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IRS and Cannabis

Since the arrival of medical marijuana, tax codes have been an enormous problem for the industry. One of the main reasons I advise entrepreneurs and investors to overestimate startup capital is Section 280E of the Internal Revenue Code. Through this provision, the IRS forbids cannabis businesses from deducting ordinary expenses from gross income because the agency says those businesses are “trafficking” Schedule I substances as defined by the Controlled Substances Act.

U.S. Supreme Court Declined Petition from a Colorado Medical Cannabis Dispensary

On June 28th, the U.S. Supreme Court declined to hear a petition challenging §280E. Alpenglow Botanicals, a Colorado medical cannabis dispensary, argued that §280E doesn’t empower the Internal Revenue Service to decide whether a business has violated federal criminal drug laws.  Cannabis law was at a standstill. 

After an IRS audit of Alpenglow Botanicals’ 2010, 2011 and 2012 tax returns, the IRS denied a variety of ordinary and necessary business expenses claimed by Alpenglow under §280E. The IRS decided that Alpenglow “committed a crime of trafficking a controlled substance,” though no one in Alpenglow had ever been charged or convicted of any such crime.

Alpenglow Challenged §280E for Stronger Tax Codes

The IRS couldn’t induce any criminal prosecution but instead denied their deductions. Alpenglow owners Charles and Justin Williams were forced to pay an additional $53,094 to the IRS. They settled the bill, and then promptly filed refund claims. The owners then took their case to the U.S. District Court in Colorado, followed by the United States Court of Appeals for the Tenth Circuit. Everything was focused on cannabis law. 

Alpenglow argued:

  • They were not criminally convicted of a crime.
  • The IRS did not have evidence that they were trafficking controlled substances.
  • The IRS did not have the authority to disallow the deductions under §280E.
  • The IRS’s calculation of their income violates the 16thAmendment by forbidding cost of goods sold under §263A.
  • §280E is a penalty and violates the Eighth Amendment.

The courts dismissed their common-sense arguments. They pointed to an obscure technicality under §6201(a), claiming the IRS can determine if and when to deny deductions under §280E. The judgment stated that the IRS “has no requirement that the Department of Justice conduct a criminal investigation or obtain a conviction before §280E applies.” Alpenglow attempted to challenge the IRS’s decision by appealing to the U.S. Supreme Court, but they declined to hear the petition instead of exposing the fraud. 

IRS Falls Behind on Cannabis Industry

While Congress has begun to push for legal cannabis banking, they aren’t pressuring the IRS to change its practices. There is no longer a factual argument that marijuana poses life-threatening risks to the user or lacks medical use, which is the justification for Schedule I Controlled Substance designation. The IRS claim for essentially stealing earnings from cannabis businesses with legitimate deductible expenses is that they are “trafficking” a dangerous compound with no medical use. 

The action is contradictory to both science and policy. The government has held a patent since 2003 on cannabis compounds. Patent 6630507 covers the medical use of specific cannabinoids. The Department of Health’s patent states, “No signs of toxicity or serious side effects have been observed following chronic administration of cannabidiol to healthy volunteers, even in large acute doses.” 

More Tax Laws Updates Needed for Medical Marijuana Companies

Tax laws and cannabis law should be part of the discussion on social equity, as lawmakers and law enforcement will continue to profit off of legitimate businesses in the industry disproportionately until the code is updated. It remains one of the more substantial barriers to an equal playing field in the American economy. Hopefully the stories of those willing to fight back, like Alpenglow Botanicals, will bring more attention to this problem.

References

Crozier, Elizabeth. “5 Important Facts About Patent 6630507.” PRØHBTD, prohbtd.com/5-important-facts-about-patent-6630507.

“In My Opinion: Alpenglow Botanicals v. United States.” JD Supra, www.jdsupra.com/legalnews/in-my-opinion-alpenglow-botanicals-v-97602/.

Marijuana Business Daily. “Canopy’s Linton out, NJ Ups Medical Cannabis Licenses, 280E MJ Tax Case a No-Go with Supreme Court.” Marijuana Business Daily, 5 July 2019, mjbizdaily.com/canopys-linton-out-nj-ups-medical-cannabis-licenses-280e-mj-tax-case-a-no-go-with-supreme-court/?utm_medium=email&utm_source=mjbiz_daily&utm_campaign=MJD_20190705_NEWS_Daily_07052019.

Smith, Jeff. “U.S. Supreme Court Declines to Hear 280E Marijuana Tax Case.” Marijuana Business Daily, 2 July 2019, mjbizdaily.com/us-supreme-court-declines-to-hear-280e-marijuana-tax-case/.

“Up in Smoke: Alpenglow Botanicals, LLC V. United States.” New Frontier Data, 6 Aug. 2018, newfrontierdata.com/marijuana-insights/smoke-alpenglow-botanicals-llc-v-united-states/.

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