Dispensary Appeals Tax Fight to Supreme Court

By Willis Jacobson
Nov 10, 2020

A Colorado MED dispensary involved in a tax dispute with the IRS has accused the federal government of overstepping its constitutional bounds. It’s now calling for the U.S. Supreme Court to take up its case.

Standing Akimbo, based in Denver, submitted a petition (read here) to the high court on Nov. 6 that asks the justices to rule on whether the federal Controlled Substances Act – which lists marijuana as a Schedule I illicit drug – overrides individual state laws, and to also provide clarity on how the IRS can obtain data from cannabis companies.

The case, like many involving cannabis companies and the IRS, is rooted in a desire to get rid of the industry-hated Internal Revenue Code Section 280E, which bars cannabis companies from claiming most common business deductions.

The case stems from an IRS audit that sought to determine whether Standing Akimbo had improperly claimed business deductions – in violation of Section 280E – in the 2014 and 2015 tax years. Because the dispensary did not provide the IRS with the information it was seeking, the agency instead obtained the data from state regulators.

Standing Akimbo had argued in court that an IRS summons was an inappropriate means of obtaining such information. The dispensary said the IRS should have to obtain a criminal warrant – given that the federal government views cannabis companies as illegal – and investigators should have to provide probable cause for seeking that warrant. Any other method would be a violation of the company’s Fourth Amendment rights against unreasonable search and seizure, the dispensary argued.

Although that argument was shot down by lower courts, the dispensary is now asking the Supreme Court to weigh in on the matter. Thorburn Law Group attorney James Thorburn, who represents Standing Akimbo in the case, said the government is playing both sides of the issue by considering cannabis businesses legal when seeking information for audits, but treating them as illegal when it comes to providing protections for things like banking.

“The whole underlying question of 280E and all of these basic issues with cannabis comes down to one basic question: Is expressly state-legal production and sales of cannabis a federal crime?” Thorburn said Tuesday. “That’s the question that really needs to get resolved.”

It’s because of that confusion, he said, that cannabis operators are unsure if a tax investigation could lead to a criminal investigation. The IRS, for example, could discover federally illegal activity during an audit and report that activity to federal law enforcement agencies, Thorburn said.

The IRS has maintained that it does not initiate criminal investigations without first informing the person or business being investigated.

Thanks to the Rohrabacher-Farr amendment, first passed in 2014, the U.S. Department of Justice is prohibited from spending funds to interfere with state-legal cannabis businesses. That gives businesses some measure of safety, Thorburn said, but he suggested it was not enough.

“What we don’t know at this point – and this is where it creates an issue – is that if Rohrabacher-Farr was to go away, what would happen?” he said. “Would the prosecutions begin again?”

“The likelihood at the moment is it looks like they’re not prosecuting,” he added, “but I can’t tell you what it’s going to look like two weeks or a month from now.”

It’s a long shot for most cases to be heard by the Supreme Court – less than 3% of petitions were granted in 2017 – and Standing Akimbo figures to face an uphill battle, given that each of the lower courts rejected its arguments.

But Thorburn is confident in the merits of his case.

He acknowledged that the Supreme Court could take up the case and rule against the cannabis businesses by declaring they are all subject to federal prosecution. He suggested that scenario would energize state lawmakers to put pressure on their federal counterparts to legalize federally.

“I don’t think that the [cannabis-legal] states are going to put up with it for very long if the Supreme Court goes that way,” he said.

The U.S. government has 30 days from Nov. 6 to file a response to the petition. If the government decides to waive its response, Thorburn said that would likely signal that the court will not take up the case. In that scenario, a decision could likely be expected by late December.

If the government files a response, Standing Akimbo will have an opportunity to reply. If that were to happen, it would likely be early 2021 before the Supreme Court announces whether it will hear the case.

“I think we have a very good chance of prevailing, but it’s up to those nine justices – if they take the case at all,” Thorburn said.

In a separate case attacking the merits of Section 280E, Oakland-based dispensary Harborside Health Centers has an appeal pending in the Ninth Circuit. Harborside, which is disputing an $11M tax bill, argues that a tax court ruling improperly limited certain business deductions through the use of Section 280E, which the appeal also argues goes against the 16th Amendment of the U.S. Constitution. 

Harborside is scheduled to submit a response brief in that case by Nov. 30.

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