emphasis added).
    Harborside wants us to treat section 471(a) as though it
    does not reference the implementing regulations, but it
    16 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    plainly does. Contrary to Harborside, compliance with
    section 471(a) cannot be assessed without consideration of
    its implementing regulations, here section 1.471-3(b). See
    Thor Power Tool, 439 U.S. at 533–35, 538–40 (holding that
    where a taxpayer using the “cost or market, whichever is
    lower” method did not comply with section 1.471-4, its
    inventory failed to clearly reflect income). Harborside cites
    no authority suggesting otherwise.
    Second, Harborside argues that because the
    Commissioner did not frame his challenge to Harborside’s
    inventory method in terms of a failure to clearly reflect
    income, he was without authority to compel Harborside to
    change its accounting methods—i.e., the way Harborside
    computed its inventory. This argument, too, is erroneous.
    Harborside is correct that the Commissioner may not force a
    taxpayer to use a particular accounting method where the
    taxpayer’s chosen method conforms to law. See, e.g., Jim
    Turin & Sons, Inc. v. Comm’r, 
    219 F.3d 1103
    , 1109 (9th Cir.
    2000). But the Commissioner does have the power to assert
    deficiencies where a taxpayer’s method of accounting does
    not conform with the applicable regulations. See, e.g., Thor
    Power Tool, 439 U.S. at 533 (sustaining the Commissioner’s
    disallowance of an inventory method of accounting that
    “was plainly inconsistent with the governing [Treasury]
    Regulations”). That is all the Commissioner sought to do
    here.
    Third, Harborside argues that under our decision in Max
    Sobel Wholesale Liquors v. Commissioner, 
    630 F.2d 670
    (9th Cir. 1980), section 1.471-3(b) cannot be grounds for
    disallowing Harborside’s cost computation because it was
    (in Harborside’s view) a “permissible” determination of cost
    of goods sold. But Harborside misreads Max Sobel, which
    held that a statute limiting deductions did not give the
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 17
    Commissioner the authority to deny exclusions for cost of
    goods sold. See 
    id.
     at 671–72. The Commissioner is not
    purporting to invoke section 280E as a basis to deny
    Harborside exclusions for cost of goods sold. Max Sobel
    does not address the issue here, namely, which expenditures
    are includible in cost of goods sold in the first place.
    Finally, Harborside argues that subsection (d) of section
    1.471-3 exempts it from the requirements of subsection (b)
    and permits it to include its purchasing and processing costs
    in its inventory cost. But section 1.471-3(d) does not apply
    to Harborside. That provision applies only to industries “in
    which the usual rules for computation of cost of production
    are inapplicable.” 
    Treas. Reg. § 1.471-3
    (d). In such
    industries, “costs may be approximated upon such basis as
    may be reasonable and in conformity with established trade
    practice in the particular industry.” 
    Id.
     The regulation
    provides three examples of such industries: “[f]armers and
    raisers of livestock,” certain “[m]iners and manufacturers,”
    and “[r]etail merchants” that use the “retail method” to
    approximate costs. 
    Id.
     Rules for each such industry are
    further detailed in respective sections of the Treasury
    Regulations. See 
    id.
     §§ 1.471-6 to -8.
    Section 1.471-3(d) is inapplicable because Harborside
    has failed to show that marijuana retail is an industry “in
    which the usual rules for computation of cost of production
    are inapplicable.” Id. § 1.471-3(d). Each of the types of
    taxpayers to which subsection (d) applies faces some
    difficulty in using the standard methods. For example,
    farmers require special inventory costing rules “[b]ecause of
    the difficulty of ascertaining actual cost of livestock and
    other farm products.” Id. § 1.471-6(c). Farmers therefore
    are permitted to approximate their costs under special
    regulations. Id. (permitting farmers to use the “farm-price
    18 PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR
    method” or “unit-livestock-price method” for approximating
    cost).
    Harborside presents no cogent argument for why a
    marijuana dispensary cannot compute its “cost of
    production” under the usual rules that apply to a retailer.
    And it does not claim that it is a “retail merchant” that uses
    the “retail method” in its cost accounting. Id. § 1.471-
    3(d)(3). Harborside’s only argument appears to be that
    because its expenditures would be disallowed as deductions
    under section 280E, it instead should be allowed to exclude
    those amounts as costs by electing to proceed under section
    1.471-3(d) rather than section 1.471-3(b). But Harborside
    does not ground this entitlement to different treatment in any
    statutory or regulatory authority. That the normal inventory
    accounting rules may be unfavorable to Harborside does not
    make them inapplicable to it. Section 1.471-3(d) therefore
    bears no relevance to Harborside’s tax liabilities for the
    years at issue.
    We thus hold that the Tax Court did not err in concluding
    that Harborside’s inventory cost for each of the years at issue
    is determined by section 1.471-3(b). Although Harborside
    is subject to serious tax consequences because of the nature
    of its business, see I.R.C. § 280E, the primary argument it
    has preserved for our review fails based on generally
    applicable provisions of federal tax law. Marijuana
    dispensaries, like all taxpayers, must abide by the intricacies
    of the Internal Revenue Code and the Treasury Regulations.
    This leaves Harborside arguing that the Tax Court erred
    in its application of section 1.471-3(b) by failing to allow at
    least some of Harborside’s claimed exclusions (such as
    employee salaries relating to negotiating marijuana
    purchases) as “necessary charges incurred in acquiring
    possession of the goods.” 
    Treas. Reg. § 1.471-3
    (b).
    PATIENTS MUTUAL ASSISTANCE COLLECTIVE V. CIR 19
    However, as with its Sixteenth Amendment claim,
    Harborside failed to raise this argument before the Tax
    Court. The issue is therefore forfeited for our review. See
    Sparkman, 
    509 F.3d at
    1158–59; Merkel v. Comm’r,
    
    192 F.3d 844
    , 852 n.10 (9th Cir. 1999).
    We therefore express no opinion on whether any of
    Harborside’s claimed exclusions may have been properly
    regarded as inventory cost under section 1.471-3(b). Nor do
    we address arguments made by amici that Harborside does
    not advance here. See United States v. Gementera, 
    379 F.3d 596
    , 607 (9th Cir. 2004) (“Generally, we do not consider on
    appeal an issue raised only by an amicus.” (quotations
    omitted)).
    AFFIRMED.