Dept. of Rev. v. Wakefield

No. 24 	September 22, 2024 	403
IN THE OREGON TAX COURT
REGULAR DIVISION
DEPARTMENT OF REVENUE,
State of Oregon,
Plaintiff,
v.
James WAKEFIELD,
Defendant.
(TC 5404)
On cross-motions for partial summary judgment regarding Plaintiff’s
(the department’s) imposition of the twenty-percent penalty for substantial
understatement of net tax under ORS 314.402, the parties disagreed whether
Defendant (taxpayer) had substantial authority for his position that Oregon had
disconnected from section 280E of the Internal Revenue Code for tax year 2015.
The court found no substantial authority for taxpayer’s constitutional arguments
because the authorities he cited either were not substantial in relation to the
authorities favoring the department or did not exist at the time prescribed in
Treas Reg § 1.6662-4(d)(3)(iv). The court concluded, however, that taxpayer had
substantial authority solely based on “a well-reasoned construction of the appli-
cable statutory provision” because the governing law had been changed multiple
times in the weeks and months before the timely filed and little other guidance
was yet available. Treas Reg § 1.6662-4(d)(3)(ii); see Booth v. Commissioner, 108
TC 524, 578 (1997). Therefore, under the highly usual facts of the case, the sub-
stantial understatement penalty under ORS 314.402 did not apply.
Oral argument on cross-motions for partial summary
judgment was held September 7, 2022, in the courtroom of
the Oregon Tax Court, Salem.
Darren Weirnick, Senior Assistant Attorney General,
Department of Justice, Salem, filed the cross-motion and
argued the cause for Plaintiff Department of Revenue (the
department).
Samuel D. Grosz, Attorney at Law, Portland, filed the
motion and argued the cause for Defendant (taxpayer).
Decision rendered September 22, 2023.
ROBERT T. MANICKE, Judge.
This matter is before the court on the motion of
Defendant (taxpayer) for partial summary judgment seek-
ing to overturn Plaintiff’s (the department’s) imposition of
the 20-percent penalty for substantial understatement of

404 	Dept. of Rev. v. Wakefield
net tax under ORS 314.402 (the Penalty) for tax year 2015,
and the department’s cross-motion asking the court to sus-
tain the Penalty.1
I. 	FACTS
The following facts are uncontested. Taxpayer filed
a timely 2015 Oregon personal income tax return on or
about April 12, 2016. Taxpayer’s Schedule C described his
business as “farmer/produce retail.” Taxpayer’s business in
2015 involved the sale of marijuana products. His Oregon
return for 2015 did not indicate that his business involved
the growing, production, or sale of marijuana or marijuana
products or that he had taken the position that Oregon had
disconnected from section 280E of the Internal Revenue
Code (Section 280E) with respect to such business. 2
After audit, the department reclassified a substan-
tial portion of taxpayer’s Schedule C expenses as cost of
goods sold and disallowed the remaining expenses on the
grounds that the expenses were not deductible by reason of
Section 280E as incorporated for Oregon personal income
tax purposes. As a result of those adjustments, the depart-
ment eventually assessed unpaid tax, interest and penal-
ties, including the Penalty at issue here. Although other
computational issues remain to be addressed, there is no
dispute that the department determined that taxpayer
underreported his net tax by more than $2,400, and that
the amount of the Penalty assessed and at issue is $7,087. 3
Taxpayer 	challenged 	the 	assessments 	in 	the
Magistrate Division, which held in taxpayer’s favor on cross-
motions for summary judgment, concluding that Oregon
had disconnected from Section 280E for 2015. The depart-
ment appealed to this division.4 In this division, the parties
1 Unless otherwise indicated, references to the Oregon Revised Statutes
(ORS) are to the 2015 edition. This order is amended to correct a factual error
that appeared in footnote 4 of the original order.
2 References to the Internal Revenue Code (IRC, or Code) are to the Internal
Revenue Code of 1986, as in effect and operative for the tax year beginning on
January 1, 2015.
3 $2400 is the statutory threshold for imposition of the substantial under-
statement penalty against a noncorporate taxpayer. See ORS 314.402(2)(a).
4 The department’s audit and the Magistrate Division appeal involved both
tax year 2014 and tax year 2015. In a single decision, the magistrate granted

Cite as 25 OTR 403 (2024) 	405
initially filed cross-motions for partial summary judgment
limited to whether Oregon had disconnected from Section
280E for 2015. In an order issued February 3, 2022, the court
held that Oregon had not disconnected from Section 280E.
Dept. of Rev. v. Wakefield, 25 OTR 1 (2022) (Wakefield). The
parties’ instant motions are limited to the applicability of
the Penalty, and specifically to whether taxpayer had “sub-
stantial authority” for his position that Oregon had discon-
nected from Section 280E.
II. 	ISSUE
Was taxpayer’s treatment of his marijuana busi-
ness expenses as deductible without limitation by Section
280E for tax year 2015 supported by substantial authority,
with the consequence that the twenty-percent penalty for
substantial understatement of net tax under ORS 314.402
does not apply?
III. 	RELEVANT LAW
A. 	ORS 314.402
The relevant portions of ORS 314.402 provide:
“(1) 	If the Department of Revenue determines that
there is a substantial understatement of net tax for any tax
year under any law imposing a tax on or measured by net
income, there shall be added to the amount of tax required
to be shown on the return a penalty equal to 20 percent of
the amount of any underpayment of tax attributable to the
understatement.
“* * * * *
“(4) 	As used in this section:
“* * * * *
“(b) 	Understatement’ means the excess of the amount
of the net tax required to be shown on the return for the tax
year over the amount of the net tax shown on the return,
reduced by any portion of the understatement that is attrib-
utable to:
summary judgment in favor of the department as to tax year 2014 and in favor of
taxpayer as to tax year 2015. This case (TC 5404) constitutes the department’s
appeal as to tax year 2015.

406 	Dept. of Rev. v. Wakefield
“(A) 	The tax treatment of any item by the taxpayer if
there is or was substantial authority for such treatment; or
“(B) 	Any item with respect to which:
“(i) 	The relevant facts affecting the item’s tax treat-
ment are adequately disclosed in the return or in a state-
ment attached to the return; and
“(ii) 	There is a reasonable basis for the tax treatment
of the item by the taxpayer.”
B. 	Department’s Rule and Incorporated Federal Treasury
Regulation
The 	department’s 	short 	rule 	interpreting 	“sub-
stantial authority” under ORS 314.402 provided at all rele-
vant times: “ ‘Substantial authority’ has the same meaning
as used in Treasury Regulation § 1.6662-4(d).” OAR 150-
314.402(4)(b) (2013) (currently codified, without substantive
amendment, as OAR 150-314-0209).
The referenced federal regulation states in relevant
part:
“(2) 	The substantial authority standard is an objec-
tive standard involving an analysis of the law and applica-
tion of the law to relevant facts. The substantial authority
standard is less stringent than the more likely than not
standard (the standard that is met when there is a greater
than 50–percent likelihood of the position being upheld),
but more stringent than the reasonable basis standard as
defined in § 1.6662–3(b)(3). * * *
“(3)(i) 	There is substantial authority for the tax treat-
ment of an item only if the weight of the authorities sup-
porting the treatment is substantial in relation to the
weight of authorities supporting contrary treatment. All
authorities relevant to the tax treatment of an item, includ-
ing the authorities contrary to the treatment, are taken
into account in determining whether substantial authority
exists. The weight of authorities is determined in light of
the pertinent facts and circumstances in the manner pre-
scribed by paragraph (d)(3)(ii) of this section. There may
be substantial authority for more than one position with
respect to the same item. Because the substantial author-
ity standard is an objective standard, the taxpayer’s belief
that there is substantial authority for the tax treatment

Cite as 25 OTR 403 (2024) 	407
of an item is not relevant in determining whether there is
substantial authority for that treatment.
“(ii) 	The weight accorded an authority depends on its
relevance and persuasiveness, and the type of document
providing the authority. For example, a case or revenue
ruling having some facts in common with the tax treat-
ment at issue is not particularly relevant if the authority
is materially distinguishable on its facts, or is otherwise
inapplicable to the tax treatment at issue. An authority
that merely states a conclusion ordinarily is less persuasive
than one that reaches its conclusion by cogently relating
the applicable law to pertinent facts. * * * The type of docu-
ment also must be considered. For example, a revenue rul-
ing is accorded greater weight than a private letter ruling
addressing the same issue. An older private letter ruling,
technical advice memorandum, general counsel memoran-
dum or action on decision generally must be accorded less
weight than a more recent one. Any document described
in the preceding sentence that is more than 10 years old
generally is accorded very little weight. However, the per-
suasiveness and relevance of a document, viewed in light
of subsequent developments, should be taken into account
along with the age of the document. There may be substan-
tial authority for the tax treatment of an item despite the
absence of certain types of authority. Thus, a taxpayer may
have substantial authority for a position that is supported
only by a well-reasoned construction of the applicable stat-
utory provision.
“(iii) 	[O]nly the following are authority for purposes
of determining whether there is substantial authority for
the tax treatment of an item: Applicable provisions of the
Internal Revenue Code and other statutory provisions;
proposed, temporary and final regulations construing
such statutes; revenue rulings and revenue procedures;
tax treaties and regulations thereunder, and Treasury
Department and other official explanations of such trea-
ties; court cases; congressional intent as reflected in com-
mittee reports, joint explanatory statements of managers
included in conference committee reports, and floor state-
ments made prior to enactment by one of a bill’s managers;
General Explanations of tax legislation prepared by the
Joint Committee on Taxation (the Blue Book); private let-
ter rulings and technical advice memoranda issued after
October 31, 1976; actions on decisions and general counsel

408 	Dept. of Rev. v. Wakefield
memoranda issued after March 12, 1981 (as well as gen-
eral counsel memoranda published in pre–1955 volumes
of the Cumulative Bulletin); Internal Revenue Service
information or press releases; and notices, announcements
and other administrative pronouncements published by
the Service in the Internal Revenue Bulletin. Conclusions
reached in treatises, legal periodicals, legal opinions or
opinions rendered by tax professionals are not authority.
The authorities underlying such expressions of opinion
where applicable to the facts of a particular case, however,
may give rise to substantial authority for the tax treatment
of an item. Notwithstanding the preceding list of authori-
ties, an authority does not continue to be an authority to
the extent it is overruled or modified, implicitly or explic-
itly, by a body with the power to overrule or modify the ear-
lier authority. In the case of court decisions, for example, a
district court opinion on an issue is not an authority if over-
ruled or reversed by the United States Court of Appeals
for such district. However, a Tax Court opinion is not con-
sidered to be overruled or modified by a court of appeals to
which a taxpayer does not have a right of appeal, unless
the Tax Court adopts the holding of the court of appeals.
Similarly, a private letter ruling is not authority if revoked
or if inconsistent with a subsequent proposed regulation,
revenue ruling or other administrative pronouncement
published in the Internal Revenue Bulletin.”
“(iv) 	* * * * *
“I. 	There is substantial authority for the tax treatment
of an item if there is substantial authority at the time the
return containing the item is filed or there was substantial
authority on the last day of the taxable year to which the
return relates.”
Treasury Regulation § 1.6662-4(d)(i)-(iv) (as in effect in
2015; last amended in 2003) (headings omitted).
The court notes that Congress’s Joint Committee
on Taxation has reported a “general consensus of scholars
and practitioners” that the substantial authority standard
requires an approximately 40-percent likelihood of success
and that the reasonable basis standard requires an approx-
imately 20-percent likelihood of success. Joint Committee
on Taxation, Study of Present-Law Penalty and Interest
Provisions as Required by Section 3801 of the Internal

Cite as 25 OTR 403 (2024) 	409
Revenue Service Restructuring and Reform Act of 1998
(Including Provisions Relating to Corporate Tax Shelters) at
160 (Table 7) (July 22, 1999).
IV. 	ANALYSIS
Taxpayer asserts that there was substantial author-
ity for his treatment of otherwise allowable marijuana
business expense deductions as not disallowed by Section
280E. 5 The court categorizes taxpayer’s positions, and the
department’s responses, as follows: (1) arguments about the
applicability of laws passed by the Oregon legislature to
the 2015 tax year, including arguments based on the Full
Text Provision of the Oregon Constitution; (2) arguments
based on the Oregon Uniformity Clauses and the Oregon
Excessive Fines Clause; (3) arguments that Section 280E
was invalid under the Sixteenth Amendment of the United
States Constitution (relating to Congress’s power to impose
an income tax without apportionment among the states);
and (4) arguments based on the Excessive Fines Clause of
the Eighth Amendment of the United States Constitution.
A. 	Taxpayer’s Constitutional Positions
The court begins its analysis with categories (2)
through (4).6
Category 	(1): 	Oregon 	“Full 	Text” 	Provision.
Taxpayer’s 2015 Oregon return, filed on April 12, 2016,
treated his business expenses as deductible notwithstand-
ing Oregon’s incorporation of Section 280E through ORS
316.680. In these cross-motions, taxpayer asserts that the
magistrate’s decision that Oregon legislation disconnect-
ing from Section 280E violated the “Full Text” Provision of
5 Section 280E provides:
“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.”
6 The court’s decision on the merits follows Oregon’s “first-things-first” doc-
trine. State v. Kennedy, 295 Or 260, 266-67, 666 P2d 1316 (1983). See also Hughes
v. State of Oregon, 314 Or 1, 12, 838 P2d 1018 (1992). On the issue of substantial
authority, however, the court begins with taxpayer’s positions under state and
federal constitutional law because they can be addressed relatively easily.

410 	Dept. of Rev. v. Wakefield
the Oregon Constitution constitutes substantial authority
for his reporting position. The court rejects this argument
because the magistrate’s decision, like the dissenting opin-
ions in Northern Cal. Small Bus. Assistants Inc. v. Comm’r,
153 TC 65 (2019) (Northern California), had not been issued
when taxpayer filed his return or at the end of 2015. See
Treas Reg § 1.6662-4(d)(3)(iv) (authority must have existed
when return was filed, or on last day of tax year to which
return relates). Taxpayer seems to argue in the alternative
that the authorities underlying the magistrate’s reason-
ing constitute substantial authority. The court rejects this
argument as well, because the court has found no authori-
ties supporting taxpayer’s understanding of the “Full Text”
Provision, while longstanding cases support the depart-
ment’s understanding. See Wakefield, 25 OTR 1, 25 (2022).
Category 	(2): Oregon 	Uniformity 	and 	Excessive
Fines Clauses. As to category (2), the court readily agrees
with the department that no substantial authority existed
for taxpayer’s position. Under paragraph (3)(i) of the fed-
eral regulation, the basic requirement is that “the weight
of the authorities supporting the treatment [be] substantial
in relation to the weight of authorities supporting contrary
treatment.” Treas Reg § 1.6662-4(d)(3)(i). With respect to
the Uniformity Clauses, the department correctly points out
that all the cases taxpayer cited were factually distinguish-
able, and taxpayer cited them mainly to establish the test.
That test is highly deferential to the legislature, requiring
only “genuine differences” between classes and a conceivable
rational basis for the classification. See Wakefield, 25 OTR
at 27 (2022). Taxpayer offered no authority for the proposi-
tion that marijuana is in the same class as, yet treated dif-
ferently from, other substances, and taxpayer did not refute
the rational basis proffered by the department. See id. at
28. As to taxpayer’s Oregon Excessive Fines Clause argu-
ment, taxpayer failed to cite, much less refute with substan-
tial authority, dispositive precedent holding that the Clause
could not apply in taxpayer’s civil case. See id. at 29.
Category 	(3): 	Federal 	Sixteenth 	Amendment.
In 	rejecting 	taxpayer’s 	argument 	under 	the 	Sixteenth
Amendment, the court relied on the doctrine that deductions

Cite as 25 OTR 403 (2024) 	411
are a matter of “legislative grace.” Id. at 43. That doctrine
is rooted in a 1934 statement of the United States Supreme
Court that, although dicta, has come to support numerous
later Supreme Court decisions upholding the denial of deduc-
tions. See New Colonial Ice Co. v. Helvering, 292 US 435, 440,
54 S Ct 788, 78 L Ed 1348 (1934) (“The power to tax income
like that of the new corporation is plain and extends to the
gross income. Whether and to what extent deductions shall
be allowed depends upon legislative grace; and only as there
is clear provision therefor can any particular deduction be
allowed.”). This court noted that scholars have made, and
continue to make, “serious arguments” that the Sixteenth
Amendment does not permit an unapportioned tax based
on gross income, but “legal periodicals” alone are not within
the definition of “authority” in Treas Reg § 1.6662-4(d)(3)
(iii), and no court has held in favor of a taxpayer based on
such an argument. Taxpayer cited the dissenting opinions
in Northern California, but those cannot constitute substan-
tial authority, if only because the decision was rendered in
2019, more than three years after taxpayer filed his return
for 2015. See Treasury Regulation § 1.6662-4(d)(3)(iv).7 The
court now concludes that taxpayer’s arguments under the
Sixteenth Amendment lacked substantial authority.
Category (4): 	Federal Excessive Fines Clause. To
evaluate the question of a “fine,” for Eighth Amendment pur-
poses, this court analyzed pre-2016 cases, identifying three
factors that tended to indicate that Section 280E could con-
stitute a “fine” and four factors that weighed against treat-
ing Section 280E as a fine. Wakefield, 25 OTR at 48. The
court found, however, that a long history of “public policy”
limitations on deductions in federal income tax law was an
“important overlay” that “weighs substantially” against
treating Section 280E as a fine. Id. at 50. Here too, tax-
payer cited the dissenting opinions in Northern California,
but apart from the fact that those opinions did not exist
when taxpayer filed his return, the opinions also could not
suffice as “authority” on the entire Excessive Fines Clause
issue because a lack of evidence in the record prevented the
7 The court in this case does not decide whether a dissenting opinion (or, for
that matter, a concurrence or a plurality opinion) could constitute a “court case[ ]”
that is “authority” under Treas Reg § 1.6662-4(d)(3)(iii).

412 	Dept. of Rev. v. Wakefield
dissenters from analyzing whether the denial of deductions
under Section 280E created a fine that was “excessive.” See
Northern Cal., 153 TC at 90, 93; see US v. Bajakajian, 524
US 321, 329, 118 S Ct 2028, 141 L Ed 2d 314 (1998) (Eighth
Amendment applies if payment is a “fine” and is “exces-
sive”). Thus, while contemporaneous authorities provided
some support for taxpayer’s position, the court concludes
that the “substantial” weight of the authorities favored the
government.
B. 	Taxpayer’s Oregon Statutory Positions (Category 1)
The court considers whether taxpayer “may have
substantial authority for a position that is supported only
by a well-reasoned construction of the applicable statu-
tory provision.” Treas Reg § 1.6662-4(d)(3)(ii). The court
has found no precedential Oregon cases considering this
provision of the regulation. Cf. Santa Fe Natural Tobacco
Co. v. Dept. of Rev., 25 OTR 124, 164 (2022) (in “matters of
first impression,” holding taxpayer’s construction of federal
statute satisfied “reasonable basis” test under Treas Reg
§ 1.6662-4(d); not reaching issue of substantial authority).
Because the department’s administrative rule adopts the
definition of substantial authority by reference, the court
looks to federal cases for any persuasive value inherent in
their reasoning. In “novel” circumstances, federal courts
have found the substantial understatement penalty inappli-
cable, applying the “well-reasoned construction” clause. See
Booth v. Commissioner, 108 TC 524, 578 (1997); Dunnegan
v. Commissioner, 82 F3d 404 (unpublished; reprinted in 77
AFTR 2d 1000-1999 (3d Cir 1996)).
1. 	Booth v. Commissioner
In Booth, the United States Tax Court considered
a set of test cases involving an employee benefit plan that
sought to qualify as a “welfare benefit” plan that consti-
tuted a “10 or more employer plan” lacking “experience-rat-
ing arrangements with respect to individual employers,” as
specified in IRC § 419A(f)(6) (1997). Employer contributions
to a plan meeting all of these requirements could be deduct-
ible in the year made, while employees could avoid reporting
the contributions as income until a year later. See 108 TC

Cite as 25 OTR 403 (2024) 	413
at 562-63. The creators of the plan developed it in 1988 in
response to federal tax legislation adopted in 1984, 1986,
and 1987 that limited the tax benefits a small business
owner derived from a pension plan. See id. at 528. One of the
plan’s designers sought a ruling from the Internal Revenue
Service (the Service), but the designer withdrew the request
when the Service did not act on it within 18 months. See
id. at 567-68. The Service ultimately published a Notice
in 1995 that indicated, without naming the plan, that the
Service disagreed that the plan qualified for the treatment
its developers intended. See id. at 562. After extensive dis-
cussion, the court held that the plan was a “welfare benefit”
plan that satisfied the first requirement, but the plan did
not satisfy the remaining requirements. See id. at 563-64,
570-71. Considering the understatement penalty, the court
stated:
“We conclude that the corporate petitioners are not liable for
the penalties in dispute. We have agreed with petitioners
that the Prime Plan is not a plan of deferred compensation
and whether the Prime Plan is within the scope of section
419A(f)(6) is a novel question. Although we decide the latter
question in favor of respondent, we are persuaded that peti-
tioners’ position is supported by a well-reasoned construc-
tion of the relevant statutory provisions. Sec. 1.6662–4(d)
(3)(iii), Income Tax Regs. We decline to uphold respondent’s
determination of the penalties against the corporate peti-
tioners in the circumstances herein.”
Id. at 578. The court did not elaborate on its conclusion,
but the court’s discussion on the merits shows that the tax-
payers put forward a number of legal arguments based on
the statutory text and legislative history, as well as a fac-
tual argument that persuaded the court as to five features
of the plan, while falling short as to nine features. See id.
at 571-73.
2. 	Dunnegan v. Commissioner
In Dunnegan, an individual taxpayer failed to per-
suade the United States Tax Court, and on appeal, the Third
Circuit, that he could include the payment of a mortgage in
his cost of purchasing a new home for purposes of the for-
mer “rollover” provisions of IRC § 1034 (1988). The taxpayer

414 	Dept. of Rev. v. Wakefield
sold his principal residence, realizing gain, and moved into
a property that he and his parents had been holding as a
rental, subject to a mortgage that had been in place for sev-
eral years. During the following two-year window to effect a
tax-free replacement, he engaged in a complex and sparsely
documented series of transactions with his parents, ulti-
mately becoming the sole owner of the former rental prop-
erty, now his new principal residence. He paid off the mort-
gage that still burdened the property and took the position
on his tax return that that payment was part of his cost of
acquiring the property. He relied on a provision in Treasury
Regulation § 1.1034-1(c)(4)(i) (1988) that defined the “cost of
purchasing a new residence” to include “any indebtedness
to which the property is subject at the time of purchase,
whether or not assumed by the taxpayer.” In doing so, he
ignored the next subpart in sequence of the regulation,
which limited the definition of “cost” to costs made within
two years of the acquisition. On the merits, the court held:
“Because the taxpayer remained jointly and severally liable
to the mortgagee at all times since the mortgage’s inception,
he incurred liability under the * * * mortgage more than two
years before the purchase of [the] property. Thus, it cannot
be considered as ‘cost’ in purchasing the new residence.”
Dunnegan, 77 AFTR 2d 1000-1999 at § II.
With respect to the substantial understatement
penalty, the Third Circuit stated:
“In this case, Dunnegan has adequately demonstrated that
there is no prior relevant authority contrary to his posi-
tion. The I.R.S. concedes in its brief to this court that the
issue is novel, and they can find no factually similar cases.
This means, of course, that Dunnegan can cite no cases
in support of his construction of the regulations either.
However, the regulations concerning Section 6661 state
that a taxpayer may have substantial authority for a posi-
tion supported only by a well-reasoned construction of the
applicable statutory provision. We hold that such support
is sufficient when the issue presented is so novel that there
are no other authorities pertaining to it.
“The Tax Court noted that Dunnegan had no authority
for his position. However, it failed to note that there was
no authority against Dunnegan’s position. Although we

Cite as 25 OTR 403 (2024) 	415
today hold it incorrect, his construction of the regulation
was arguably supportable. Under such circumstances, we
believe that it is unreasonable for the IRS to impose a 25%
penalty on Dunnegan for substantial understatement.”
Dunnegan, 77 AFTR 2d 1000-1999 at § III.
3. 	Application of Booth and Dunnegan
In both Booth and Dunnegan, the courts were willing
to consider the “novelty” of the issue when deciding whether
the position was “supported only by a well-reasoned con-
struction” of the relevant statute or regulation. This court
finds persuasive the United States Tax Court’s reasoning in
Booth, where the court found the taxpayers’ position novel
because the relevant statute had been enacted only recently
before the benefit plan was established, and guidance was
not yet available from the taxing authority, or from decided
cases. In that case, the court also found several cogent, but
unpersuasive, legal and factual arguments supporting the
taxpayers’ position.
By contrast, this court does not find the Third
Circuit’s reasoning in Dunnegan persuasive. There is no
indication that the regulation on which the taxpayer relied
was new, and the plain language of the next subpart of the
same regulation substantially undercut the taxpayer’s posi-
tion. The issue appears to have been novel only because the
facts of the taxpayer’s own complex transactions with his
parents were unusual (or possibly because no litigant prior
to the taxpayer in the case had ventured to advance the
legal argument on which he relied).
In this case, the court finds that the state of the law
at the relevant time was analogous to, but more extreme
than, that in Booth. In mid-April 2016, when taxpayer filed
his 2015 Oregon return, only about two weeks had elapsed
since the legislature passed the fifth relevant change in a
little over a year. See Wakefield, 25 OTR at 18 (discussing
passage of SB 1601 (2016) on March 29, 2016). The passage
of Measure 91 by the people in November 2014 had clearly
disconnected from Section 280E for at least a portion of
2015, and the first bill passed by the legislature in the 2015
session reinforced, and even extended that disconnection

416 	Dept. of Rev. v. Wakefield
to all of 2015. See id. at 8 (discussing passage of HB 3400
(2015)). When the legislature later eliminated Measure 91’s
disconnection language for personal income taxpayers for
2015, it did so by replacing the text, in contrast to the tech-
nique of an express repeal, which the legislature used for
corporate taxpayers. See id. at 10-11 (discussing replace-
ment text in HB 2041 (2015)); id. at 14 (discussing use of
“repeal” for corporate provisions in HB 3400 (2015)). This
legislative technique doubtless was appropriate to the sit-
uation, but it also had the effect of providing less obvious
notice to personal income taxpayers than an express repeal.
The court itself, in its decision on the merits, required some
15 pages to explicate the consequences of the various bills
before concluding that the department had correctly argued
that the legislature had disconnected from Section 280E for
all of 2015. See id. at 6-21.
The court in Booth relied both on the fact that the
applicable law was new, untested, and uninterpreted by
administrative guidance, and on the strength of the tax-
payers’ substantive position based on the law’s text and leg-
islative history. Considering those two factors in this case,
the court finds that the relevant Oregon law was equally
untested but also much newer in relation to taxpayer’s fil-
ing date. Neither party has made the court aware of any
administrative interpretations on the deductibility under
Oregon law of marijuana-related business expenses for
2015. Taxpayer’s interpretation of the relevant laws is incor-
rect, but the formulation of the text of the laws, and the
number of them in rapid succession, present a significant
challenge to understanding. By comparison, the provi-
sion at issue in Booth clearly put taxpayers on notice that
Congress had created a statutory exception for a particular
type of benefit plan, even if the precise application of the test
required resort to legislative history. See IRC § 419A(f)(6)
(A) (1997) (“This subpart shall not apply in the case of any
welfare benefit fund which is part of a 10 or more employer
plan.”). And in Booth, Congress published a report written
by the staff of the House Ways and Means Committee, as
well as a highly detailed conference committee report, both
of which provided examples and rationales on which the
court was able to rely. See Booth, 108 TC at 565-66 (citing

Cite as 25 OTR 403 (2024) 	417
H Conf Rept 98-861 (1984); H Rep 98-432 (Part 2) (1984).).
By contrast, the legislative history of the Oregon bills pro-
vided mainly information about the many urgent regula-
tory issues involving the legalization of marijuana, with
few references to connection with Section 280E. See, e.g.,
Testimony of Mark Mayer, Work Session, Joint Committee
on Marijuana Legalization, HB 4014 (Feb 9, 2016) at 11:35
to 13:00 (discussing tax provisions and noting that legisla-
tion adds medical marijuana businesses so that they can
claim tax deductions on state tax forms (for 2016 and later));
Staff Measure Summary, HB 4014A (“Allows all marijuana
establishments to deduct business expenses * * * when filing
a state tax return.”); Preliminary Staff Measure Summary,
SB 1601 (Feb 22, 2016) (“The measure would also now allow
medical 	marijuana 	businesses 	along 	with 	recreational
licensees to claim business deductions on their state tax
forms.”). In these highly unusual circumstances, given the
novelty of the issue, this court concludes that taxpayer’s
position that his business expense deductions for 2015 were
not limited by Section 280E was supported “by a well-rea-
soned construction of the applicable statutory provision.”
The court emphasizes the unusual and transitory
nature of the facts in this case. The issue here is not “novel”
simply because it is one of first impression. Cf. Curcio v.
C.I.R., 99 TCM (CCH) 1478 (2010) (“Even if these cases were
without direct precedent, the issue of whether an expendi-
ture by a close corporation is ordinary and necessary under
section 162 or a constructive distribution is not novel.”). Nor
is the fact that taxpayer filed his return shortly after the
relevant law had been passed solely significant. Cf. White
v. C.I.R., 103 TCM (CCH) 1560, *24 (2012) (“In Booth the
Court did not impose an accuracy-related penalty because
the question of whether the Prime Plan was within the scope
of section 419A(f)(6) was at the time a novel question. In
Notice 95–34 the IRS provided guidance on the tax problems
raised by certain trust arrangements in seeking to qualify
for exemption from section 419. Furthermore, before any of
the years at issue, this Court issued Neonatology Assocs.,
P.A. v. Commissioner, 115 T.C. 43, 2000 WL 1048512. We
therefore conclude that there was not substantial author-
ity supporting the [taxpayer’s position].”). The court relies

418 	Dept. of Rev. v. Wakefield
primarily on the number of changes (six, counting Measure
91 itself) actually passed into law, over less than 18 months,
that altered the result for this taxpayer twice. 8 This hap-
pened because the legislature was in the difficult and
extraordinary circumstance of having to react quickly to a
regulatory sea change enacted by citizens’ initiative. The
legislature ultimately resolved the issue squarely against
the position taken by taxpayer, but when taxpayer timely
filed his return, the copious “dust” was not long settled.
V. 	CONCLUSION
For the foregoing reasons, the court concludes that
taxpayer had substantial authority for the position that
his business expense deductions for tax year 2015 were not
limited by application of Section 280E. The Penalty under
ORS 314.402 does not apply. Now, therefore,
IT 	IS 	ORDERED 	that 	Defendant’s 	Motion 	for
Partial Summary Judgment is granted.
IT IS FURTHER ORDERED that Plaintiff’s Cross-
Motion for Partial Summary Judgment is denied.
8 The court counts a total of 27 bills introduced in the 2015 and 2016 sessions
in response to some aspect of Measure 91; eight of them passed. See Wakefield, 25
OTR at 7-8.