Legal Marijuana and Section 280E - Tax and Ethical Issues

September 15, 2017

 

 

September 15th 2017                         

 

CONTROLLED SUBSTANCES ACT VS. STATE LAWS

 

Under the Controlled Substances Act (“CSA”), it is illegal under federal law to manufacture, distribute, or dispense marijuana. The federal government still lists marijuana as a Schedule I controlled substance under the CSA.

 

On August 29, 2013, Deputy Attorney General James Cole issued a memorandum to all United States Attorneys providing updated guidance on marijuana enforcement under the CSA (“Cole Memorandum”). This guidance applies expressly to all DOJ federal enforcement activities relating to marijuana in all states.

 

There are many states that impose and enforce similar restrictions.  29 states have legalized medical marijuana, as well as the District of Columbia.

 

Under the Cole Memorandum, banks could still face prosecution if they provide financial services to marijuana businesses that conduct activities in violation of one of its priorities.

Financial institutions remain at risk for money laundering, unlicensed money transmitting, and BSA offenses based on participation in violations of the CSA through the provision of financial services to marijuana-related businesses.

 

 

TAX IMPLICATIONS

 

Income earned from selling marijuana is taxable and generally, a business may deduct all “ordinary and necessary” business expenses.

 

However! IRC Sec. 280E: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business (or the activities which compromise such trade or business) that consists of trafficking controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

 

U.S. Tax Court found that business expenses incurred in connection with marijuana sales are not deductible.


● Californians Helping to Alleviate Med. Problems (CHAMP), Inc. v. Commissioner, 128 T.C. 173 (2007).
● Olive v. Commissioner, 139 T.C. 19 (2012)
• The Court interpreted “trafficking” to mean “to engage in commercial activity: buy and sell regularly.”

•IRC Sec. 280E does not apply to cost of goods sold (“COGS”).
and only applies to drug portion of business.

 

Case Study: CHAMP, Inc. v. Commissioner

 

  • Taxpayer (marijuana dispensary) offered clients both medical marijuana and care-giving services

  • 69% of employees worked exclusively in care-giving business

  • Provided low-income members daily lunches

  • Rented space in a church for peer group meetings and yoga classes

  • Consider degree of economic interrelationship between the two undertakings. Taxpayer’s care-giving services were regular and substantially different from its provision of medical marijuana.

  • Court accepted taxpayer’s expense allocation between the medical marijuana business (subject to Sec. 280E) and the care-giving business (not subject to Sec. 280E)

 

Case Study: Olive v. Commissioner

 

  • Taxpayer (marijuana dispensary) promoted itself as a place where its patrons, including the terminally ill, “could socialize and consume marijuana”.  Facility included comfortable lounge chairs, games, books and art supplies for patrons to use.  Taxpayer claimed that the facility’s purpose was to provide care-giving services.

  • Court disagreed.  Court found that taxpayer’s “dispensing of marijuana and its providing of services and activities share a close and inseparable organization and economic relationship. They are one in the same business.” The additional services and activities were merely secondary to dispensing marijuana.  All expenses were ruled subject to Sec. 280E. 23.

 

 

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