Sunnyside Health Center has been presented with a $3.6 million tax bill (including back taxes, penalties, and interest) following an audit by the Internal Revenue Service (IRS) for tax years 2014, 2015, and 2016.

Sunnyside is a San Francisco Bay area medical marijuana dispensary, with 94,000 customers and 95 full-time employees. It offers a variety of medical marijuana and has $25 million in annual sales.

The IRS disallowed deductions for standard operating costs such as rent, payroll, employee health insurance and licensing fees. However, the IRS did not dispute the largest expense of the dispensary, the millions it spent buying the marijuana to sell.

I need relevant IRC, regulations, and case(s).