The Drug Dealer Wrote Off His Scale, and Congress Got a Headache

It is a well-established fact that the Internal Revenue Service is not particularly sentimental about the source of your income. They taxed Al Capone for bootlegging, after all. Their operating philosophy seems to be that if you can make a dollar — whether by baking bread, fixing a leaky faucet, or engaging in activities that might alarm your grandmother — they would like their customary slice. 

This leads to a rather fascinating question: if the IRS is going to tax your illegal business, can you at least write off your expenses?

In 1981, a Minneapolis entrepreneur named Jeffrey Edmondson decided to find out. His business, you see, involved the sale of amphetamines, cocaine, and marijuana. 

And when the IRS came knocking for their share of his 1974 profits, Mr. Edmondson did what any small business owner would do: he reconstructed his books and filed a return, complete with a cost of goods (i.e. drugs) sold and a list of business deductions.

A Very Unusual Day in Tax Court

This is how the United States Tax Court found itself in the faintly surreal position of ruling on the deductibility of a drug dealer’s digital scale. Mr. Edmondson, to his credit, made a decent case. 

He argued that a portion of his apartment rent should be deductible, as it was his only place of business. He’d also paid for packaging, phone calls, and, of course, that small scale for weighing his product. These, he claimed, were all ordinary and necessary expenses for his particular line of work.

The Court, which operates on the dry logic of statutes rather than moral outrage, mostly agreed. It noted that the law at the time didn’t say you couldn’t deduct legitimate business expenses just because your business was illegal. 

So, they allowed him to deduct a third of his rent, his phone bills, the packaging costs, and, yes, the scale. They drew the line at a poorly documented business trip to San Diego — even for drug dealers, the rules on travel and entertainment deductions are mercilessly strict.

Congress Decides to Spoil the Fun

When the ruling hit the newspapers, it caused what you might call a legislative tizzy. The image of a drug dealer successfully writing off his equipment on his taxes did not sit well with the elected officials in Washington. Congress, moving with a speed it rarely musters, reached for a very large wrench.

In 1982, they created Section 280E of the Internal Revenue Code. If your business consists of trafficking in Schedule I or II controlled substances, you can no longer deduct your business expenses. You can still account for your cost of goods sold, but rent, utilities, salaries, and scales are out. It was a direct, unambiguous response to Mr. Edmondson’s minor victory.

And so, a strange little legal battle from the 1970s created a law that continues to give today’s state-legal cannabis industry a giant headache. It’s a perfect parable about the tax code’s weird logic, the power of good recordkeeping, and how one man’s attempt to write off his scale caused ripple effects for decades to come.