Recent Crackdown On “Commercial Marijuana Industry” A Concerted Effort By DOJ And IRS
On October 7, 2011, federal prosecutors announced that California-based medical marijuana dispensaries cannot shelter themselves from criminal prosecutions under federal law by claiming they are compliant with the states Compassionate Use Act. As we previously reported, over the past several months federal authorities have increased their efforts at prohibiting a growing medical marijuana industry because, although 15 states currently allow for the use of medical marijuana, marijuana remains prohibited under federal law. Additionally, prosecutors are now alleging that medical marijuana dispensaries violate the California Compassionate Use Act: "It is important to note that for-profit, commercial marijuana operations are illegal not only under federal law, but also under California law. While California law permits collective cultivation of marijuana in limited circumstances, it does not allow commercial distribution through the store-front model we see across California."
The announcement comes as 38 medical marijuana dispensaries were sent letters by the DOJ explaining that the operation of medical marijuana store-fronts violates the federal Controlled Substances Act. The AP reported that the letters advised the business owners, and their landlords, that the businesses have 45 days to cease operations or they will be subject to federal criminal prosecution and civil penalties. By focusing their efforts on store owners and their landlords, federal prosecutors are taking aim at the “sale, distribution, and cultivation” of medical marijuana and not the individual consumers.
The DOJ letters were issued only days after the IRS ruled that Harborside Health Center, the largest dispensary in California, owed $2.5 million in back taxes. In finding that Harborside owed back taxes, the IRS ruled that medical marijuana dispensaries are not allowed to deduct normal business expenses, such as payroll and rent. The IRS based its decision on § 280E of the Internal Revenue Code which disallows deductions in the trade or business of trafficking controlled substances. As explained by the IRS in a series of letters to Congress in December 2010:
Section 280E of the Code disallows deductions incurred in the trade or business of trafficking in controlled substances that federal law or the law of any state in which the taxpayer conducts the business prohibits. For this purpose, the term “controlled substances” has the meaning provided in the Controlled Substances Act. Marijuana falls within the Controlled Substances Act. See Californians Helping to Alleviate Medical Problems, Inc. v. C.I.R., 128 T.C. No. 14 (2007). The United States Supreme Court has concluded that no exception in the Controlled Substances Act exists for marijuana that is medically necessary. U.S. v. Oakland Cannabis Buyers Co-op., 532 U.S. 483 (2001).
While the threat of criminal prosecution and asset seizure for marijuana distribution are severe, the IRS ruling could have an equally devastating impact on the industry.
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