10th Circuit Reinforces Answers to Marijuana Tax Questions

Medical marijuana businesses can’t take deductions — or dodge audits

The IRS wins again. 


The 10th Circuit Court of Appeals ruled in early March that a New Mexico marijuana dispensary had no loophole out of an IRS tax audit. A three-judge panel of the Court of Appeals, which included judges Allison Eid, Carlos Lucero and Jerome Holmes, upheld a lower court ruling that the IRS was in the right when it went to get information about a marijuana business’ finances from its banks after the business refused to comply with an audit. The ruling reinforces — and heavily references — an opinion from the appellate court last year but doesn’t move the needle regarding taxes for marijuana businesses.

The core issue in the case relates to section 280e of the federal tax code that says, “no deduction or credit shall be allowed … if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances.” The IRS in 2016 began investigating New Mexico medical marijuana dispensary High Desert Relief to determine whether the business was improperly taking deductions, in violation of section 280e. 

HDR said it would only comply with the audit if it received assurance from the IRS that it would only use the information for an audit and “not to support the IRS’ determination that the Taxpayer’s business consists of illegal activities.” The IRS, unsurprisingly, did not agree to those terms.

HDR later filed petitions to quash the summonses, claiming the IRS was running a “de facto criminal investigation pursuant to the Controlled Substances Act” and also that the enforcement of section 280e was improper because the Ogden and Cole memos established a policy of “non-enforcement” for marijuana businesses that were run according to state laws. 

The 10th Circuit, however, agreed with two federal district judges in siding with the U.S. government. 

HDR’s attorney did not respond to a request for comment on the case. 

Regarding the Ogden and Cole memos, a district judge and the 10th Circuit panel found that the memos set Department of Justice policies but were not law. As Ireland Stapleton Pryor & Pascoe director Tom Downey describes it, the local police department might have a policy not to pull someone over for driving less than five miles per hour over the speed limit, but it’s still legal for the police to issue a ticket for doing so. Furthermore, the memos were both rescinded by former U.S. Attorney General Jeff Sessions.

Regarding the section 280e claims, the court referenced last summer’s opinion in Alpenglow Botanicals v. U.S., which similarly dealt with the question of whether that section of the federal tax code could be used to reject tax deductions for marijuana businesses without a criminal investigation first. The court in HDR cited its own opinion in Alpenglow: “Section 280e is placed in the Internal Revenue Code and instructs that deductions should be disallowed if certain circumstances exist in a taxpayer’s business. It would certainly be strange if the Internal Revenue Service was not charged with enforcing that provision. The fact that selling marijuana may also constitute a violation of the CSA is simply a byproduct of section 280e using the CSA’s definition of ‘controlled substances.’”

The opinion also dealt with an issue of interpreting U.S. v. Powell, which sets out the requirements for the enforcement of an IRS summons — ultimately that the IRS cannot conduct an investigation as an ulterior motive for a criminal investigation. The court found that the investigation according to Powell’s guidelines was conducted in good faith.  

Downey said the HDR opinion doesn’t reveal anything that wasn’t already known after Alpenglow, and the question in Alpenglow was already something attorneys in regulated industries have known for years. He said that marijuana businesses have an effective tax rate of 75 to 80 percent and in large part due to section 280e, which makes it a difficult industry to stay in. 

“The opinion affirms that if folks in the industry want change, they need to have 280e amended by Congress and the president,” Downey said.

— Tony Flesor

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