You are a Tax Manager for Combs & Carter CPA firm in New Jersey. Your client, James Arnold, an owner of several local businesses, is interested in opening a cannabis retail store. Arnold relies on your firm for all his tax and accounting advice and has asked you about federal tax treatment on the sale of cannabis.

In a memo to Arnold, summarize the federal tax laws on 1) income generated from the sale of cannabis 2) the related business deductions for cost of goods sold and 3) business operating expenses on the sale of cannabis. You may use tax code(s), regulations, letter rulings, and/or case law to support your conclusion.