United States Tax Court

United States Tax Court

REVIEWED

165 T.C. No. 5

AYLA A. SAVAGE,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

PATRICIA A. TORRES,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket Nos. 21606-22, 21607-22.

Filed September 11, 2025.

—————

Ps, shareholders of three S corporations, each filed

individual income tax returns for 2018 and 2019 reporting

items with respect to the S corporations. Two of the

S corporations are subject to I.R.C. § 280E, and therefore

certain of their deductions were disallowed in determining

taxable income for those years.

For 2018 and 2019, Ps claimed qualified business

income deductions under I.R.C. § 199A with respect to the

activities of the S corporations.

In computing the

deductions under I.R.C. § 199A, Ps treated as “W–2 wages,”

within the meaning of I.R.C. § 199A(b)(4), all of the

amounts paid and reported by the S corporations without

regard to whether those amounts were deductible in

determining taxable income.

Served 09/11/25

2

As relevant here, R determined that, under I.R.C.

§ 199A(b)(4)(B) and (c), the computation of Ps’ I.R.C.

§ 199A deductions should take into account only wages

that were deductible after the application of I.R.C. § 280E,

see I.R.C. § 199A(c)(3)(A)(ii), and reduced Ps’ section 199A

deductions accordingly.

Held: R correctly applied I.R.C. § 199A with respect

to the wages at issue.

TORO, J., wrote the opinion of the Court, which

URDA, C.J., and KERRIGAN, BUCH, NEGA, PUGH,

ASHFORD,

COPELAND,

JONES,

GREAVES,

MARSHALL, WEILER, WAY, LANDY, ARBEIT,

GUIDER, and FUNG, JJ., joined.

JENKINS, J., wrote a dissenting opinion.

—————

Cory L. Johnson, for petitioners.

Allison M. Case, Gregory Michael Hahn, and Logan M. Westerman, for

respondent.

OPINION

TORO, Judge: The Tax Cuts and Jobs Act (TCJA), Pub. L. No.

115-97, 131 Stat. 2054 (2017), lowered the income tax rate applicable to

corporations. See TCJA § 13001, 131 Stat. at 2096. 1 To provide a

measure of parity for noncorporate business taxpayers (including

taxpayers who are taxed on income earned by passthrough entities, such

as S corporations), 2 the TCJA also introduced a new deduction under

1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and Rule references are to the Tax Court Rules of Practice and

Procedure. On April 4, 2023, these cases were consolidated for purposes of trial,

briefing, and opinion.

2 An S corporation reports items of gross income and deductions to the Internal

Revenue Service and its shareholders on an information return, Form 1120–S,

3

section 199A. See TCJA § 11011(a), 131 Stat. at 2063–70. As relevant

here, for certain taxpayers, the amount of the deduction is limited by the

“W–2 wages” the taxpayer (or the passthrough entity) pays, among other

things. See I.R.C. § 199A(a), (b)(2). Thus, all else being equal and

simplifying considerably, a taxpayer who pays more “W–2 wages” may

qualify for a larger deduction than a taxpayer who pays less

“W–2 wages.”

Section 199A(b)(4) defines the term “W–2 wages.” The question

before us in these consolidated deficiency cases is whether that term (as

Congress defined it) includes or excludes wage amounts for which a

deduction is disallowed under section 280E. If such amounts are

included in “W–2 wages,” petitioners, Ayla A. Savage and Patricia A.

Torres, would receive larger section 199A deductions and therefore have

lower tax bills. If they are excluded, the opposite would be true.

Ms. Savage and Ms. Torres maintain that wage amounts for

which a deduction is disallowed under section 280E are included in the

term “W–2 wages” under section 199A(b)(4). The Commissioner takes

the contrary view. We conclude that a straightforward reading of the

relevant statutory text supports the Commissioner, as we explain

further below. 3

Background

The parties submitted these cases fully stipulated under

Rule 122. The facts below are based on the pleadings and the parties’

Stipulations of Facts (including the Exhibits attached thereto). The

parties’ Stipulations of Facts with the accompanying Exhibits are

incorporated herein by this reference. Ms. Savage and Ms. Torres

resided in the State of Washington when they timely filed their Petitions

in these cases.

Because the dispute before us is strictly legal, the background we

provide here is brief. Ms. Savage and Ms. Torres co-owned three

S corporations that filed Forms 1120–S for tax years 2018 and 2019. In

the individual federal income tax returns Ms. Savage and Ms. Torres

filed for those years, they each claimed the deduction provided under

U.S. Income Tax Return for an S Corporation. See I.R.C. § 6037(a) and (b); Treas. Reg.

§ 1.1366-1(a)(1). The shareholders take these items into account on their own returns.

See I.R.C. § 1366(a).

3 In view of the dispute the parties have presented to us and our disposition,

we express no view on any further interactions between section 199A and section 280E.

4

section 199A with respect to income earned by the S corporations and

passed through to them.

Two of the corporations—Tru Greenthumb, Inc., and Fillabong,

Inc.—sell cannabis and cannabis-derived products and are subject to the

limitations section 280E imposes. 4 The parties have stipulated that the

third—Fillabong and Glass, Inc.—is not subject to the limitations of

section 280E. 5

The parties agree that section 280E limits the amounts of W–2

wages that Tru Greenthumb and Fillabong may deduct from their gross

income on their Forms 1120–S for tax years 2018 and 2019. They have

stipulated the amounts of W–2 wages Tru Greenthumb and Fillabong

paid in tax years 2018 and 2019 (Total W–2 Wages) and the amounts of

W–2 wages Tru Greenthumb and Fillabong may deduct from gross

income on their Forms 1120–S for tax years 2018 and 2019 after the

application of section 280E (Deductible W–2 Wages). The relevant

amounts are shown in the tables below.

4 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.

5 In Patients Mutual Assistance Collective Corp. v. Commissioner, 151 T.C. 176,

198–99 (2018), aff’d, 995 F.3d 671 (9th Cir. 2021), we held that a single taxpayer could

have multiple trades or businesses, some of which would be subject to section 280E

and some of which would not, or a single trade or business consisting of multiple

activities all of which would be subject to section 280E, even if the activities are

undertaken through separate entities. The record does not disclose the precise trades

or businesses of the three S corporations at issue, and we have no reason to believe

that the parties’ stipulations are inconsistent with the Court’s caselaw on the proper

delineation of trades or businesses for purposes of applying section 280E. See Estate

of Saia v. Commissioner, 61 T.C. 515, 519 (1974) (explaining that, while the parties

may agree to certain facts by stipulation, the Court is not bound to accept as controlling

stipulations as to conclusions of law); see also Estate of Sanford v. Commissioner, 308

U.S. 39, 51 (1939) (same).

5

Tax Year 2018

Total

W–2 Wages

Deductible

W–2 Wages

Tru Greenthumb

$7,740

$3,991

Fillabong

605,955

148,782

-0-

-0-

$613,695

$152,773

Fillabong and Glass

Total

Tax Year 2019

Total

W–2 Wages

Deductible

W–2 Wages

Tru Greenthumb

$168,134

$40,658

Fillabong

641,886

146,828

Fillabong and Glass

59,860

59,860

$869,880

$247,346

Total

The only remaining disagreement between the parties is whether

(a) Total W–2 Wages or (b) Deductible W–2 Wages should be used for

computing the section 199A deductions under section 199A(b)(2)(B)(i)

for tax years 2018 and 2019 for Ms. Savage and Ms. Torres. 6

Discussion

“As with any question of statutory interpretation, our analysis

begins with the plain language of the statute.” Jimenez v. Quarterman,

555 U.S. 113, 118 (2009) (citing Lamie v. U.S. Tr., 540 U.S. 526, 534

(2004)). Resolution of the dispute before us requires close reading of

rather technical Code provisions that contain nested definitions. As the

Supreme Court has instructed, “‘[w]hen a statute includes an explicit

definition, we must follow that definition,’ even if it varies from a term’s

ordinary meaning.” Tanzin v. Tanvir, 592 U.S. 43, 47 (2020) (quoting

Digital Realty Tr., Inc. v. Somers, 583 U.S. 149, 160 (2018)); see also

Dep’t of Agric. Rural Dev. Rural Hous. Serv. v. Kirtz, 144 S. Ct. 457, 472

(2024) (“When Congress takes the trouble to define the terms it uses, a

court must respect its definitions as ‘virtually conclusive.’” (quoting

Sturgeon v. Frost, 139 S. Ct. 1066, 1086 (2019))). By contrast, when the

6 The parties have resolved by agreement all other issues, including issues

concerning tax year 2017.

6

statute does not define a term, “we ask what that term’s ‘ordinary,

contemporary, common meaning’ was when Congress enacted” the

relevant provision. Food Mktg. Inst. v. Argus Leader Media, 139 S. Ct.

2356, 2362 (2019) (quoting Perrin v. United States, 444 U.S. 37, 42

(1979)); Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224,

234 (2018) (reviewed).

I.

Definition of “W–2 Wages”

We have already noted that, for some taxpayers, the amount of

the section 199A deduction is limited by the “W–2 wages” they (or, as is

the case here, their passthrough entities) paid. See I.R.C. § 199A(a),

(b)(2). Thus, the concept of “W–2 wages” is critical to operation of the

statute.

Section 199A(b)(4) defines the term as follows:

(4) Wages, etc.—

(A) In general.—The term “W–2 wages” means, with

respect to any person for any taxable year of such person,

the amounts described in paragraphs (3) and (8) of

section 6051(a) paid by such person with respect to

employment of employees by such person during the

calendar year ending during such taxable year.

(B) Limitation to wages attributable to qualified

business income.—Such term shall not include any amount

which is not properly allocable to qualified business income

for purposes of subsection (c)(1).

(C) Return requirement.—Such term shall not

include any amount which is not properly included in a

return filed with the Social Security Administration on or

before the 60th day after the due date (including

extensions) for such return.

A few observations jump out from the text. First, the definition

takes the form of a general rule followed by exceptions. Second, both the

general rule and one of the exceptions turn on other statutory

provisions.

A.

The General Rule

Pausing briefly on the general rule, we note that it directs the

reader to section 6051(a), which sets out rules concerning the

preparation of Forms W–2, Wage and Tax Statement. Paragraph (3) of

7

section 6051(a) addresses the wages an employer pays an employee,

while paragraph (8) generally addresses amounts contributed to taxadvantaged retirement accounts and deferred compensation. Piecing

these references together, to determine what the term “W–2 wages”

means for purposes of section 199A, one must start with the Form W–2

statements an employer files. And, more specifically, with certain of the

amounts reflected in those statements.

But that is only the beginning of the analysis. One must also

consider the limitations Congress set out. See, e.g., Burgess v. United

States, 553 U.S. 124, 130 (2008) (“As a rule, [a] definition which declares

what a term ‘means’ . . . excludes any meaning that is not stated.”

(quoting Colautti v. Franklin, 439 U.S. 379, 392 n.10 (1979))); Antonin

Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal

Texts 232 (2012) (“Legal drafters have the power not only to define their

terms but also to limit the implications of their terms . . . .”).

B.

The Relevant Exception

Section 199A(b)(4)(B) expressly provides for one such limitation.

Specifically, it says that “[s]uch term”—i.e., the term “W–2 wages”—

“shall not include any amount which is not properly allocable to

qualified business income for purposes of subsection (c)(1).” 7

Put another way, although certain amounts may have been

reported by an employer to an employee in a Form W–2 under

section 6051(a), those amounts do not constitute “W–2 wages” for

purposes of section 199A if they are not properly allocable to qualified

business income for purposes of section 199A(c)(1). Or, to state the same

proposition affirmatively, wages must be properly allocable to qualified

business income for purposes of section 199A(c)(1) in order to be

considered “W–2 wages” for purposes of section 199A.

1.

“Properly Allocable”

The term “properly allocable” is not defined in the statute.

Accordingly, we must discern its ordinary meaning when section 199A

was adopted. See, e.g., Food Mktg. Inst., 139 S. Ct. at 2362; Dynamo

Holdings Ltd. P’ship, 150 T.C. at 234.

7 The parties have no dispute with respect to section 199A(b)(4)(C), so we need

not discuss that provision further.

8

“Properly” is the adverbial form of the adjective “proper,” defined

as “[c]haracterized by appropriateness or suitability; fitting” and

“[c]alled for by rules or conventions; correct.” Proper, The American

Heritage Dictionary (5th ed. 2018); Proper, The American Heritage

Dictionary (5th ed. 2011) (same).

The word “allocable” means “capable of being allocated.”

Allocable, The American Heritage Dictionary (5th ed. 2018); Allocable,

The American Heritage Dictionary (5th ed. 2011) (same); Allocable,

Black’s Law Dictionary (10th ed. 2014) (“Capable of being allocated;

assignable.”). And the word “allocate” in turn means “[t]o set apart for

a special purpose; designate.”

Allocate, The American Heritage

Dictionary (5th ed. 2018); Allocate, The American Heritage Dictionary

(5th ed. 2011) (same); Allocation, Black’s Law Dictionary (10th ed. 2014)

(“The amount or share of something that has been set aside or

designated for a particular purpose.”).

Putting these definitions together, we conclude that the ordinary

meaning of the phrase “properly allocable” refers to something that may

be designated to go with something else and fits appropriately or

correctly (permissibly, one might say) with it. That an amount is

“capable of being allocated” to a category in the abstract is not enough.

The item must go appropriately or correctly with the category. Any

other interpretation would leave the adverb “properly” with no work to

do.

2.

“Qualified Business Income”

For the meaning of “qualified business income,” we turn to

section 199A(c)(1), as instructed. See, e.g., Tanzin, 592 U.S. at 47.

Section 199A(c) defines the concept of “qualified business income” for all

purposes of section 199A. See I.R.C. § 199A(c) (noting in the lead text

that it applies “[f]or purposes of this section”); see also Digital Realty Tr.,

Inc., 583 U.S. at 160–61 (“Leaving no doubt as to the definition’s reach,

the statute instructs that the ‘definitio[n] shall apply’ ‘[i]n this section,’

that is, throughout [the section at issue].” (quoting 15 U.S.C. § 78u-6)).

Section 199A(c)(1)—the specific paragraph referenced in section

199A(b)(4)(B)—provides:

In general.—The term “qualified business income” means,

for any taxable year, the net amount of qualified items of

income, gain, deduction, and loss with respect to any

qualified trade or business of the taxpayer. Such term

9

shall not include any qualified REIT dividends or qualified

publicly traded partnership income.

Thus, according to section 199A(c)(1), “qualified business income”

consists of the net amount of certain items—which the statute terms

“qualified items of income, gain, deduction, and loss.”

That latter phrase is further defined in section 199A(c)(3). As

relevant to our discussion, section 199A(c)(3) provides:

Qualified items of income, gain, deduction, and loss.—For

purposes of this subsection [i.e., for purposes of section

199A(c)]—

(A) In general.—The term “qualified items of

income, gain, deduction, and loss” means items of

income, gain, deduction, and loss to the extent such

items are—

(i) effectively connected with the

conduct of a trade or business within the

United States . . . , and

(ii) included or allowed in determining

taxable income for the taxable year.

Working backwards from the statutory definitions makes it easy

to understand how the provision works. Wages are included in the term

“qualified items of income, gain, deduction, and loss” only “to the extent”

they are “allowed in determining taxable income for the taxable year.”

To state the converse, if certain wage amounts are not “allowed in

determining taxable income for the taxable year,” those amounts are not

part of the term “qualified items of income, gain, deduction, and loss” for

purposes of section 199A(c). For convenience, we will refer to these

wages amounts as nondeductible wages.

Because nondeductible wages are not part of the defined term

“qualified items of income, gain, deduction, and loss,” they cannot be

included in the defined term “qualified business income” for purposes of

section 199A(c)(1).

II.

Application to Wages Disqualified Under Section 280E

A.

Statutory Analysis

As we have said, section 199A(b)(4)(B) requires that wages be

“properly allocable” to “qualified business income for purposes of

10

[section 199A(c)(1)]” in order to be considered “W–2 wages” for purposes

of section 199A. Under ordinary usage, for wages to be properly

allocable to qualified business income, they must be capable of being

designated to go with (or set apart for) qualified business income and

must fit appropriately, suitably, or correctly with qualified business

income. See supra Discussion Part I.B.1 (setting out the relevant

dictionary definitions).

But nondeductible wages cannot be included in “qualified

business income” for purposes of section 199A(c)(1) because the statute

expressly excludes them from the scope of that concept. In view of that

statutory command, such wages are not capable of being designated to

go correctly with (or being set apart for) qualified business income. They

do not “fit” “correctly” under that statutory construct and, therefore, are

not properly allocable to it. And if nondeductible wages are not properly

allocable to qualified business income, they cannot be “W–2 wages” as

defined in section 199A(b)(4)(B).

The parties here agree that portions of the wages Tru

Greenthumb and Fillabong paid are not “allowed” as deductions “in

determining the taxable income” of those corporations. Put differently,

the parties agree that the wages whose treatment for purposes of

section 199A is in dispute are nondeductible wages. 8 Under our analysis

above, those amounts cannot constitute “qualified items of income, gain,

deduction, and loss” under section 199A(c)(3) or be part of “qualified

business income” for purposes of section 199A(c)(1). Thus, they are not

“W–2 wages” within the meaning of section 199A(b)(4)(B).

In short, the Commissioner’s position is consistent with the

statutory text, 9 and petitioners’ position is not.

8 For 2018, nondeductible wages were $460,922—i.e., the difference between

Total W–2 Wages ($613,695) for Tru Greenthumb and Fillabong and Deductible W–2

Wages ($152,773) for those two entities. See supra p. 5. For 2019, nondeductible wages

were $622,534—again, the difference between Total W–2 Wages ($810,020) for Tru

Greenthumb and Fillabong and Deductible W–2 Wages ($187,486) for those two

entities. See supra p. 5.

9 The Commissioner’s position is also consistent with the regulations

promulgated under section 199A. See, e.g., Treas. Reg. § 1.199A-2(b)(4) (“W–2 wages

are properly allocable to [qualified business income] if the associated wage expense is

taken into account in computing [qualified business income] under § 1.199A-3.”); Prop.

Treas. Reg. § 1.199A-2(b)(4), 83 Fed. Reg. 40,884, 40,918 (Aug. 16, 2018) (same). On

August 16, 2018, the Department of the Treasury and the Internal Revenue Service

11

B.

Petitioners’ Arguments

Ms. Savage and Ms. Torres protest that the Commissioner is

ignoring the plain text of section 199A(b)(4)(A). According to them, W–2

wages include “all remuneration included on the W–2s issued by the

business.” Pet’rs’ Op. Br. 6. They decry the Commissioner’s “attempt to

add conditions and additional language not in the statute to limit W–2

wages to those wages allowed to be deducted by the business after

application of § 280E” and ask us to reject it “because it is manifestly

contrary to the clear statutory language.” Pet’rs’ Op. Br. 6–7.

But as our analysis above shows, Ms. Savage’s and Ms. Torres’s

view rests on a selective reading of the statute. Their proposed reading

focuses on the general rule of section 199A(b)(4)(A), but wholly ignores

the express limitation set out in section 199A(b)(4)(B) and the ordinary

meaning of the phrase “properly allocable.” That is not an acceptable

method of statutory analysis. See United Therapeutics Corp. v.

Commissioner, 160 T.C. 491, 513 (2023) (explaining that a cardinal

principle of interpretation requires that we give effect, if possible, to

every clause and word of the statute and collecting authorities), aff’d,

105 F.4th 183 (4th Cir. 2024); see also Cyan, Inc. v. Beaver Cnty. Emps.

Ret. Fund, 583 U.S. 416, 428 (2018) (rejecting an attempt “to cherry pick

from the material covered by the statutory cross-reference”).

Ms. Savage’s and Ms. Torres’s claim that the Commissioner is

rewriting the statute and adding to it something that is not there fails

for similar reasons. As we have explained, the Commissioner’s

interpretation of section 199A tracks the relevant statutory provisions

and gives meaning to each of them. Section 199A(c) expressly tells us

how to treat amounts that are not “allowed in determining taxable

income for the taxable year.” I.R.C. § 199A(c)(3)(A)(ii). Specifically, we

must exclude them from qualified business income, 10 and they cannot

(collectively, Treasury) published a notice of proposed rulemaking with proposed

regulations under section 199A. See Qualified Business Income Deduction, 83 Fed.

Reg. 40,884. On February 8, 2019, Treasury published a Treasury Decision with final

regulations under section 199A. See T.D. 9847, 2019-9 I.R.B. 670, 84 Fed. Reg. 2952

(Feb. 8, 2019). The final regulations apply only to taxable years ending after

February 8, 2019, although, for taxable years ending in calendar year 2018, taxpayers

may rely on either the final regulations in their entirety or the proposed regulations in

their entirety. Id.

10 We note that Ms. Savage and Ms. Torres do not object to using wages limited

by section 280E (that is, Deductible W–2 Wages) to calculate qualified business income

for Tru Greenthumb and Fillabong. That is understandable, as using the lower wage

12

be “properly allocable” to such income. Therefore, nondeductible wages

likewise cannot be “W–2 wages” as the statute defines that term. The

Commissioner does not “add to the statute something which is not

there,” Pet’rs’ Op. Br. 13 (cleaned up), when he insists that the statutory

provisions be followed.

Furthermore, the text of section 199A(b)(4)(B) focuses the inquiry

on whether an amount is “properly allocable” to “qualified business

income,” a net amount. The text does not refer to “gross receipts” or

specific items of income or gain listed in section 199A(c)(3). Congress

could, of course, have used those words if it had wished to. It certainly

knew how to do so. See I.R.C. § 199A(g)(1)(B) (excluding from the

definition of “W–2 wages” for purposes of the deduction for income

attributable to domestic production activities of specified agricultural or

horticultural cooperatives “any amount which is not properly allocable

to domestic production gross receipts for purposes of [section

199A(g)(3)(A)]”). The fact that it did not must be respected. See Digital

Realty Tr., Inc., 583 U.S. at 161 (“[W]hen Congress includes particular

language in one section of a statute but omits it in another[,] . . . this

Court presumes that Congress intended a difference in meaning.”

(quoting Loughrin v. United States, 573 U.S. 351, 358 (2014))); see also

Knight v. Commissioner, 552 U.S. 181, 188 (2008) (“The fact that

[Congress] did not adopt [a] readily available and apparent alternative

strongly supports rejecting [a] reading [that relies on the rejected

alternative text].”); Thomas v. Commissioner, 160 T.C. 371, 382–83

(2023) (reviewed) (same). 11

Congress also could have referred us not to section 199A(c)(1), but

to section 199A(c)(3)(A)(i), or even to the term “qualified item of income

[or] gain” or some other term, to achieve the result Ms. Savage and

Ms. Torres seek. As the Supreme Court has noted, “‘Congress often

drafts statutes with hierarchical schemes—section, subsection,

number in this particular calculation produces greater qualified business income, and

the potential for higher section 199A deductions for Ms. Savage and Ms. Torres. But

their interpretation of the statute produces an inconsistency: They ask us to use

Deductible W–2 Wages for one aspect of the section 199A computation and Total W–2

Wages for another. The Commissioner’s interpretation, by contrast, produces no such

inconsistency.

11 Nor does the use of phrase “properly allocable” in other parts of the Code

provide petitioners any refuge. Whatever form “proper allocation” might take in other

contexts, in view of the specific text and statutory structure here, an amount that

expressly may not be a part of “qualified business income” cannot be “properly

allocable” thereto, as we have explained above.

13

paragraph, and on down the line.’ NLRB v. SW General, Inc., 580 U.S.

288, 300 (2017). And ‘[w]hen Congress want[s] to refer only to a

particular subsection or paragraph, it sa[ys] so.’ Ibid. It said no such

thing” here. Cyan, Inc., 583 U.S. at 428.

In addition, that section 199A may be patterned after the nowrepealed section 199 gives us no license to ignore the actual words

Congress used in section 199A(b)(4)(B) and (c) in favor of words that

were used in former section 199. “The starting point in discerning

congressional intent is the existing statutory text . . . and not the

predecessor statutes.”

Lamie, 540 U.S. at 534; accord United

Therapeutics, 160 T.C. at 507–10.

Finally, Ms. Savage and Ms. Torres press certain policy

arguments in favor of their view. We do not find them well founded, but

in any event the arguments are misdirected. We have no warrant to

rewrite the statutory text Congress wrote. See Varian Med. Sys., Inc. &

Subs. v. Commissioner, 163 T.C. 76, 102 (2024) (reviewed). “Achieving

a better policy outcome . . . is a task for Congress, not the courts.”

Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S.

1, 13–14 (2000); see also Crowe v. Wormuth, 74 F.4th 1011, 1032 (9th

Cir. 2023) (“[O]ur role is not to devise a ‘better’ administrative scheme

than the one Congress enacted.”); Tex. Brine Co. v. Am. Arb. Ass’n, 955

F.3d 482, 486 (5th Cir. 2020) (“We are not the final editors of statutes,

modifying language when we perceive some [purported] oversight.”).

III.

Conclusion

To sum up, the Commissioner offers the best reading of the

statute. Because the parties have stipulated what the deficiencies

would be under their respective positions, we need not order

computations under Rule 155, but may enter decisions in accordance

with their stipulated computations.

On the basis of those computations, the deficiencies we find for

2018 and 2019 are as follows:

Deficiency Amounts

Year

Ms. Savage

Ms. Torres

2018

$313,900

$292,759

2019

187,325

186,107

14

We have considered all of the parties’ arguments and, to the

extent not discussed above, conclude they are irrelevant, moot, or

without merit.

To reflect the foregoing,

Appropriate decisions will be entered.

Reviewed by the Court.

URDA, C.J., and KERRIGAN, BUCH, NEGA, PUGH,

ASHFORD, COPELAND, JONES, GREAVES, MARSHALL, WEILER,

WAY, LANDY, ARBEIT, GUIDER, and FUNG, JJ., agree with this

opinion of the Court.

JENKINS, J., dissents.

15

JENKINS, J., dissenting: Respondent concedes that petitioners

can deduct some of the income with respect to their cannabis-related

businesses in order to reduce their tax on that income. But, respondent

argues, the deduction is indirectly zeroed out by a cap intended to limit

the benefit to businesses that pay wages to employees. It does not matter

that the businesses did pay wages to employees, respondent says,

because the fact that petitioners are not allowed to deduct the wages

means the wages are not properly allocable to the income from the

businesses. The opinion of the Court agrees. I respectfully disagree.

I.

Purposes of Section 199A

As the opinion of the Court acknowledges, see op. Ct. pp. 2–3,

Congress created the section 199A deduction to reduce the tax rate that

applies to certain income from qualified trades or businesses. Consistent

with its purpose, section 199A permits a qualified trade or business to

deduct an amount more or less equal to 20% of the U.S. taxable income

from such trade or business, subject to a cap. See § 199A(a)(2)(A),

(b)(2)(A), (c)(1). In these cases, the cap is an amount equal to 50% of

“W–2 wages,” see § 199A(b)(2)(B)(i), consistent with the fact that

“Congress intended that [the statute] create jobs in the United States,”

Gibson & Assocs. Inc. v. Commissioner, 136 T.C. 195, 223 (2011)

(addressing the same limitation in former section 199).

Congress put some effort into drawing the line between qualified

trades or businesses eligible for the deduction and those trades or

businesses that are not eligible. However, it did not include drug

trafficking businesses in the detailed list of businesses that are not

eligible for the deduction. See § 199A(d)(1) and (2). And Congress did not

amend section 280E to disallow the section 199A deduction, leaving

respondent conceding that it is available with respect to petitioners’

cannabis-related businesses.

II.

Computation of Section 199A Deduction

In order to determine the amount of a taxpayer’s section 199A

deduction, the taxpayer’s businesses must first be considered one by one,

both to separate the qualified trades or businesses from those not

eligible for the deduction, see § 199A(d)(1), and to separate the qualified

trades or businesses from each other, see § 199A(b)(1)(A), (2). Then,

qualified items of income, deduction, gain, or loss with respect to each

qualified trade or business must be identified. See § 199A(c)(1), (3). That

requires determining to which business each item of gross income is

16

“properly allocable” and to which items of gross income each item of

deduction is “properly allocable.” See § 199A(c)(3)(B)(iii), (vii); Treas.

Reg. § 1.199A-3(b)(5). 1 Given that qualified items of income and

deduction must both be properly allocable to a qualified trade or

business, see § 199A(c)(1), and meet the other statutory criteria, such as

being “included or allowed in determining taxable income,”

§ 199A(c)(3)(A)(ii), only after those allocations are done can qualified

items of income and deduction be identified. Cf. Treas. Reg. § 1.199A3(b)(2)(ii)(H). 2

The final step of the multistep process set forth in section 199A(c)

is to determine net qualified business income for a particular qualified

trade or business by netting all of the qualified items with respect to

such business pursuant to section 199A(c)(1). However, the preliminary

allocation steps have already served to identify wage expenses that are

1 Although the regulations do not explicitly address the specific issue in these

cases, they illustrate the understanding of the Department of the Treasury (Treasury)

as to how the section 199A statutory scheme operates. The opinion of the Court

highlights Treasury Regulation § 1.199A-2(b)(4), see op. Ct. note 9, but includes no

discussion of the rules in Treasury Regulation § 1.199A-3 to which Treasury

Regulation § 1.199A-2(b)(4) refers and which are contrary to respondent’s position in

these cases.

The allocation of “items of QBI”—meaning “items of income, gain, deduction,

and loss”—prescribed by Treasury Regulation § 1.199A-3(b)(5) is consistent with the

allocation that the Court has recognized is required to determine which of a taxpayer’s

deductions are subject to section 280E. See Californians Helping to Alleviate Med.

Probs., Inc. v. Commissioner, 128 T.C. 173, 185–86 (2007) (discussing the allocation of

expenses between a taxpayer’s business subject to section 280E and its separate legal

business). And it is consistent with allocations of expenses generally required under

the Code in being to gross income in order to determine net income. See, e.g., §§ 161,

863(a); Treas. Reg. § 1.861-8(a) and (b).

2 Treasury Regulation § 1.199A-3(b)(2)(ii)(H) underscores that the allocation of

compensation deductions is to a trade or business and gross income therefrom, and not

to qualified business income as defined in section 199A(c)(1). Furthermore, in

prescribing when compensation “will reduce QBI” (emphasis added), and not just be

taken into account in computing qualified business income or be allocable to qualified

business income, it contradicts the understanding of the opinion of the Court of those

concepts as being equivalent. Compare Treas. Reg. § 1.199A-3(b)(2)(ii)(H), with Treas.

Reg. § 1.199A-3(b)(4) (“Expenses for all wages paid . . . must be taken into account in

computing QBI.”), and Treas. Reg. § 1.199A-2(b)(4) (“W–2 wages are properly allocable

to QBI if the associated wage expense is taken into account in computing QBI under

§ 1.199A-3.”). And finally, by addressing the points separately, Treasury Regulation

§ 1.199A-3(b)(2)(ii)(H) also makes clear that the consideration of whether

compensation is deductible for federal income tax purposes is separate and apart from

the consideration of whether the compensation is properly allocable to a trade or

business and thus the gross income and qualified business income therefrom.

17

properly allocable to income from a qualified business. And that income

can be described as qualified business income. Accordingly, if a taxpayer

has gross income from a qualified trade or business eligible for a section

199A deduction, wage expenses properly allocable to that gross qualified

business income should constitute “W–2 wages” within the meaning of

section 199A(b)(4).

III.

Overall Statutory Framework

The opinion of the Court focuses on the final step in section

199A(c) as necessarily prescribing for purposes of section 199A(b)(4)(B)

what amounts are “properly allocable to qualified business income for

purposes of subsection (c)(1).” More specifically, the opinion of the Court

concludes that because wage expenses that are not allowed in

determining taxable income are not qualified items of deduction, and

therefore do not reduce qualified business income, they are also not

properly allocable to qualified business income. But if Congress had

intended that, it could have said so by using the same phrase—“allowed

in determining”—that it used in defining the term “qualified items of

deduction” or by using that term. Congress did not do that. And, as the

opinion of the Court puts it, citing Digital Realty Trust, Inc. v. Somers,

583 U.S. 149 (2018), and Knight v. Commissioner, 552 U.S. 181 (2008):

“The fact that it did not must be respected.” See op. Ct. p. 12. However,

such caselaw even more strongly supports the understanding that

Congress did not intend “properly allocable to” in section 199A(b)(4)(B)

to mean “allowed in determining,” given that it “did not adopt this

readily available and apparent alternative,” Knight v Commissioner,

552 U.S. at 188, used in section 199A(c)(3)(A)(ii). Congress, therefore,

presumably “intended a difference in meaning.” Digital Realty Tr., 583

U.S. at 161 (quoting Loughrin v. United States, 573 U.S. 351, 358

(2014)); cf. Russello v. United States, 464 U.S. 16, 23 (1983) (“We refrain

from concluding here that the differing language in the two subsections

has the same meaning in each.”).

Contrary to the assertion of the opinion of the Court, the inquiry

into what different meaning Congress might have intended must

consider the entirety of section 199A. See Davis v. Mich. Dep’t of

Treasury, 489 U.S. 803, 809 (1989) (“It is a fundamental canon of

statutory construction that the words of a statute must be read in their

context and with a view to their place in the overall statutory scheme.”);

K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) (“In ascertaining

the plain meaning of the statute, the court must look to the particular

statutory language at issue, as well as the language and design of the

18

statute as a whole.”). Starting with the definition of “W–2 wages” in

section 199A(b)(4), and its cross-reference to section 199A(c)(1), it must

be noted that it is inconsistent with the design of section 199A to allocate

wage expenses to qualified business income as computed in section

199A(c)(1) “for purposes of” the computation of qualified business

income in section 199A(c)(1). In fact, it would be circular to allocate to

an amount “for purposes of” computing that amount. By contrast, the

understanding that the allocation required for purposes of determining

“W–2 wages” is to gross income is not only consistent with the operation

of section 199A(c) and the regulations. It is also supported by former

section 199(b)(2), 3 which is duplicated by section 199A(b)(4) nearly

verbatim. And it is supported by current section 199A(g)(1)(B)(ii), which

the opinion of the Court would interpret to apply a completely different

meaning of “properly allocable” despite being enacted by the same

Congress to appear in the same Code section. See Consolidated

Appropriations Act, 2018, Pub. L. No. 115-141, div. T, § 101(a)(1), 132

Stat. 348, 1151.

IV.

Interaction of Sections 199A and 280E

Petitioners’ position is also supported by the rate reduction and

job creation purposes of section 199A. Respondent argues, and the

opinion of the Court apparently agrees, see op. Ct. note 10, that

petitioners inappropriately seek to maximize the amount of their “W–2

wages” in order to maximize the amount of the deduction to which they

are entitled. I appreciate the concern that petitioners are deducting the

lower amount of wage expenses allowed after application of section

280E, thereby increasing their qualified business income under section

199A(c)(1), while seeking to take into account a higher amount of wage

expenses unlimited by section 280E for purposes of the cap based on

“W–2 wages.” However, because the higher amount of “W–2 wages” is

used only for purposes of the cap based on “W–2 wages,” it does not allow

the amount of the deduction to exceed 20% of qualified business income

and taxable income (as determined for purposes of section 199A), which

is higher simply by virtue of the application of section 280E. Accordingly,

the drug-trafficking deterrence objective of section 280E is still

furthered by the resulting overall tax burden relative to gross income,

3 Treasury repeatedly explained that the section 199A regulations were based

on the regulations implementing former section 199(b)(2). See Qualified Business

Income Deduction, 83 Fed. Reg. 40,884, 40,887 (Aug. 16, 2018); T.D. 9847, 2019-9

I.R.B. 670, 705, 84 Fed. Reg. 2952, 2983 (Feb. 8, 2019).

19

as compared to a business that is not subject to section 280E. 4 And that

is accomplished without a distorted reading of section 199A. Allowing a

qualified business with meaningful wage expenses a deduction of up to

20% of taxable income, however taxable income is determined, is

consistent with the goals of section 199A. Accordingly, I am not swayed

by respondent’s equitable, policy-based argument.

V.

Conclusion

For the reasons discussed herein, I would hold that “W–2 wages,”

as defined in section 199A(b)(4), are determined without regard to the

application of section 280E. Such a conclusion is also supported by the

understanding that “in statutes levying taxes . . . [i]f the words are

doubtful, the doubt must be resolved against the government and in

favor of the taxpayer.” United States v. Merriam, 263 U.S. 179, 187–88

(1923). 5 Accordingly, I respectfully dissent.

Suppose, for example, that a taxpayer had $80,000 of qualified items of

income with respect to a qualified trade or business, the only expenses with respect to

which were $40,000 of wage expenses described in section 199A(b)(4)(A). Suppose

further that those wage expenses, despite being properly allocable to the qualified

trade or business, were not deductible in computing taxable income on account of the

application of section 280E. The taxpayer’s qualified business income would be

$80,000, such that the uncapped amount of the deduction would be $16,000 (20% of

$80,000), instead of the $8,000 (20% of $40,000 ($80,000 – $40,000)) that it would be if

the wage expenses were deductible in computing qualified business income.

Nevertheless, the cap based on “W–2 wages” would be $20,000 (50% of $40,000),

instead of the zero that it would be if “W–2 wages” were determined after application

of section 280E. And, if there were no difference between the taxpayer’s qualified

business income and taxable income, the taxpayer could therefore potentially be

entitled to a deduction of $16,000 instead of $8,000. However, if a flat 30% rate would

otherwise apply, the taxpayer would pay $19,200 (30% of $64,000 ($80,000 – $16,000))

of tax, or 24% of gross income, instead of the $9,600 (30% of $32,000 ($40,000 –

$8,000)), or 12% of gross income, that would obtain if the qualified trade or business

were not subject to section 280E.

4

5 Section 199A provides a deduction, such that it could be argued that

“countervailing tradition suggests that the ambiguity should be resolved in the

government’s favor.” United Dominion Indus., Inc. v. United States, 532 U.S. 822, 839

n.1 (2001) (Stevens, J., dissenting). However, as discussed, it does so as a mechanism

to reduce tax rates, suggesting that its function should be considered together with the

underlying rules fixing tax at a particular rate, which undeniably levy taxes.