EMPLOYMENT CLASS ACTION

Alaska Airlines Unit, Workers Get Final OK On Cell Use Deal

By Abby Wargo

Law360 (September 28, 2023, 12:38 PM EDT) -- A California federal judge put the final stamp of approval on a settlement ending a group of nearly 3,900 workers' claims that an Alaska Airlines unit failed to reimburse employees for work-related cellphone use, saying the deal was a fair resolution.

U.S. District Judge Vince Chhabria granted final approval in an order Tuesday to the $420,000 settlement between McGee Air Services Inc. and a group of 3,876 station agents, aircraft fleet workers, aircraft agents, ramp agents, customer service agents, interline agents and their superiors. Judge Chhabria had preliminarily approved the deal in May.

The judge said the settlement, which will result in a $49 average payout for class members, is fair and reasonable and rationally related to the strength of the claims given the risks of continuing to litigate the issue. None of the identified class members have objected to any aspects of the deal and none have opted out, the judge said, which supports approving the deal.

Out of the total settlement fund, $105,000 is set aside for attorney fees, over $41,000 for court costs, $24,500 for settlement administration and $5,000 for an award to named plaintiff Mohamed Ibrahim.

After the settlement has been fully distributed, the judge directed class counsel to file an accounting detailing the number of class members sent payments, the amount of cashed and uncashed checks, the number of members who could not be reached and the residual amount to be distributed.

The parties had requested $140,000 in attorney fees, but Judge Chhabria said in Tuesday's order that the $105,000 amount equals 25% of the total settlement fund and complies with the Ninth Circuit's benchmark. The judge said the court will withhold 10% of the $105,000 until after the post- distribution accounting has been filed, after which point class counsel can submit a proposed order releasing the remainder.

The workers sued in 2021 in state court, with McGee removing the case to federal court in February 2022.

In a June 2022 amended complaint, the workers said all McGee employees were required to use their personal cellphones for company communications and duties, including tracking aircraft landings via a downloaded app. While McGee had radios and other technology available, the workers said, the company mainly relied on their personal devices to communicate work-related information.

Matthew W. Kumin, who is representing the workers, declined to comment on the settlement.

Representatives for McGee did not immediately respond to requests for comment Thursday.

The workers are represented by Matthew W. Kumin of The Law Offices of Matthew Kumin.

McGee Air Services is represented by Melissa Hughes, Paul S. Cowie, John D. Ellis and Patricia M. Jeng of Sheppard Mullin Richter & Hampton LLP.

The case is Ibrahim et al. v. McGee Air Services Inc., case number 3:22-cv-00744, in the U.S. District Court for the Northern District of California.

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SLAPP CASE - MORE EMPLOYEE PROTECTION

SHORT DESCRIPTION OF THIS CASE: EMPLOYERS ARE PROHIBITED FROM FILING A LAWSUIT AGAINST PUBLIC PARTICIPATION (SLAPP) AGAINST THEIR EMPLOYEES SIMPLY BECAUSE THE EMPLOYEES DID NOT FILE THEIR LAWSUIT FOR WAGE AND HOUR VIOLATIONS BEFORE THE EMPLOYER SUED THE EMPLOYEE ON AN UNRELATED MATTER.

LINK TO OFFICIAL PUBLICATION HERE:https://www.courts.ca.gov/opinions/archive/C094008.PDF

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Trinity)

CONNOR CALLANAN, Cross-complainant and Appellant, v. GRIZZLY DESIGNS, LLC, et al., Cross-defendants and Respondents. C094008 (Super. Ct. No. 20CV057)

At issue in this appeal is whether a cross-complaint filed by Connor Callanan against Charles Menken, Steven Menken, and Grizzly Designs, LLC, dba Brotherly Love (collectively “the Menkens”) is a SLAPP suit1 subject to a special motion to strike under Code of Civil Procedure section 425.16 (also known as the anti-SLAPP statute). 2 The Menkens contend Callanan’s cross-complaint is a SLAPP suit because it was filed in 1 SLAPP stands for strategic litigation against public participation. (See Navellier v. Sletten (2002) 29 Cal.4th 82, 85 & fn. 1 (Navellier).) 2 Further undesignated statutory references are to the Code of Civil Procedure. 2 retaliation for a cross-complaint they filed against Callanan, and they filed a motion under section 425.16 seeking to strike it. The trial court granted the motion, and Callanan appeals. For the reasons stated below, we find Callanan’s cross-complaint is not a SLAPP suit because none of his claims arise from the filing of the Menkens’ crosscomplaint. We thus reverse the trial court.

FACTUAL AND PROCEDURAL BACKGROUND

Although the Menkens’ motion is directed solely at Callanan’s cross-complaint, there are actually three separate complaints in this case: (1) a complaint filed by Riccardo Marino against the Menkens; (2) a cross-complaint filed by the Menkens against Marino and Callanan;3 and (3) a cross-complaint filed by Callanan against the Menkens. Marino’s complaint is not at issue here, and he is not a party to this appeal. We thus summarize only the Menkens’ cross-complaint against Callanan and Callanan’s cross-complaint against the Menkens. The Menkens’ Cross-complaint As noted, the Menkens filed a cross-complaint against Marino and Callanan. According to the allegations in the Menkens’ cross-complaint, the relevant facts are as follows. The Menkens are “engaged in the research and development of various cannabis based products intended for marketing in the burgeoning cannabis market space.” Marino and Callanan own and operate a business called UHSE Media LLC that provides media, marketing, and consulting services to the cannabis industry, and that holds itself out as having “specialized knowledge regarding the cultivation of high quality cannabis, and the preparation, marketing, development and branding of unique, high quality cannabis-based products for distribution in the cannabis market space.” In May 2019, the 3 The Menkens also sued Sierra Van Meter, who is alleged to be Marino’s significant other. Because Van Meter is not relevant to this appeal, we do not mention her further. 3 Menkens entered into an “oral agreement” with Marino and Callanan for such consulting services and agreed to pay them $30,000 each. The Menkens claim that, at least as to this consulting work, Marino and Callanan were independent contractors rather than employees. Marino and Callanan were “permitted” to live at the Menkens’ “business location” “as they deemed necessary” in order to do their consulting work, but they “were at all times free to come and go as they determined necessary and for their own purposes.” They began living and working at the Menkens’ business location in late May 2019. The Menkens run an apprenticeship program that gives “individuals seeking to gain entry into the cannabis production space . . . the opportunity to learn all phases of cannabis product production, including, but not limited to, planting, cultivating, harvesting, curing, manicuring, processing, packaging and/or marketing” cannabis. Although Marino and Callanan were not apprentices themselves, they were permitted to “embed themselves alongside such apprentices . . . to better inform their understanding” of the farm’s “unique and distinctive processes, procedures and branding elements.” At some point in time, Marino and Callanan began performing the duties assigned to the apprentices, including cultivating, harvesting, and processing cannabis. The Menkens contend “the substantial majority” of the work Marino and Callanan did on the farm was related to their independent media and consulting business. The Menkens also allege, however, that by November 2019, Marino and Callanan were failing to perform media and consulting services and were instead spending most of their time harvesting and processing cannabis. Marino and Callanan also began demanding sums of money “they believed they were entitled to under California’s wage and hour laws.” At this point, the parties’ relationship “became openly hostile” and Marino and Callanan (allegedly) set fire to a building that was used as an office and sleeping quarters, causing over $100,000 in damages. Marino and Callanan thereafter “embark[ed] on a campaign of harassing, defamatory and extortionate conduct” that included threatening to release photos and 4 videos that showed the Menkens “ ‘doing VERY illegal actions’ ” unless the Menkens (1) paid them $630,000, and (2) “convert[ed] them to wage/hour employees.” Based on these allegations, the Menkens asserted causes of action against Marino and Callanan for negligent and/or malicious destruction of property; civil conspiracy/extortion; intentional infliction of emotional distress; misappropriation of trade secrets; tortious breach of contract; and breach of the implied covenant of good faith and fair dealing. Callanan’s Cross-complaint Callanan then filed a cross-complaint against the Menkens, and it is Callanan’s cross-complaint that is the subject of the underlying anti-SLAPP motion.4

According to the allegations in Callanan’s cross-complaint, the Menkens operate a licensed cannabis farm in Northern California, and Callanan was employed by the Menkens to work on the farm. He alleges the Menkens deliberately misclassified him and others as independent contractors in order to deny them protections afforded to employees under California wage and hour laws. More particularly, he alleges the Menkens offered him a job in May 2019 and verbally agreed to pay him $30,000 for the six-month growing season; later, however, they presented him with a written contract that stated he would receive a salary of $30,000 per year and a production bonus of $30 per pound of cannabis harvested. He alleges various claims that he was not paid proper wages and that the Menkens ordered him to stay on the farm and threatened to reduce his production bonus if he did not stay. Callanan also alleges he was severely burned in a fire in the farm’s bunkhouse (which is presumably the same fire that the Menkens allege he and Marino intentionally set), and the Menkens thereafter “began a vengeful tirade” against him. He alleges the 4 We note that Callanan’s cross-complaint is virtually identical to Marino’s complaint. 5 Menkens only paid him a $30,000 production bonus he was owed “while [he] lay in the hospital emergency room,” and they did not carry workers’ compensation insurance, which left him “with limited options to recover for the severe burns covering over 30% of his body.”

Callanan’s cross-complaint asserted fifteen causes of action against the Menkens for: (1) failure to pay minimum wages in violation of Labor Code section 1194; (2) false imprisonment; (3) failure to pay wages when due in violation of Labor Code section 204; (4) inducing him to relocate for work by making false representations about his compensation, in violation of Labor Code section 970; (5) failure to pay wages for missed meal periods in violation of Labor Code section 226.7; (6) failure to pay wages for missed rest periods in violation of Labor Code section 226.7; (7) failure to reimburse for business expenses in violation of Labor Code section 2802; (8) failure to provide accurate, itemized wage statements in violation of Labor Code section 226; (9) failure to maintain accurate payroll records in violation of Labor Code section 1174; (10) failure to promptly pay all wages due upon termination of employment, in violation of Labor Code sections 201, 202, and 203; (11) unfair competition; (12) unjust enrichment; (13) breach of contract; (14) conversion; and (15) recovery of civil penalties under the Labor Code Private Attorneys General Act (Lab. Code, § 2698 et seq.).

Finally, and critically for purposes of this appeal, Callahan’s cross-complaint contains the following allegation: “[Callanan] initially decid[ed] to not file an employment claim against [the Menkens] because [they] did pay the $30,000 Production Bonus to [Callanan]. [Callanan] decided that [the Menkens’] atrocious behavior merited filing this claim because of the baseless Cross-Complaint filed against him, alleging he intentionally started the fire in the bunkhouse which burned him severely.”

It is this allegation that apparently spawned the Menkens’ anti-SLAPP motion. 6 The Menkens’ Anti-SLAPP Motion The Menkens filed a motion to strike Callanan’s cross-complaint pursuant to section 425.16. As noted above, the motion is based entirely on the allegation that Callanan filed his cross-complaint against the Menkens because they filed a crosscomplaint against him. The Menkens argued this allegation conclusively demonstrates that Callanan filed his cross-complaint to retaliate against them for exercising their constitutional right of petition, and thus “violates the Anti-SLAPP law on its face.” The trial court agreed, finding the offending allegation “makes clear that the cross-complaint was filed only as a result of [the Menkens] suing Callanan.” The trial court also found Callanan failed to establish there was a reasonable probability he would prevail on any of his 15 causes of action. It thus granted the motion to strike, and this appeal followed.

DISCUSSION

A cause of action “arising from” the defendant’s exercise of the constitutional right of free speech or petition for the redress of grievances, is commonly known as a SLAPP suit (§ 425.16, subd. (b)(1)). A claim arises from the defendant’s speech or petitioning activity “only if the speech or petitioning activity itself is the wrong complained of.” (Park v. Board of Trustees of California State University (2017) 2 Cal.5th 1057, 1060 (Park).) A SLAPP suit is subject to a special motion to strike pursuant to section 425.16, also known as the anti-SLAPP statute. Section 425.16 provides, “A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.” (§ 425.16, subd. (b)(1).) Courts frequently refer to acts in furtherance of a person’s right of petition or free speech as “protected activity.” 7 (Bonni v. St. Joseph Health System (2021) 11 Cal.5th 995, 1009; Park, supra, 2 Cal.5th at p. 1062.)

Resolution of a special motion to strike, also referred to as an anti-SLAPP motion, “requires the court to engage in a two-step process.” (Equilon Enterprises v. Consumer Cause, Inc. (2002) 29 Cal.4th 53, 67 (Equilon Enterprises).) First, the court must determine whether “the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity. The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken ‘in furtherance of the [defendant]’s right of petition or free speech under the United States or California Constitution in connection with a public issue,’ as defined in the statute. (§ 425.16, subd. (b)(1).)” (Ibid.) If the defendant fails to meet its burden, there is no need to proceed to the second step of the process, and the motion must be denied. (See City of Cotati v. Cashman (2002) 29 Cal.4th 69, 80-81 (City of Cotati) [“In view of our conclusion that City’s cause of action did not arise from Owners’ federal suit, we do not reach the anti-SLAPP statute’s secondary question”]; Young v. Tri-City Healthcare Dist. (2012) 210 Cal.App.4th 35, 55 [if action does not arise out of protected activity, “the trial court need not proceed to the second prong of the anti-SLAPP analysis”].) If the defendant meets its burden, the court proceeds to the second step, which requires it to determine “whether the plaintiff has demonstrated a probability of prevailing on the claim.” (Equilon Enterprises, supra, 29 Cal.4th at p. 67.) In making these determinations, the court analyzes each challenged cause of action separately, and may strike some causes of action, while allowing others to remain. (Kajima Engineering & Construction, Inc. v. City of Los Angeles (2002) 95 Cal.App.4th 921, 928.) “In making its determination, the court shall consider the pleadings, and supporting and opposing 8 affidavits stating the facts upon which the liability or defense is based.”5 (§ 425.16, subd. (b)(2).) We review de novo the grant or denial of an anti-SLAPP motion, and we exercise our independent judgment in determining whether the challenged claims arise from protected activity. (Park, supra, 2 Cal.5th at p. 1067.)

Callanan argues the trial court should have denied the anti-SLAPP motion at the first step of the process because his cross-complaint does not arise from an act in furtherance of the Menkens’ right of petition or free speech.

We agree.

“The filing of a complaint is a protected activity under the anti-SLAPP statute (the right to petition).” (Joslin v. Third Laguna Hills Mutual (2020) 49 Cal.App.5th 366, 369 (Joslin); see also Navellier, supra, 29 Cal.4th at p. 90 [constitutional right of petition includes basic act of filing lawsuit].) The Menkens thus engaged in protected petitioning activity when they filed their cross-complaint against Callanan.

The issue in this case is whether any of Callanan’s claims against the Menkens arise from that protected activity.

They do not.

As our Supreme Court has recognized, “the ‘arising from’ requirement is not always easily met.” (Equilon Enterprises, supra, 29 Cal.4th at p. 66.) “[T]he mere fact that an action was filed after protected activity took place does not mean the action arose from that activity for the purposes of the anti-SLAPP statute. [Citation.] Moreover, that a cause of action arguably may have been ‘triggered’ by protected activity does not entail that it is one arising from such.” (Navellier, supra, 29 Cal.4th at p. 89.) “A claim arises from protected activity when that activity underlies or forms the basis for the claim. [Citations.] Critically, ‘the defendant’s act underlying the plaintiff’s cause of action must 5 The Menkens motion was based entirely on the pleadings, and they submitted no affidavits in support of their motion. Callanan submitted a declaration and various exhibits in support of his opposition to the motion. 9 itself have been an act in furtherance of the right of petition or free speech.’ [Citations.]” (Park, supra, 2 Cal.5th at pp. 1062-1063.) “[I]n ruling on an anti-SLAPP motion, courts should consider the elements of the challenged claim and what actions by the defendant supply those elements and consequently form the basis for liability.” (Id. at p. 1063.) Put another way, courts should first identify “the allegedly wrongful and injury-producing conduct that provides the foundation for the claims,” and then determine whether that conduct itself constitutes protected activity. (Castleman v. Sagaser (2013) 216 Cal.App.4th 481, 490-491; see also Equilon Enterprises, supra, 29 Cal.4th at p. 66 [“The only means specified in section 425.16 by which a moving defendant can satisfy the [‘arising from’] requirement is to demonstrate that the defendant’s conduct by which plaintiff claims to have been injured” constitutes protected activity].)

Here, the injury-producing conduct is not the Menkens’ filing of a cross-complaint against Callanan; instead, it is the Menkens’ alleged failure to comply with various wage and hour laws and other actions they took that have nothing to do with the Menkens’ filing of a cross-complaint. For example, in support of his first cause of action, Callanan alleges the Menkens failed to pay him the applicable minimum wage for each hour he worked, and that failure is thus the injury-producing conduct. The failure to pay minimum wage, however, has nothing to do with the Menkens’ filing of a crosscomplaint. Again, the focus must be on “ ‘the defendant’s act underlying the plaintiff’s cause of action,’ ” and the critical question is whether that act itself was “ ‘in furtherance of the right of petition or free speech.’ ” (Park, supra, 2 Cal.5th at p. 1063.) Failing to pay minimum wage is not an act in furtherance of the right of petition or free speech. The first cause of action thus does not arise from the Menkens’ filing of a crosscomplaint. As another example, in the fifth cause of action Callanan alleges the Menkens violated Labor Code section 970, which prohibits employers from inducing or persuading employees to move to or within California by knowingly misrepresenting the 10 compensation for the work. (Lab. Code, § 970; see also Finch v. Brenda Raceway Corp. (1994) 22 Cal.App.4th 547, 553 [to establish claim under Lab. Code, § 970, plaintiff must prove defendant “made a knowingly false representation [about the position] with the intent to persuade her to move there from another place to take the position”].) In support of this cause of action, Callanan alleges the Menkens induced him to move from Florida to California by falsely promising to pay him $30,000 for the six-month growing season, and then only paying him $30,000 per year (or less).

Again, the conduct underlying this cause of action has nothing to do with the Menkens’ filing of a crosscomplaint, and the cause of action thus does not arise from that cross-complaint. As a final example, in support of the second cause of action for false imprisonment, Callanan alleges the Menkens ordered him to stay on the farm and threatened to reduce his production bonus if he did not. He also alleges one of the Menkens threatened him with a firearm, which increased his fear and prevented him from leaving the farm at will. None of these acts have anything to do with the Menkens’ filing of a cross-complaint. We note that a similar analysis applies to all of Callanan’s claims. We also note that the conduct underlying all of Callanan’s claims occurred either while he was working for the Menkens or immediately after he stopped working for them. All of this conduct thus pre-dates the Menkens’ cross-complaint, which was filed months after Callanan stopped working for them.

Because all of Callanan’s claims are based on conduct that occurred before the Menkens filed their cross-complaint, they almost by definition cannot be deemed to arise from the filing of that cross-complaint within the meaning of section 425.16. (See, e.g., Park, supra, 2 Cal.5th at p. 1063 [plaintiff’s lawsuit did not arise from defendant’s lawsuit, but from “dispute that existed prior to” defendant’s lawsuit (italics added)].) It is useful to compare this case to Navellier, supra, 29 Cal.4th 82. There, the plaintiffs sued the defendant in federal court for breach of fiduciary duty. The parties 11 thereafter reached at least a partial settlement, and the defendant signed a general release of claims. The plaintiffs subsequently amended their federal lawsuit, and the defendant then filed various counterclaims. (Id. at p. 86.) While the federal suit was still pending, the plaintiffs filed a complaint in state court for breach of contract based on the allegation that the defendant breached the parties’ settlement agreement by filing counterclaims that were included within the scope of the general release. The defendant filed an antiSLAPP motion, which the trial court denied, and the appellate court affirmed because it found the state court complaint did not arise from the defendant’s federal counterclaims. The Supreme Court reversed, because the very act on which the plaintiffs’ breach of contract claim was based—i.e., the defendant’s filing of a claim for relief in federal court—constituted protected petitioning activity. (Id. at p. 87.) As the court put it, “[Defendant] is being sued because of the affirmative counterclaims he filed in federal court. In fact, but for the federal lawsuit . . . plaintiffs’ present claims would have no basis.” (Navellier, supra, 29 Cal.4th at p. 90.)

This case is different because, unlike in Navellier, the Menkens are not being sued because of the cross-complaint they filed against Callanan. Instead, they are being sued because they allegedly failed to pay Callanan as required by California law and the parties’ agreement; ordered him to stay on the farm and threatened to withhold his bonus if he left; made false representations about his compensation to induce him to move to the farm; failed to reimburse him for business expenses; and stole $180 from his wallet.

None of these actions have anything to do with their cross-complaint.

Moreover, and again unlike in Navellier, all of Callanan’s claims against the Menkens would exist even if they had never filed a cross-complaint against Callanan. Thus, it does not matter what motivated Callanan to file his cross-complaint.

At best, the Menkens have established that Callanan would not have sued them if they had not sued him first, and that his suit was thus in some sense retaliatory. This, however, is not sufficient under the anti-SLAPP statute. “[A] cross-complaint or 12 independent lawsuit filed in response to, or in retaliation for, threatened or actual litigation is not subject to the anti-SLAPP statute simply because it may be reviewed as an oppressive litigation tactic. No lawsuit is properly subject to a special motion to strike under section 425.16 unless its allegations arise from acts in further of the right of petition or free speech.” (Kajima Engineering & Construction, supra, 95 Cal.App.4th at p. 924.)

Even our Supreme Court has explained, “The anti-SLAPP statute cannot be read to mean that ‘any claim asserted in an action which arguably was filed in retaliation for the exercise of free speech or petition rights falls under section 425.16, whether or not the claim is based on conduct in exercise of those rights.’ ” (City of Cotati, supra, 29 Cal.4th at p. 77.) City of Cotati is instructive in this regard. There, a group of mobilehome park owners sued a city in federal court seeking a judicial declaration that a new mobilehome park rent stabilization ordinance was unconstitutional. The city then sued the owners in state court seeking a judicial declaration that the ordinance was constitutional, and it admitted it did so because it thought state court would be a more favorable forum than federal court in which to litigate the constitutionality of the ordinance.6 (City of Cotati, supra, 29 Cal.4th at pp. 72-73.)

In a later case explaining City of Cotati, the Supreme Court noted that “it could be said that” the city’s lawsuit “was filed because of” the owners’ lawsuit “in that perhaps the [city] would not have filed suit had the [owners] not done so first.” (Park, supra, 2 Cal.5th at p. 1064.) The owners filed an anti-SLAPP motion in state court. The trial court granted the motion, finding the city’s complaint arose from the owners’ complaint, and the city failed to demonstrate a probability of prevailing on its claim. The Court of Appeal reversed, and our Supreme Court affirmed. (City of Cotati, supra, 29 Cal.4th at pp. 72-73.) It explained, “the statutory phrase ‘cause 6 The city also filed a motion in federal court asking that the owners’ action be dismissed on abstention grounds. (City of Cotati, supra, 29 Cal.4th at p. 72.) 13 of action . . . arising from’ means simply that the defendant’s act underlying the plaintiff’s cause of action must itself have been an act in furtherance of the right of petition or free speech.” (Id. at p. 78.) So defined, the court found the city’s complaint did not arise from the owners’ complaint, but instead arose from the dispute between the parties over the constitutionality of the ordinance.

This case is similar.

Callanan’s cross-complaint does not arise from the Menkens’ cross-complaint, but from a dispute over whether the Menkens paid Callanan as required by law, etc., and this is true even though “it could be said” that Callanan’s cross-complaint “was filed because of” the Menkens’ cross-complaint “in that perhaps [Callanan] would not have filed suit had the [Menkens] not done so first.” (Park, supra, 2 Cal.5th at p. 1064.)

As relevant here, the City of Cotati court also held a party’s subjective intent or motivation for filing a lawsuit is not relevant to determining whether that lawsuit arose from an act in furtherance of the right to petition for free speech. (City of Cotati, supra, 29 Cal.4th at p. 74 [“Whether City’s subjective motivations for filing this action were, in reality, primarily as City describes them, or primarily in accordance with Owners’ speculation, cannot be ascertained with certainty from the record. . . . Fortunately, the question of subjective intent is not relevant”].)

Numerous cases agree. (See Equilon Enterprises, supra, 29 Cal.4th at p. 58 [“There simply is ‘nothing in the statute requiring the court to engage in an inquiry as to the plaintiff’s subjective motivations before it may determine [whether] the anti-SLAPP statute is applicable’ ”]; Navellier, supra, 29 Cal.4th at p. 88 [“the Court of Appeal erred in assuming that whether this action arises from protected activity depends on whether plaintiffs subjectively intended to chill [defendant’s] speech or petitioning”]; JSJ Limited Partnership v. Mehrban (2012) 205 Cal.App.4th 1512, 1521 [“The subjective intent of a party in filing a complaint is irrelevant in determining whether it falls within the ambit of section 425.16”]; Century 21 Chamberlain & Associates v. Haberman (2009) 173 Cal.App.4th 1, 7 [“It is immaterial 14 whether plaintiffs asserted the cause of action ‘in response to, or in retaliation for’ [the defendant’s] attempt to initiate arbitration” because “[t]he anti-SLAPP analysis turns ‘on the substance of [the] lawsuit,’ not plaintiffs’ ‘subjective intent’ ”]; Tuchscher Development Enterprises, Inc. v. San Diego Unified Port Dist. (2003) 106 Cal.App.4th 1219, 1234 [“plaintiff’s subjective motivations in bringing the suit are irrelevant to the [anti-SLAPP] statute’s application”]; Damon v. Ocean Hills Journalism Club (2000) 85 Cal.App.4th 468, 480 [“We find nothing in the statute requiring the court to engage in an inquiry as to the plaintiff’s subjective motivations before it may determine the antiSLAPP statute is applicable”].) Callanan’s allegation that he sued the Menkens because they sued him first thus does not turn a rather garden-variety wage and hour complaint into a SLAPP suit.

Joslin, supra, 49 Cal.App.5th 366 is also instructive.

There, a homeowners association (HOA) filed a complaint against a homeowner alleging he had violated its covenants, conditions, and restrictions (CC&Rs), and the homeowner filed a crosscomplaint alleging the HOA unlawfully prevented him from renting out the condominium unit he owned. The HOA filed an anti-SLAPP motion, arguing it was clear the homeowner was suing the HOA for suing him. The trial court denied the motion and the appellate court affirmed. (Id. at pp. 369-370, 376.) The Joslin court noted, “A cross-complaint may be subject to an anti-SLAPP motion based on the plaintiff’s right to petition. [Citation.] However, such a crosscomplaint must allege a cause of action arising from the plaintiff’s act of filing the complaint itself.” (Joslin, supra, 49 Cal.App.5th at pp. 371-372.) It explained, “Under the anti-SLAPP statute, a challenged ‘claim arises from protected activity when that activity underlies or forms the basis for the claim.’ ” (Id. at p. 371.) It also noted that determining whether a particular claim is subject to the anti-SLAPP statute requires the court to consider both (1) the elements of the challenged claim, and (2) what actions supply those elements and thus form the basis of liability. (Ibid.)

Finally, it held that 15 none of the homeowner’s claims arose from the HOA’s act of filing its complaint; instead, they all arose from decisions the HOA made and actions it took that allegedly prevented the homeowner from renting out his unit. (Id. at p. 374.)

So, too, in this case. Callanan’s cross-complaint arises from and is based on conduct and actions by the Menkens that has nothing to do with their cross-complaint. Indeed, the allegedly injury-producing conduct and actions occurred before the Menkens even filed their cross-complaint. Callanan’s cross-complaint thus does not arise from the Menkens’ act of filing a cross-complaint, and is not subject to early dismissal under the anti-SLAPP statute.7

DISPOSITION The judgment is reversed, and the trial court is directed to enter an order denying the Menkens’ motion. Callanan shall recover his costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1), (2).)

/s/ EARL, J. We concur: /s/ ROBIE, Acting P. J. /s/ MAURO, J. 7 As noted above, because the Menkens fail to demonstrate Callanan’s cross-complaint arises from their cross-complaint, we need not determine whether Callanan has established a probability of prevailing. 1 Filed 7/22/22

CERTIFIED FOR PUBLICATION IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA THIRD APPELLATE DISTRICT (Trinity) ---- CONNOR CALLANAN, Cross-complainant and Appellant, v. GRIZZLY DESIGNS, LLC, et al., Cross-defendants and Respondents. C094008 (Super. Ct. No. 20CV057) ORDER CERTIFYING OPINION FOR PUBLICATION APPEAL from a judgment of the Superior Court of Trinity County, Eric L. Heryford, Judge. Reversed. The Law Offices of Matthew Kumin, Matthew W. Kumin, Kenneth A. Seligson; Jeff Lewis Law, Jeffrey Lewis and Sean C. Rotstan for Cross-complainant and Appellant. Reese, Smalley, Wiseman & Schweitzer and Paul C. Meidus for Cross-defendants and Respondents. 2

THE COURT: This opinion in the above-entitled matter filed June 29, 2022, was not certified for publication in the Official Reports. For good cause it appears now that the opinion should be published in the Official Reports and it is so ordered.

BY THE COURT: /s/ ROBIE, Acting P. J. /s/ MAURO, J. /s/ EARL, J.

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CALIFORNIANS HELPING ALLEVIATE MEDICAL SUFFERING, INC. v. COMMISSIONER OF THE IRS

Docket No. 20795-05.

128 T.C. 173 (2007)
128 T.C. No. 14

CALIFORNIANS HELPING TO ALLEVIATE MEDICAL PROBLEMS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

United States Tax Court.

Filed May 15, 2007.

Attorney(s) appearing for the Case

Matthew Kumin, Henry G. Wykowski, and Willian G. Panzer, for petitioner.

Margaret A. Martin, for respondent.

LARO, Judge:
Respondent determined a $355,056 deficiency in petitioner's 2002 Federal income tax and a $71,011 accuracy-related penalty under section 6662(a).1 Following concessions by respondent, including a concession that petitioner is not liable for the determined accuracy-related penalty, we decide whether section 280E precludes petitioner from deducting the ordinary and necessary expenses attributable to its provision of medical marijuana pursuant to the California Compassionate Use Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5 (West Supp. 2007).2 We [128 T.C. 174]hold that those deductions are precluded. We also decide whether section 280E precludes petitioner from deducting the ordinary and necessary expenses attributable to its provision of counseling and other caregiving services (collectively, caregiving services). We hold that those deductions are not precluded.

FINDINGS OF FACT

Certain facts were stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference. When the petition was filed, petitioner was an inactive California corporation whose mailing address was in San Francisco, California.

Petitioner was organized on December 24, 1996, pursuant to the California Nonprofit Public Benefit Corporation Law, Cal. Corp. Code secs. 5110-6910. (West 1990).3 Its articles of incorporation stated that it "is organized and operated exclusively for charitable, educational and scientific purposes" and "The property of this corporation is irrevocably dedicated to charitable purposes". Petitioner did not have Federal tax-exempt status, and it operated as an approximately break-even (i.e., the amount of its income approximated the amount of its expenses) community center for members with debilitating diseases. Approximately 47 percent of petitioner's members suffered from acquired immune deficiency syndrome (AIDS); the remainder suffered from cancer, multiple sclerosis, and other serious illnesses. Before joining petitioner, petitioner's executive director had 13 years of experience in health services as a coordinator of a statewide program that trained outreach workers in AIDS prevention work.

Petitioner operated with a dual purpose. Its primary purpose was to provide caregiving services to its members. Its secondary purpose was to provide its members with medical marijuana pursuant to the California Compassionate Use Act [128 T.C. 175] of 1996 and to instruct those individuals on how to use medical marijuana to benefit their health. Petitioner required that each member have a doctor's letter recommending marijuana as part of his or her therapy and an unexpired photo identification card from the California Department of Public Health verifying the authenticity of the doctor's letter. Petitioner required that its members not resell or redistribute the medical marijuana received from petitioner, and petitioner considered any violation of this requirement to be grounds to expel the violator from membership in petitioner's organization.

Each of petitioner's members paid petitioner a membership fee in consideration for the right to receive caregiving services and medical marijuana from petitioner. Petitioner's caregiving services were extensive. First, petitioner's staff held various weekly or biweekly support group sessions that could be attended only by petitioner's members. The "wellness group" discussed healing techniques and occasionally hosted a guest speaker; the HIV/AIDS group addressed issues of practical and emotional support; the women's group focused on women-specific issues in medical struggles; the "Phoenix" group helped elderly patients with lifelong addiction problems; the "Force" group focused on spiritual and emotional development. Second, petitioner provided its low-income members with daily lunches consisting of salads, fruit, water, soda, and hot food. Petitioner also made available to its members hygiene supplies such as toothbrushes, toothpaste, feminine hygiene products, combs, and bottles of bleach. Third, petitioner allowed its members to consult one-on-one with a counselor about benefits, health, housing, safety, and legal issues. Petitioner also provided its members with biweekly massage services. Fourth, petitioner coordinated for its members weekend social events including a Friday night movie or guest speaker and a Saturday night social with live music and a hot meal. Petitioner also coordinated for its members monthly field trips to locations such as beaches, museums, or parks. Fifth, petitioner instructed its members on yoga and on topics such as how to participate in social services at petitioner's facilities and how to follow member guidelines. Sixth, petitioner provided its members with online computer access and delivered to them informational [128 T.C. 176]services through its Web site. Seventh, petitioner encouraged its members to participate in political activities.

Petitioner furnished its services at its main facility in San Francisco, California, and at an office in a community church in San Francisco. The main facility was approximately 1,350 square feet and was the site of the daily lunches, distribution of hygiene supplies, benefits counseling, Friday and Saturday night social events and dinners, and computer access. This location also was the site where petitioner's members received their distribution of medical marijuana; the medical marijuana was dispensed at a counter of the main room of the facility, taking up approximately 10 percent of the main facility. The peer group meetings and yoga classes were usually held at the church, where petitioner rented space. Pursuant to the rules of the church, petitioner's members were prohibited from bringing any marijuana into the church. Petitioner also maintained a storage unit at a third location in San Francisco. Petitioner used the storage unit to store confidential medical records; no medical marijuana was distributed or used there.

Petitioner paid for the services it provided to its members by charging a membership fee that covered, and in the judgment of petitioner's management approximated, both the cost of petitioner's caregiving services and the cost of the medical marijuana that petitioner supplied to its members. Petitioner notified its members that the membership fee covered both of these costs, and petitioner charged its members no additional fee. Members received from petitioner a set amount of medical marijuana; they were not entitled to unlimited supplies.

On May 6, 2002, petitioner's board of directors decided that petitioner would henceforth discontinue all of its activities. Petitioner thus ceased conducting any activity and filed a "Final Return" (Form 1120, U.S. Corporation Income Tax Return) for 2002. This return reported the following items on the basis of an accrual method of accounting:

Gross receipts or sales $1,056,833

Less returns and allowances 8,802

__________

Balance 1,048,031

Cost of goods sold:

Inventory at beginning of year $12,551

Purchases 575,317

[128 T.C. 177]

Cost of labor 203,661

Other costs:

Cash (over/under) $1,680

Operating supplies 29,077

Program costs 13,026

______

Total other costs 43,783 43,783

Inventory at end of year -0-

_______

Total cost of goods sold 835,312 835,312

___________________

Gross profit 212,719

Deductions:

Compensation of officers 14,914

Salaries and wages 44,799

Repairs and maintenance 1,456

Rents 25,161

Taxes and licenses 28,201

Depreciation 8,409

Advertising 200

Employee benefit programs 24,453

Other deductions:

Accounting 5,086

Auto and truck 308

Bank charges 1,097

Computer expense 961

Dues and subscriptions 20

Employee development training 1,940

Insurance 7,727

Internet service provider 2,238

Janitorial 1,409

Laundry and cleaning 105

Legal and professional 5,500

Meals and entertainment 402

Miscellaneous 269

Office expense 4,533

Outside services 4,421

Parking and toll 120

Security 2,185

Supplies 660

Telephone 7,870

Utilities 18,514

_______

Total other deductions 65,365 65,365

_________________

Total deductions 212,958 212,958

_________________

Taxable loss 239

In a notice of deficiency mailed to petitioner on August 4, 2005, respondent disallowed all of petitioner's deductions and costs of goods sold, determining that those items were "Expenditures in Connection with the Illegal Sale of Drugs" within the meaning of section 280E. Respondent has since conceded this determination except to the extent that it [128 T.C. 178]relates to the "Total deductions" of $212,958.4 Respondent has also conceded that the expenses underlying the $212,958 of total deductions are substantiated.

The "Total deductions" were ordinary, necessary, and reasonable expenses petitioner incurred in running its operations during the subject year. The specific expenses underlying those deductions are as follows:

•The $14,914 deducted for compensation of officers reflects the salary of petitioner's executive director. The executive director worked 50 hours a week for 17 weeks. The executive director directed petitioner's overall operations and was not directly engaged in petitioner's provision of medical marijuana.

• The $44,799 deducted for salaries and wages reflects the compensation of petitioner's 24 other employees. Seven of the 24 employees were involved in petitioner's provision of medical marijuana. The other 17 employees were involved with petitioner's provision of caregiving services.

• The $1,456 deducted for repairs and maintenance reflects expenses petitioner incurred to repair and maintain its main facility.

• The $25,161 deducted for rents reflects $15,000 of rent for the main facility, $5,700 of rent for the use of the church, and $4,461 of rent for the storage unit and a photocopier.

• The $28,201 deducted for payroll taxes reflects petitioner's liability for the payment of payroll taxes.

• The $8,409 deducted for depreciation reflects depreciation of petitioner's property.

• The $200 deducted for advertising reflects the cost of advertising by petitioner, including a $150 expense for the rental of a booth where petitioner distributed literature.

• The $24,453 deducted for employee benefit programs reflects the cost of a health insurance policy that petitioner maintained for its employees.

• The $5,086 deducted for accounting reflects the fees of petitioner's accountant. [128 T.C. 179]

• The $308 deducted for auto and truck reflects repairs made to a van used to transport members.

• The $1,097 deducted for bank charges reflects bank service charges petitioner incurred.

• The $961 deducted for computer expense reflects the cost of purchasing and maintaining computers petitioner used in its operations.

• The $20 deducted for dues and subscriptions reflects dues petitioner paid to an association comprising persons performing functions similar to those of petitioner.

• The $1,940 deducted for employee development training reflects costs petitioner incurred to train its bookkeeper and management team.

• The $7,727 deducted for insurance reflects the cost of petitioner's liability insurance.

• The $2,238 deducted for Internet service provider reflects the cost of petitioner's Internet services.

• The $1,409 deducted for janitorial reflects the cost of petitioner's garbage services.

• The $105 deducted for laundry and cleaning reflects costs petitioner incurred to clean and launder napkins used in its food distribution.

• The $5,500 deducted for legal and professional reflects the fees of petitioner's attorney. None of these fees involved any defense for criminal prosecution.

• The $402 deducted for meals and entertainment reflects costs that petitioner incurred for meals furnished to its employees who worked late or long hours.

• The $269 deducted for miscellaneous reflects miscellaneous expenses petitioner incurred.

• The $4,533 deducted for office expenses reflects costs petitioner incurred for office supplies such as paper and printer toner.

• The $4,421 deducted for outside services reflects the cost of petitioner's payroll service company.

• The $120 deducted for parking and toll reflects petitioner's reimbursement to its employees who paid parking fees and tolls on behalf of petitioner.

• The $2,185 deducted for security reflects the cost of security at the main facility, including the costs of an alarm company and medical service. [128 T.C. 180]

• The $660 deducted for supplies reflects the costs petitioner incurred to buy various supplies.

• The $7,870 deducted for telephone reflects the cost petitioner incurred for its telephone service.

• The $18,514 deducted for utilities reflects the cost of the gas and electricity petitioner used at its main facility.

OPINION

The parties agree that during the subject year petitioner had at least one trade or business for purposes of section 280E. According to respondent, petitioner had a single trade or business of trafficking in medical marijuana. Petitioner argues that it engaged in two trades or businesses. Petitioner asserts that its primary trade or business was the provision of caregiving services. Petitioner asserts that its secondary trade or business was the supplying of medical marijuana to its members. As to its trades or businesses, petitioner argues, the deductions for those trades or businesses are not precluded by section 280E in that the trades or businesses did not involve "trafficking" in a controlled substance. Respondent argues that section 280E precludes petitioner from benefiting from any of its deductions.

Accrual method taxpayers such as petitioner may generally deduct the ordinary and necessary expenses incurred in carrying on a trade or business. See sec. 162(a). Items specified in section 162(a) are allowed as deductions, subject to exceptions listed in section 261. See sec. 161. Section 261 provides that "no deduction shall in any case be allowed in respect of the items specified in this part." The phrase "this part" refers to part IX of subchapter B of chapter 1, entitled "Items Not Deductible". "Expenditures in Connection With the Illegal Sale of Drugs" is an item specified in part IX. 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.

[128 T.C. 181]

In the context of section 280E, marijuana is a schedule I controlled substance. See, e.g., Sundel v. Commissioner, T.C. Memo. 1998-78, affd. without published opinion 201 F.3d 428 (1st Cir. 1999). Such is so even when the marijuana is medical marijuana recommended by a physician as appropriate to benefit the health of the user. See United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483 (2001).

Respondent argues that petitioner, because it trafficked in a controlled substance, is not permitted by section 280E to deduct any of its expenses. We disagree. Our analysis begins with the text of the statute, which we must apply in accordance with its ordinary, everyday usage. See Conn. Natl. Bank v. Germain, 503 U.S. 249, 253-254 (1992). We interpret that text with reference to its legislative history primarily to learn the purpose of the statute. See Commissioner v. Soliman, 506 U.S. 168, 174 (1993); United States v. Am. Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940); Venture Funding, Ltd. v. Commissioner, 110 T.C. 236, 241-242 (1998), affd. without published opinion 198 F.3d 248 (6th Cir. 1999); Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996).

Congress enacted section 280E as a direct reaction to the outcome of a case in which this Court allowed a taxpayer to deduct expenses incurred in an illegal drug trade. See S. Rept. 97-494 (Vol. 1), at 309 (1982). In that case, Edmondson v. Commissioner, T.C. Memo. 1981-623, the Court found that the taxpayer was self-employed in a trade or business of selling amphetamines, cocaine, and marijuana. The Court allowed the taxpayer to deduct his business expenses because they "were made in connection with * * * [the taxpayer's] trade or business and were both ordinary and necessary." Id. In discussing the case in the context of the then-current law, the Senate Finance Committee stated in its report:

Ordinary and necessary trade or business expenses are generally deductible in computing taxable income. A recent U.S. Tax Court case allowed deductions for telephone, auto, and rental expense incurred in the illegal drug trade. In that case, the Internal Revenue Service challenged the amount of the taxpayer's deduction for cost of goods (illegal drugs) sold, but did not challenge the principle that such amounts were deductible.

On public policy grounds, the Code makes certain otherwise ordinary and necessary expenses incurred in a trade or business nondeductible in [128 T.C. 182] computing taxable income. These nondeductible expenses include fines, illegal bribes and kickbacks, and certain other illegal payments. [S. Rept. 97-494 (Vol. 1), supra at 309.] The report then expressed the following reasons the committee intended to change the law:

There is a sharply defined public policy against drug dealing. To allow drug dealers the benefit of business expense deductions at the same time that the U.S. and its citizens are losing billions of dollars per year to such persons is not compelled by the fact that such deductions are allowed to other, legal, enterprises. Such deductions must be disallowed on public policy grounds. [Id.]

The report explained that the enactment of section 280E has the following effect:

All deductions and credits for amounts paid or incurred in the illegal trafficking in drugs listed in the Controlled Substances Act are disallowed. To preclude possible challenges on constitutional grounds, the adjustment to gross receipts with respect to effective costs of goods sold is not affected by this provision of the bill. [Id.]

Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. They do not express an intent to deny the deduction of all of a taxpayer's business expenses simply because the taxpayer was involved in trafficking in a controlled substance. We hold that section 280E does not preclude petitioner from deducting expenses attributable to a trade or business other than that of illegal trafficking in controlled substances simply because petitioner also is involved in trafficking in a controlled substance.

Petitioner argues that its supplying of medical marijuana to its members was not "trafficking" within the meaning of section 280E. We disagree. We define and apply the gerund "trafficking" by reference to the verb "traffic", which as relevant herein denotes "to engage in commercial activity: buy and sell regularly". Webster's Third New International Dictionary 2423 (2002). Petitioner's supplying of medical marijuana to its members is within that definition in that petitioner regularly bought and sold the marijuana, such sales occurring when petitioner distributed the medical marijuana to its members in exchange for part of their membership [128 T.C. 183] fees.5 Accord United States v. Oakland Cannabis Buyers' Coop., supra at 489.

We now turn to analyze whether petitioner's furnishing of its caregiving services is a trade or business that is separate from its trade or business of providing medical marijuana. Taxpayers may be involved in more than one trade or business, see, e.g., Hoye v. Commissioner, T.C. Memo. 1990-57, and whether an activity is a trade or business separate from another trade or business is a question of fact that depends on (among other things) the degree of economic interrelationship between the two undertakings, see Collins v. Commissioner, 34 T.C. 592 (1960); sec. 1.183-1(d)(1), Income Tax Regs. The Commissioner generally accepts a taxpayer's characterization of two or more undertakings as separate activities unless the characterization is artificial or unreasonable. See sec. 1.183-1(d)(1), Income Tax Regs.

We do not believe it to have been artificial or unreasonable for petitioner to have characterized as separate activities its provision of caregiving services and its provision of medical marijuana. Petitioner was regularly and extensively involved in the provision of caregiving services, and those services are substantially different from petitioner's provision of medical marijuana. By conducting its recurring discussion groups, regularly distributing food and hygiene supplies, advertising and making available the services of personal counselors, coordinating social events and field trips, hosting educational classes, and providing other social services, petitioner's caregiving business stood on its own, separate and apart from petitioner's provision of medical marijuana. On the basis of all of the facts and circumstances of this case, we hold that petitioner's provision of caregiving services was a trade or business separate and apart from its provision of medical marijuana.

Respondent argues that the "evidence indicates that petitioner's principal purpose was to provide access to marijuana, that petitioner's principal activity was providing [128 T.C. 184] access to marijuana, and that the principal service that petitioner provided was access to marijuana * * * and that all of petitioner's activities were merely incidental to petitioner's activity of trafficking in marijuana." We disagree. Petitioner's executive director testified credibly and without contradiction that petitioner's primary purpose was to provide caregiving services for terminally ill patients. He stated: "Right from the start we considered our primary function as being a community center for seriously ill patients in San Francisco. And only secondarily as a place where they could access their medicine." The evidence suggests that petitioner's operations were conducted with that primary function in mind, not with the principal purpose of providing marijuana to members.

As stated by the Board of Tax Appeals in Alverson v. Commissioner, 35 B.T.A. 482, 488 (1937): "The statute is not so restricted as to confine deductions to a single business or principal business of the taxpayer. A taxpayer may carry on more than one trade or business at the same time." Moreover, as the Supreme Court has observed in the context of illegal, nondeductible expenditures: "It has never been thought * * * that the mere fact that an expenditure bears a remote relation to an illegal act makes it non-deductible." Commissioner v. Heininger, 320 U.S. 467, 474 (1943).

Respondent relies heavily on his assertion that "Petitioner's only income was from marijuana-related matters, except for a couple of small donations". The record does not support that assertion, and we decline to find it as a fact. Indeed, the record leads us to make the contrary finding that petitioner's caregiving services generated income attributable to those services. In making this finding, we rely on the testimony of petitioner's executive director, whom we had an opportunity to hear and view at trial. We found his testimony to be coherent and credible, as well as supported by the record. He testified that petitioner's members paid their membership fees as consideration for both caregiving services and medical marijuana, and respondent opted not to challenge the substance of that testimony. While a member may have acquired, in return for his or her payment of a membership fee, access to all of petitioner's goods and services without further charge and without explicit differentiation as to the portion of the fee that was paid for goods versus services, we do not believe that such a fact establishes that petitioner's [128 T.C. 185] operations were simply one trade or business. As the record reveals, and as we find as a fact, petitioner's management set the total amount of the membership fees as the amount that management consciously and reasonably judged equaled petitioner's costs of the caregiving services and the costs of the medical marijuana.

Given petitioner's separate trades or businesses, we are required to apportion its overall expenses accordingly. Respondent argues that "petitioner failed to justify any particular allocation and failed to present evidence as to how * * * [petitioner's expenses] should be allocated between marijuana trafficking and other activities." We disagree. Respondent concedes that many of petitioner's activities are legal and unrelated to petitioner's provision of medical marijuana. The evidence at hand permits an allocation of expenses to those activities. Although the record may not lend itself to a perfect allocation with pinpoint accuracy, the record permits us with sufficient confidence to allocate petitioner's expenses between its two trades or businesses on the basis of the number of petitioner's employees and the portion of its facilities devoted to each business. Accordingly, in a manner that is most consistent with petitioner's breakdown of the disputed expenses, we allocate to petitioner's caregiving services 18/25 of the expenses for salaries, wages, payroll taxes, employee benefits, employee development training, meals and entertainment, and parking and tolls (18 of petitioner's 25 employees did not work directly in petitioner's provision of medical marijuana), all expenses incurred in renting facilities at the church (petitioner did not use the church to any extent to provide medical marijuana), all expenses incurred for "truck and auto" and "laundry and cleaning" (those expenses did not relate to any extent to petitioner's provision of medical marijuana), and 9/10 of the remaining expenses (90 percent of the square footage of petitioner's main facility was not used in petitioner's provision of medical marijuana).6 We disagree with respondent that petitioner must further justify the allocation of its expenses, reluctant to substitute our judgment for the judgment [128 T.C. 186] of petitioner's management as to its understanding of the expenses that petitioner incurred as to each of its trades or businesses. Cf. Boyd Gaming Corp. v. Commissioner, 177 F.3d 1096 (9th Cir. 1999), revg. T.C. Memo. 1997-445.

All arguments by the parties have been considered. We have rejected those arguments not discussed herein as without merit. Accordingly, Decision will be entered under Rule 155.

FootNotes

1. Unless otherwise indicated, section, subchapter, and chapter references are to the applicable versions of the Internal Revenue Code, and Rule references are to the Tax Court Rules of Practice and Procedure.

2. At a general election held on Nov. 5, 1996, the California electors approved an initiative statute designated on the ballot as Proposition 215 and entitled "Medical Use of Marijuana". See People v. Mower, 49 P.3d 1067, 1070 (Cal. 2002). The statute, the California Compassionate Use Act of 1996, codified at Cal. Health & Safety Code sec. 11362.5 (West Supp. 2007), was intended

To ensure that seriously ill Californians have the right to obtain and use marijuana for medical purposes where that medical use is deemed appropriate and has been recommended by a physician who has determined that the person's health would benefit from the use of marijuana in the treatment of * * * any * * * illness for which marijuana provides relief. [Id. sec. 11362.5(b)(1)(A).] See also People v. Mower, supra at 1070. We use the term "medical marijuana" to refer to marijuana provided pursuant to the statute.

3. Under California law, public benefit corporations are organized for a public or charitable purpose; they are not operated for the mutual benefit of their members but for a broader good. See Knapp v. Palisades Charter High School, 53 Cal.Rptr.3d 182, 186 n.5 (Ct. App. 2007).

4. In other words, respondent concedes that the disallowance of sec. 280E does not apply to costs of goods sold, a concession that is consistent with the caselaw on that subject and the legislative history underlying sec. 280E. See Peyton v. Commissioner, T.C. Memo. 2003-146; Franklin v. Commissioner, T.C. Memo. 1993-184; Vasta v. Commissioner, T.C. Memo. 1989-531; see also S. Rept. 97-494 (Vol. 1), at 309 (1982).

5. In support of its position, petitioner relies upon Raich v. Ashcroft, 352 F.3d 1222, 1228 (9th Cir. 2003), vacated and remanded sub nom. Gonzales v. Raich, 545 U.S. 1 (2005), where the Court of Appeals for the Ninth Circuit reasoned that the use of medical marijuana is "different in kind from drug trafficking". Petitioner's reliance on that reasoning is mistaken. The U.S. Supreme Court rejected the reasoning in Gonzales v. Raich, supra at 26-28, 31-33, holding that the Controlled Substances Act applied to individuals within the purview of California's medical marijuana law.

6. While we apportion most of the $212,958 in "Total deductions" to petitioner's caregiving services, we note that the costs of petitioner's medical marijuana business included the $203,661 in labor and $43,783 in other costs respondent conceded to have been properly reported on petitioner's tax return as attributable to cost of goods sold in the medical marijuana business.