There are now four states that have legalized recreational and medicinal use of Marijuana, Colorado and Washington, Oregon and Alaska. The cities of Portland and South Portland in Maine fully legalized marijuana for both medical and recreational use. The District of Columbia has fully legalized recreational and medical marijuana, but recreational commercial sale is currently blocked by Congress. Nineteen (19) other states have legalized Marijuana for medicinal use only. If you are one of many thousands of Americans who will be servicing the Marijuana industry either through growing and farming, distribution, wholesale supply to hospitals and pharmacies, or retail sales to the public, the IRS has a special surprise for you when you file your income tax return. Don’t like surprises form the IRS? Better stay tuned to TaxView with Chris Moss CPA Tax Attorney to find out the latest on the IRS vs Marijuana Court battles, where we are headed, and how best to structure your Marijuana business.
We have previously written about IRS Section 280E in IRS or State Law for Medical Marijuana, which disallows tax deductions for any amount paid in a business dealing in “trafficking of controlled substances” prohibited by Federal law. As of publication of this Article, the only expense that is currently deductible against Marijuana sales is the Cost of Goods of the Marijuana. See California Helping to Alleviate Medical Problems v IRS US Tax Court (2007) (CHAMP) and Martin Olive v IRS US Tax Court (2012). If you are asking why a Marijuana business legally set up under State law is still considered by the IRS as a business dealing in trafficking of a controlled substance you are asking a very good question indeed.
The answer may be soon playing out in Federal Court. In CHAMP Judge Laro of the US Tax Court said “Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances. However another non-tax case has been winding its way through the Federal Courts in US v Schweder, Pickard, et al Federal District Court for the Eastern District of California (2011) questions whether or not 30 years after the enactment of Section 280E Marijuana should still be classified in 2015 as a controlled substance.
The facts of the case or very simple. On October 20, 2011, sixteen individuals were indicted for conspiracy to manufacture at least 1,000 marijuana plants, in violation of 21 U.S.C. §§ 846, 841(a)(1) Mr. Pickard moved to dismiss the indictment in 2013, arguing that the classification of marijuana as a Schedule I substance under the CSA, 21 U.S.C. § 801, et seq., violates his Fifth Amendment equal protection rights and that the government’s allegedly disparate enforcement of the federal marijuana laws violates the doctrine of equal sovereignty of the states under the Tenth Amendment. To prove his case Picard filed a motion for an evidentiary hearing which the Court eventually granted.
After the evidentiary hearing was held Judge Mueller on April 17, 2015 denied Picard’s Motion to Dismiss in a 38 page Order concluding that while “At some point in time, in some Court, the record may support granting such a Motion, having carefully considered the facts and the law as relevant to this case, the Court concludes that on the record in this case, this is not the Court and this is not the time.” Judge Mueller concludes “In sum, the evidence of record shows there are serious, principled differences between and among prominent, well-informed, equivalently credible experts. There are some positive anecdotal reports from persons who have found relief from marijuana used for medical purposes; those reports do not overcome the expert disputes. Consistent with the conclusions other courts have reached, this court finds “[t]he continuing questions about marijuana and its effects make the classification as a controlled substance rational.”
Judge Mueller further opines that after careful consideration, the court joins the chorus of other courts considering the same question, and concludes as have they that – assuming the record created here is reflective of the best information currently available regarding Marijuana - the issues raised by Pickard are policy issues for Congress to revisit if it chooses, citing United States v. Canori, 737 F.3d 181, 183 (2d Cir. 2013) which upheld the constitutionality of Congress’s classification of marijuana as a Schedule I drug.”. Picard then moved for Reconsideration on May 6, 2015 and Judge Mueller Denied the Motion last week on June 1, 2015. Will Picard appeal to the US Court of Appeals for the 9th Circuit? Good question.
What does all this mean for anyone planning to run a legal Marijuana business and file a Federal and State income tax return? First, make sure you retain the services of a good tax attorney who will not only file your tax return but represent you before an almost certain audit of your business by the IRS, Be prepared to appeal within the Service and eventually to US Tax Court. Second, be prepared to structure your business to legally maximize your tax deductions through non-Marijuana businesses and to contemporaneously defend this structure to the IRS with sufficient documentation included into the tax return prior to filing. Finally, be prepared to pay a lot of income tax as an owner of a legal Marijuana business, at least until Congress removes Marijuana as a controlled substance from Federal law.
Thank you for joining us on TaxView, with Chris Moss CPA Tax Attorney,
Chris Moss CPA Tax Attorney