Oscar is an employee of the SVC Pharmacy. In recognition of his hard work during the pandemic

Fantastic news! We've Found the answer you've been seeking!

Question:

Oscar is an employee of the SVC Pharmacy. In recognition of his hard work during the pandemic his employer buys a NY Lottery Ticket for $1 in March 2021 and gives it to Oscar. A week later Oscar’s numbers are drawn as the winner of a $500,000 prize which he promptly collects. Having heard that NY State recently legalized the sale of recreational Marijuana,

Oscar decides that he wants to invest his winnings in a Marijuana dispensary as soon as NY approves his application for a license. He asks you to help him choose between two possible methods of operation for his business in which he expects to sell 10,000 ounces per year at $200 per ounce. The first method would be for him to establish a Marijuana growing and processing operation. He expects the cost of renting farmland, paying for, seed, fertilizer, labor, transportation, machinery, energy, insurance, and other costs of operating the marijuana farm to be $800,000 and the cost of the operation of the retail store to be another $200,000, producing a net profit of $1,000,000 before taxes on the sale of the 10,000 ounces for $2,000,000 dollars.

The second possible method of operation would be to buy the 10,000 ounces from a grower for 900,000, paying $200,000 still for the retail store operation, producing a net profit of $900,000 before taxes on the sale of the 10,000 ounces for $2,000,000 dollars. Oscar wishes to know which business model would be best after federal taxes. For purposes of this paper, Oscar is married and in the 37% tax bracket on his Marijuana earnings. Finally, note that when the sale of Marijuana is legal under NY law,

Marijuana growing and sales still violate federal law. Base your advice solely on Federal tax law without regard to state tax consequences.

Please state, clearly and succinctly, the tax effect to Oscar, if any, of these transactions or of the alternative operating methods proposed for his new business. Use the format 1) Facts-2) Issue-3) Conclusion-4) Reasoning. Give primary authority for each statement made.