Californians Helping to Alleviate Medical Problems, Inc. v. Commissioner (CHAMP) is one of the most, if not the most important, precedent cases upon which 280E’s application turns. Thus it is important to the state-regulated psychedelics sector. For cannabis, CHAMP determined a number of industry standards for structuring one’s business to manage tax liability, and many following cases compared and contrasted their proceedings relative to the facts of CHAMP. We feel it will play an equally important role for psychedelics until rescheduling happens.
Dual-Category Businesses
The most significant legacy of CHAMP is the framework it established for “dual-category” businesses, proving that a single entity can operate multiple distinct trades or businesses simultaneously. Under this precedent, Section 280E may apply to only one trade, while leaving the other portion eligible for standard business deductions. Practically, for companies providing access to psychedelics alongside a distinct trade (such as therapy, etc.) not involving schedule I substances, this would mean that 280E does not need to apply to the entire operation. This result, if applied correctly, can significantly lower tax bills. Before one gets too excited though, you should be aware that subsequent cases narrowed the conditions under which multiple trades could be considered distinct. But first, let’s dive deeper into this case.
To begin to set the stage, we need a few facts. CHAMP INC. was located in San Francisco, California and operated from 1996 to 2002. It functioned as a charitable organization that only sought to break-even, but was not legally tax exempt. CHAMP’s primary stated purpose was providing care for those with serious or terminal diseases. This was validated by its member demographics, 47% of which had AIDS, with the rest having cancer, multiple sclerosis, and other acute diseases.
CHAMP gave its members a fixed amount of state-legal medical marijuana with the intention of easing the suffering of these diseases. However, it also provided extensive care services beyond that. These services included various weekly and bi-weekly support group sessions, and one-on-one opportunities to meet with a counselor. Daily lunches were provided to low-income members, as well as access to hygiene products and information services such as the internet. Special events were coordinated weekly and field trips monthly, and much more.
All services and cannabis were covered under a single fixed fee that management reasonably calculated equaled the cost for both. This fact is particularly important for us to consider for state regulated psychedelic therapy. So let’s keep this in mind as we continue.
280E and Two Trades
CHAMP dissolved in 2002, but in 2005 the IRS hit them with a bill saying they had underpaid taxes on their 2002 return. The basis for this claim was that CHAMP engaged in the “trafficking” of cannabis. Thus under federal law 280E was applied and CHAMP was not allowed to deduct normal business expenses.
The first court sided with the IRS. They agreed that CHAMP owed back taxes because CHAMP was engaged in trafficking, and so the entire business received no deduction. Fortunately, a higher tax court reached a different conclusion.
The higher court decided that CHAMP had two trades within a single business, stating that the IRS “generally accepts a taxpayer’s characterization of two or more undertakings as separate activities unless the characterization is artificial or unreasonable” (18).
Going further, the tax court, in favor of CHAMP concluded that one could deduct business expenses from the portion of a company’s trade that was not involved with scheduled substances. Specifically they said:
“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 the trafficking in a controlled substance” (17).
Now the question was whether one of CHAMP’s trades was not engaged in trafficking. Recalling earlier CHAMP’s extensive care services, the court decided that care services and cannabis provision were two distinct trades. And, because 280E does not apply to the care services, they were allowed normal business deductions for that trade.
Implications for State-Regulated Psychedelic Therapy
CHAMP creates the possibility that psychedelic therapy providers, including those operating under Oregon Measure 109 and Colorado’s Natural Medicine Health Act, might be able to lower their tax burden by demonstrating that they too have two distinct trades, with only a portion involving “trafficking.” This is because Healing Centers share many commonalities with the facts of CHAMP. Yet, there are also causes for concern.
Like in CHAMP, Healing Centers provide care services in the form of therapy for the primary purpose of alleviating suffering and promoting growth. The extensiveness and regularity of these care services were an important part of the deciding criteria the court used for characterizing CHAMP’s separate trades. In the following case of Olive v. Commissioner, this was even more explicitly stated:
“A taxpayer, to be engaged in a trade or business for purposes of section 162, must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit” (Olive, 37).
Going even further than simply distinguishing the two trades, the court found CHAMP “operated the dispensary with caregiving as the primary feature and the dispensing of medical marijuana (with instructions on how to best consume it) as a secondary feature (Olive, 35).
For healing centers, arguing for a split in trades, or even that one trade is primary, the case is more substantive if the centers are run by experienced care providers or therapists who have had a prior practice separate from psychedelics. This is especially true if one continues to maintain a separate entity involving non-psychedelic therapy, or if psychedelics are integrated into an already existing practice. Here, there would be substantial precedent to claim a trade distinction, or even that the medicine is secondary to the primary goal of treatment, yet still a distinct trade.
This leads into another important shared feature between CHAMP and Healing Centers, that the personnel have expertise within the field of the distinctive trade. As we will see next in Olive v. Commissioner, a fact brought up repeatedly is that CHAMP’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” (4).
This is in direct contrast to Olive, where the dispensary was created by a college drop-out, a fact which was used, along with a long listing of incompetences and negligence, for the purpose of destroying the credibility of defensive arguments about supplying substantive services similar to CHAMP. Fortunately, most providers within the psychedelic space have extensive backgrounds as therapists, along with education. At the very least, facilitators must pass a series of professional criteria within their given state to gain licensure for service. This gives the sector a strong claim that the care services are a separate trade that could be carried on independent of the use of natural medicine.
While we generally advise separating fees for the purpose of creating clean books and providing further distinction, CHAMPS only charged a single non-distinguished fee for being a member. The price of the fee was calculated from a reasonable basis equaling the costs for all the distinct services. This court’s ruling that a single unified fee can still be divided between two separate trades provides a favorable precedent for the industry, especially given the Colorado Natural Medicine Division’s May 1, 2026 decision. This decision prohibits Healing Centers from selling psychedelics to participants as a separate transaction from therapeutic services, aka single-fee transaction is required.
Sometimes it is asked: “what if we just give the medicine away?” Besides possibly being prohibited at a state level for Healing Centers, this is a bad idea because one needs to have distinct profit motives in order for there to be separate trades. In the later cases of Olive, and also Harborside, the two were cannabis dispensaries that also provided services for free. The result of this was that the services were found to be incidental to the purchase of cannabis, and so no business deductions were allowed. So it is important that each portion has its own cost. Within CHAMP and for Healing Centers, there is a distinct profit motive for each trade and the revenue is substantial for both.
There is, however, the issue of economic interrelationship in CHAMP that could cause problems for state-regulated psychedelic providers. For there to be two separate trades, they must have some economic independence from each other. In the case of CHAMP, it was possible to acquire medical marijuana independent of the care service. It is possible that tax authorities could argue that in the psychedelics sector, the medicine cannot be sold without the care service, and the customer would not engage in the care service without the medicine. While in CHAMP, the cannabis was not permitted to be consumed on the grounds, but in psychedelic therapy it is required to be consumed alongside part of the care service. We believe there are strong arguments to counter such a position, nonetheless, we see this as a risk that needs to be surfaced.
The Importance of Bookkeeping and Good Faith
So lets say one does have distinct trades, how does one reflect that within the company’s bookkeeping?
Returning to CHAMP, after it was recognized that there were distinct trades, the court needed to determine how to allocate the business expenses between them. It was established that there was “sufficient confidence to allocate expenses off the basis of facilities portion and employee distribution, as well as petitioners expense breakdown” (22). For e.g., it was established that 18/24 employees were not involved in the provision of cannabis and only 1/3 facilities dispensed cannabis. The facts were used to distribute expenses between the “trafficking” trade in marijuana and the care services.
It is because of this precedent that we routinely suggest to our clients to split costs between the activities required to support the sale of medicine and the activities required to provide care services. Besides maintaining splits between expenses based on factors such as a square footage used, we go further and suggest clients retain separate accounts for medicine and service expenses and revenues. Being able to provide clean books that clearly represent the split between the trades we anticipate will be supportive should anyone come asking.
Another important take away from these proceedings, is that we can see that tax courts are not intrinsically unreasonable or unsympathetic to cannabis businesses, and we believe the same will hold for the psychedelic space. The tax courts recognize that navigating the complexity of tax law is difficult and confusing, and that, especially in cutting edge industries, there can be a lack of clarity and past precedent. This, however, is not an excuse to be negligent.
We take away from CHAMP that the courts want to be shown there has been a “good faith” attempt at navigating the legal landscape, even if there is no clear answer. The exact criteria of what it means to be in “good faith” is laid out more clearly in later cases, and yet, the entirety of the argument CHAMP put forward is couched in the credibility of the business and the facts it provides. This included its testimony, the rigor of its bookkeeping, as well as the professional character and expertise of the owners and employees. These points matter in terms of the grace given by the court during decision making, and as is shown in later cases such as Olive and also Harborside, may not prevent 280E taxation, but are critical for waiving tax penalties.
If you are operating a natural medicine healing center and want to make sure your books reflect the distinction between trades, that’s exactly the kind of work we do here at Bipanna. We work exclusively with companies in health innovation, including state-licensed healing centers navigating 280E. If you want to talk through what this looks like for your situation, the first step is a quick 30-minute conversation. Reach out to set one up.
This article is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Tax laws, regulations, and accounting standards change frequently, and the application of rules can vary based on your organization’s specific facts and circumstances. Before acting on anything you read here, consult a qualified professional who can advise you based on your situation.
