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Got questions about the 280E deduction? Looking for the best Tulsa medical marijuana attorney? Make a call to the Cale Law Office at 918-277-4800 for a free initial consultation. Attorney Stephen Cale is a member of the Legal Committee for the National Organization for the Reform of Marijuana Laws. Practicing since 1999, attorney Cale focuses his practice on criminal defense and medical marijuana law.
Here’s an interesting case from the U.S. 10th Circuit Court of Appeals. It deals with the 280E deduction statute. The best Tulsa medical marijuana attorney will refer you to skilled CPAs who have a thorough knowledge of cannabis business issues.
Alpenglow Botanicals, LLC (“Alpenglow”) sued the Internal Revenue Service (“IRS”) for a tax refund Aplenglow alleged that the IRS exceeded its statutory and constitutional authority by denying Alpenglow’s business tax deductions under 26 U.S.C. § 280E. The district court dismissed Alpenglow’s suit, saying that it failure to state a claim for which relief could be granted.
At the time of this case, 28 states and Washington, D.C. had legalized medical or recreational marijuana use. However, the federal government classifies marijuana as a “controlled substance” under schedule I of the Controlled Substances Act (“CSA”). The CSA makes it unlawful to knowingly or intentionally “manufacture, distribute, or dispense … a controlled substance.”
Under former President Obama, the Justice Department had declined to enforce this federal law against marijuana businesses acting in accordance with state law. However, the best Tulsa medical marijuana attorney will tell you that the IRS has shown no inclination to “overlook federal marijuana distribution crimes.” Instead, the IRS consistently denies business deductions to state-sanctioned marijuana dispensaries under 26 U.S.C. § 280E. This statute prohibits any “deduction or credit” for any business that “consists of trafficking in controlled substances (within the meaning of … the Controlled Substances Act).” The best Tulsa medical marijuana attorney will tell you that federal prohibition could come to an end.
As the federal appeals court pointed out, this appeal is the product of the clash between these state and federal policies. Alpenglow is a medical marijuana business doing business legally in Colorado. After an audit of Alpenglow’s 2010, 2011, and 2012 tax returns, the IRS issued a Notice of Deficiency. The federal agency concluded that Alpenglow had “committed the crime of trafficking in a controlled substance in violation of the CSA.” It denied some of Alpenglow’s claimed business deductions under § 280E.
Alpenglow’s income and resultant tax liability were increased based on the denial of these deductions. Because Alpenglow is a “pass through” entity, the increased tax liability was passed on to Charles Williams and Justin Williams, the owners of the business. Consequently, Charles Williams owed the IRS an additional $24,133 in taxes and Justin Williams owed an additional $28,961. The two men paid the increased tax liability under protest and filed for a refund, which the IRS denied. When looking for the best Tulsa medical marijuana attorney, see if they can refer you to a cannabis CPA.
The owners then filed a complaint in federal district court to overturn the IRS’s decision. Filed a motion to dismiss, saying that Alpenglow had no legal suit. First, Alpenglow asserts the IRS lacks the general authority to investigate and deny tax deductions under § 280E without a criminal conviction, and that, even if it had such authority, the IRS has insufficient evidence of trafficking to apply § 280E in this case.
Secondly, Alpenglow argued that the IRS’s calculation of Alpenglow’s income violates the Sixteenth Amendment. Third, Alpenglow contends § 280E violates the Eighth Amendment.
The federal appeals court did not buy these arguments. Alpenglow offered no reason why the IRS does not have the authority to assess taxes under § 280E, but cannot impose excess tax liability under § 280E. There is also no evidence that Congress intended to limit the IRS’s investigatory power, according to the appeals court.
The best Tulsa medical marijuana attorney will note that the Tax Code contains other instances where the applicability of deductions or tax liability turns on whether illegal conduct has occurred. Some examples include: denying deductions for illegal bribes, kickbacks, etc.; imposing civil tax penalty for fraud); and allowing deduction for theft loss.
And other courts have upheld tax deficiencies against state-sanctioned marijuana dispensaries based on application of § 280E, without questioning the IRS’s authority on this issue. Alpenglow argued, however, that because Congress has not expressly delegated the IRS authority to investigate violations of federal drug laws, the IRS cannot make the foundational finding needed to deny deductions under § 280E.
The cases cited by Alpenglow were challenges to “the methods employed by Congress” in enforcing these statutes, not the authority of the IRS to investigate and tax illegal activity. Second, these statutes involved the imposition of a tax for specific illegal conduct, not the denial of a tax deduction . Third, the tax information at issue in the cited cases was routinely shared with the Department of Justice and frequently used to support criminal charges, creating a tax provision that served as a proxy for a criminal investigation.
In this case, Alpenglow has failed to cite a single case in which the government relied on a denial of deductions under § 280E as evidence of guilt in a criminal trial. Accordingly, these decisions do not prohibit the IRS from applying § 280E to deny Alpenglow’s deductions. In summary, it is within the IRS’s statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances. Thus, the IRS did not exceed its authority in denying Alpenglow’s business deductions under § 280E.
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Tulsa medical marijuana attorney Stephen Cale has certification in marijuana horticulture. So, he is knowledgeable about the cannabis growing industry.