Could The IRS Put Marijuana Companies Out Of Business?

September 20, 2018 at 9:01 am Leave a comment

Image result for tax manThese are the best of times and the worst of times for marijuana banking depending on if you want to view the glass half empty or half full. I’m definitely going with half empty.

For you optimistic types, we have the news that a credit union is proudly proclaiming itself the first to offer marijuana banking services catering to marijuana’s nascent recreational marijuana industry in Massachusetts where it has been legalized. I even heard a person being interviewed on Bloomberg Radio this morning saying that the emerging industry will put pressure on neighboring states to further loosen their marijuana laws in order to claim their piece of the pie. This is a direct shot at New York which has one of the most restrictive marijuana laws in the country.

Now for the bad news and there’s lots of it. There are growing signs that the IRS is emerging as a major roadblock to expanding the marijuana industry, even in states where it is legal and federal prosecutors have shown no inclination to move against marijuana related businesses operating legally under state law. The case that has gotten most of the attention is the Justice Department’s announcement that it has obtained a conviction against the Oregon operator of a marijuana business for not paying his taxes. But from what I’ve read about this case, this can be brushed aside as the Justice Department taking action against someone who simply neglected to pay his taxes.

But the publicity the case has received comes at a time when the IRS is taking a more aggressive stand against marijuana businesses and this could have a direct impact on your credit union even if you don’t wish to fund this industry. A decision in July by the Court of Appeals for the 10th Circuit (Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018)), which has jurisdiction over the mile high state of Colorado, upheld a decision by the IRS refusing to recognize deductions taken by a legal marijuana related businesses because the business was violating the Controlled Substances Act. In the closely watched case, the business in question argued that the IRS could only deny a deduction for violating the CSA following a criminal conviction, but the court made clear that the IRS has independent authority to make this finding and deny deductions for businesses engaged in drug trafficking.

They also argued that the IRS overstepped its authority. Taxable income is defined for tax purposes as gross income minus deductions allowed by law (26 USC 63(a)). They argued that the deductions were legal because their businesses were legal. The problem is that federal tax deductions are a matter of “legislative grace” the court concluded and that by refusing to allow drug traffickers to take deductions for the everyday expenses of running their businesses, Congress had clearly decided that such companies are not entitled to take deductions.

This is yet another example of how many issues credit unions considering working with marijuana businesses or even opening accounts for employees of such business need to take into consideration. For example, there is now case law in which bankruptcy judges have invalidated settlements because trustees could not be made to distribute funds resulting from illegal activities (re [Jerry] Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015). The bottom line is there are many issues and moving parts you have to analyze, in addition to assessing the likelihood that the Justice Department will begin prosecuting legal MRB’s.

Entry filed under: Compliance, Legal Watch, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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