Recent decisions on tax fines offer ray of hope for cannabis industry around burdens of IRS’ 280E

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The
U.S.
Supreme
Court’s
decision
this
week
not
to
consider
a
Colorado
Supreme
Court

ruling
on
a
tax
fine


coupled
with
dissenting
opinions
in
a
recent
case
involving
a

California
medical
marijuana
company


could
have
significant
ramifications
for
the
cannabis
industry,
according
to
tax
experts.

Left
standing
by
the
U.S.
Supreme
Court
was
a
decision
holding
that
a
Colorado
Department
of
Labor
levy
against
Dami
Hospitality
was
an
excessive
fine
or
penalty
under
the
Eighth
Amendment
to
the
U.S.
Constitution.

The
decision
shed
new
light
on
possible
limitations
and
defenses
against
Internal
Revenue
Code
(IRC)

Section
280E

under
the
Eight
Amendment,
according
to
Nick
Richards,
a
Denver-based
cannabis
tax
attorney
with
Greenspoon
Marder.

The
two
rulings
together
appear
to
have
somewhat
weakened
280E,
which
potentially
is
good
news
for
the
cannabis
industry.
Here’s
why: 

  • By
    not
    hearing
    the
    Colorado
    case,
    the
    U.S.
    Supreme
    Court
    decision
    could
    open
    the
    door
    to
    challenges
    to
    280E.
    If
    such
    challenges
    are
    eventually
    successful,
    it
    would
    be
    a
    boon
    to
    the
    marijuana
    industry
    since
    that
    IRS
    provision
    states
    a
    business
    involved
    in
    the
    trafficking
    of
    a
    federally
    controlled
    substance,
    such
    as
    cannabis,
    cannot
    take
    tax
    deductions
    or
    credits
    even
    though
    it
    must
    pay
    taxes
    on
    income.
  • The
    dissenting
    opinions
    in
    the
    California
    case
    further
    cast
    doubt
    about
    280E,
    with
    one
    judge
    contending
    it
    is
    unconstitutional
    under
    the
    Eighth
    Amendment.


Details
around
the
cases

In
the
Colorado
case,
the
state’s
labor
department

fined
Dami
,
owner
of
the
Star
Motel
in
Denver,
$425,000
for
letting
its
workers’
compensation
insurance
coverage
lapse
for
nearly
1,700
days
through
July
2014,
according
to
The
Colorado
Sun.

In
its
appeal,
Dami
argued
it
didn’t
have
the
money
to
pay
the
fine,
which
it
also
contended
was
in
violation
of
the
Eighth
Amendment,
the
Sun
reported.
The
Colorado
Supreme
Court
ruled
in
Dami’s
favor.

That
ruling
comes
on
the

heels
of
a
challenge

last
October
in
U.S.
Tax
Court
by
Northern
California
Small
Business
Assistants,
a
California
medical
marijuana
firm,
of
an
IRS
ruling
disallowing
the
company’s
claim
of
$1.5
million
in
tax
deductions
for
“ordinary
and
necessary”
business
expenses
in
the
2012
tax
year.

While
the
company’s
challenge
ultimately
was
unsuccessful,
of
particular
interest
to
the
cannabis
industry
are
the
dissenting
opinions

there
were
two

in
the
case,
according
to
Greenspoon
Marder’s
Richards.

In
his
dissent

which
two
additional
judges
hearing
the
case
signed
onto

U.S.
Tax
Court
Judge
David
Gustafson
wrote
that
IRC
Section
280E
was
an
unconstitutionally
excessive
fine
or
penalty
under
the
Eighth
Amendment.

His
dissent
essentially
stated
that
because
Section
280E
is
unlimited
and
applies
to
all
“deductions
and
credits”
paid
or
incurred
in
the
sale
of
cannabis,
it
could
result
in
taxes
in
excess
of
“income,”
which
is
in
violation
of
the
16th
Amendment.

And,
because
it
could
violate
the
16th
Amendment,
Gustafson
held
it
was
an
unconstitutionally
excessive
penalty
under
the
Eighth
Amendment.

As
counsel
on
numerous
state
and
federal
cannabis
tax
matters,
Richards
wrote
in
an
email
to

Marijuana
Business
Daily

that
many
in
the
industry
are
saddled
with
millions
of
dollars
in
tax
debt
they
have
no
ability
to
pay.


Diving
deeper
into
280E

A
former
IRS
trial
attorney,
Richards
added
if
the
Internal
Revenue
Service
had
to
consider
a
company’s
ability
to
pay
before
assessing
and
collecting
Section
280E
liabilities,
the
result
would
be
different.

Specifically,
before
making
a
penalty
assessment,
the
IRS
must
obtain
certain
manager
approvals
and
follow
certain
administrative
processes,
Richards
said.

Finding
that
Section
280E
is
a
penalty,
he
continued,
could
trigger
requirements
that,
because
they
were
not
followed,
could
lead
to
a
claim
that
previous
IRS
assessments
are
invalid.

If
the
statute
of
limitations
on
assessment
(three
years
from
filing)
had
expired
on
an
invalid
assessment,
said
Richards,
the
IRS
would
not
be
able
to
correct
the
mistake
“absent
fraud
or
a
substantial
understatement
by
the
taxpayer.”

These
recent
decisions
could
also
help
reduce
Section
280E
tax
debt
that
was
assessed
correctly
and
is
due,
Richards
said.

Generally,
most
tax
liabilities
are
subject
to
“offers
in
compromise,”
wherein
taxpayers
offer
to
pay
a
fraction
of
the
total
based
upon
their
ability
to
pay,
he
added.

In
the
cannabis
industry,
however,
the
IRS
does
not
reverse
the
Section
280E
“phantom
income”
in
determining
eligibility
for
an
offer,
thus
rendering
ability
to
pay
meaningless,
Richards
said.

If
Section
280E
was
found
to
be
a
penalty,
the
IRS
would
have
to
consider
a
taxpayer’s
actual
ability
to
pay,
and
offers
would
be
viable.

Because
many
taxpayers
were
assessed
Section
280E
income
taxes
far
in
excess
of
their
income
and
net
worth,
according
to
Richards,
a
requirement
to
consider
the
true
ability
to
pay
for
cannabis
industry
taxpayers
could
provide
huge
relief.

As
such,
many
cannabis
taxpayers
and
advisers,
he
said,
are
reviewing
their
tax
liabilities
and
considering
protective
claims
for
refund
to
protect
their
past
tax
years.

Should
Section
280E
be
found
unconstitutional,
a
protective
claim
“could
protect
a
taxpayer’s
right
to
a
refund
after
the
three-year
period
to
claim
a
refund
expires,”
Dean
Guske,
managing
director
of
Guske
&
Co.
accounting
firm
in
Bellevue,
Washington,
wrote
in
an
email
to

MJBizDaily
.

Guske
noted
that
since
the
California
tax
court
decision
he
has
been
discussing
protective
claims
for
refund
with
his
clients
and
is
seriously
considering
them.
The
Colorado
decision
may
provide
further
reason
to
file
such
claims,
Richards
said.


(Editor’s
note:
Nick
J.
Richards
will
be
writing
stories
about
the
key
points
and
challenges
created
by
federal
and
state
taxes
affecting
the
cannabis
industry
as
part
of

Marijuana
Business
Daily’s

new
Other
Voices
series.
Richards
is
a
partner
at
Greenspoon
Marder,
a
national
law
firm
serving
the
cannabis
industry
that
has
marijuana
tax
clients
throughout
North
America.
He
has
been
a
tax
attorney
for
more
than
20
years
and
is
an
adjunct
professor
of
law
at
the
University
of
Denver.)


Howard
Burns
can
be
reached
at [email protected]

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