With 15 states having legalized the sale of medicinal marijuana, the only thing growing faster than the number of 24-year old males with questionable glaucoma prescriptions is the IRS’s scrutiny of this controversial industry.
In early March, the IRS audited tax returns of a Marin County, California facility and denied all of the company’s deductions for 2008 and 2009, resulting in an assessed tax in the “millions and millions” according to the facility’s founder and director.
How can the IRS deny all deductions – payroll, rent, utilities…everything – of a legitimate operating company, you ask?
Section 280E provides that no deduction shall be allowed for any amount incurred in a business that consists of trafficking in controlled substances. Since marijuana finds itself on Schedule I of the Controlled Substances Act, the IRS has the ammunition necessary to deny all deductions of any facility that buys and sells the drug.
One would think that marijuana’s legalization in certain states would effectively remove the drug from the gambit of Section 280E, but that’s not the case. Prior case law has held that Section 280E will apply “even when the marijuana is medical marijuana recommended by a physician as appropriate to benefit the health of the user.”
This issue has been litigated once before, in Californians Helping to Alleviate Medical Problems, 128 T.C. 173, (2002). In Californians, a medical marijuana facility was able to effectively argue that only a portion of their business involved the buying and selling marijuana — which constituted non-deductible trafficking — while the bulk of their activity involved counseling customers on which type of marijuana would best treat their particular ailment. This enabled the facility to salvage a portion of their business deductions.
With the potential fate of an entire industry hinging squarely on the resolution of this most recent challenge, it’s safe to say the entire medicinal marijuana community will be keeping their glazed, bloodshot eyes on all future developments.