Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Santa Barbara County Police Shuts Down Illegal Cannabis Operation

Anyone conducting business in cannabis surely knows that under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. So the risk is apparent that at any time Federal authorities could come and shut you down but don’t think that just because cannabis is legal in California, you do not have to worry about the State.

California law mandates that you can only sell cannabis if you have obtained a license to do so. These licenses being issued by the BCC. If you don’t have a license, then selling cannabis or transporting it in order to sell it is still a crime under H&S Code §11360.

State Authorities Raid Illegal Cannabis Operation In Carpinteria

The Santa Barbara County Sheriff’s Office announced in a press release that on January 31, 2019, the Santa Barbara County Sheriff’s Cannabis Compliance Team concluded a four-month investigation into a local cannabis cultivator, operating under the name of Power Farms LLC, which is located just outside the City of Carpinteria. During this investigation, which spanned two counties and involved three separate search warrants, Detectives discovered one of the owners (whose name is being withheld due to the ongoing investigation) had provided false information during the county cannabis application process and was failing to follow proper shipping and manifest procedures.

The owner’s Los Angeles County home, was served with a search warrant. There, Detectives seized several unregistered firearms, two which were reported stolen, as well as approximately 60 pounds of processed and packaged marijuana taken from Power Farms. They also seized thousands of dollars in cash and other items of evidence.

This investigation culminated in the voluntary surrender of the owner’s state temporary cannabis license, which resulted in detectives from the Cannabis Compliance Team, Special Investigations Bureau, District Attorney’s Office, and Game Wardens from the California Department of Fish and Wildlife, eradicating and removing illegal cannabis from Power Farms as they no longer had a valid state permit to cultivate or possess commercial cannabis. Approximately 22,420 cannabis plants were eradicated from three separate green houses and approximately 1,420 pounds of dried / drying cannabis were seized.

Penalties For Selling Cannabis Without A License.

For most defendants, unlicensed sale or transport for sale of cannabis is a misdemeanor punishable by up to six months in county jail and/or a fine of up to $1,000. For defendants under 18, it is an infraction. Also, giving away or transporting for sale up to 28.5 grams of cannabis without a license is an infraction.

But the sale/transport for sale of cannabis without a license to do so is a felony for the following defendants:

  1. Defendants who have a prior conviction for one of a list of particularly serious violent felonies, including murder, sexually violent offenses, sex crimes against a child under 14, or gross vehicular manslaughter while intoxicated, or a sex crime that requires them to register as a sex offender;
  1. Defendants who have two or more prior convictions for H&S Code §11360 sale/transportation of cannabis; 
  1. Defendants who knowingly sold, attempted to sell, or offered to sell or furnish cannabis to someone under 18; or
  1. Defendants who imported or attempted or offered to import into California, or transported or attempted/offered to transport out of California for sale, more than 28.5 grams of cannabis or more than four grams of concentrated cannabis.

In any of these scenarios, black market sale or transportation for sale of cannabis under H&S Code §11360 is punishable anywhere from two to four years in jail.

Transporting cannabis without intent to sell it, or giving cannabis away, is not a crime in California so long as BOTH of the following are true:

  1. You transport or give away not more than 28.5 grams of cannabis or eight grams of concentrated cannabis, and
  2. Any people you give cannabis to are 21 years of age or older.

What Should You Do?

You can count on other county governments coordinating resources like the Santa Barbara County Cannabis Compliance Team which since June 2018 focuses on unlicensed and illegal cannabis operations for the safety of the public.

Both civil and criminal penalties will apply to unlicensed operators so it is imperative that anyone cultivating, manufacturing or distributing cannabis on a commercial basis in California seeks a local and state license for their operations immediately, if they have not already done so. Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits.

HR 420 cannabis legalization bill

Senator Introduces Cannabis Legalization Bills – If You Can’t Beat Them, Then Join Them!

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to  $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

Federal Bills Introduced In 2019

Following the filing last month by Congressman Earl Blumenauer (D-OR) of a congressional bill to regulate marijuana like alcohol (click here for more details on H.R. 420), Senator Ron Wyden (D-OR) filed Senate Bill 420 (click here for detail) which would deschedule marijuana by removing it from the Controlled Substances Act (“CSA”), establish a federal excise tax on legal sales and create a system of permits for businesses to engage in cannabis commerce. It would also authorize regulations on packaging and labeling of cannabis products and apply alcohol advertising guidelines to the product.

Senator Wyden also introduced two other pro-cannabis bills:

Senate Bill 421 (click here for details) proposes a number of changes such as exempting state-legal marijuana activity from the CSA, allowing banking access for cannabis companies, eliminating advertising prohibitions, expunging criminal records, shielding immigrants from deportation over marijuana and allowing Department of Veterans Affairs doctors to issue medical cannabis recommendations.

Senate Bill 422 (click here for details), proposes the exemption of state-legal cannabis businesses from Internal Revenue Code §280E, which section prevents them from taking normal business tax deductions that are available to operators in other industries.

But until these bills become law, the cannabis industry will still have to bear the followings risks and challenges:

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

Temporary Cannabis Tax Reduction Bill California cannabis

California Cannabis Tax Relief Coming? Check Out Assembly Bill 286 – the Temporary Cannabis Tax Reduction Bill.

A bill was just re-introduced in the California legislature that would give legal cannabis businesses a tax break to help them thrive and level the playing field with cannabis businesses that continue to operate in the grey and black markets.

Assembly Bill 286 Was First Introduced February 16, 2018

The proposed legislation, which is sponsored by state Treasurer Fiona Ma, follows California’s tax revenue for the cannabis industry coming in $101 million below projections in the first six months of 2018.

This bill which has been kicked around Sacramento for almost a year would wind up reducing the state’s excise tax from 15% to 11% for a period of three years and remove the cultivation tax on growers until 2022. The full text of the Temporary Cannabis Tax Reduction Bill can be viewed here.

Even though 31 states have legalized cannabis for medical or adult use, banks and financial institutions are hesitant to provide services to cannabis businesses because federal law still classifies cannabis as an illegal Schedule 1 drug under the Controlled Substances Act.

Higher Federal Taxes Still Remain

While the developments listed above are favorable for California cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Federal Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

medical marijuana cannabis

Another Medical Cannabis Breakthrough! How Cannabis May Help Relieve Autism Symptoms.

Israeli researchers record sharp improvement in measures such as quality of life, ability to dress and shower independently after 6 months of cannabis oil treatmen taccording to an Israeli study published in Nature.

The joint study conducted by Ben Gurion University and Soroka Medical Center in Beer Sheva showed that cannabis oil was an effective treatment for a variety of Autism-related symptoms including seizures, tics, depression, restlessness and rage attacks for patients under the age of 18.The study found that after six months of regular consumption, 30% of patients reported significant improvement, 53.7% reported moderate improvement and only 15% had slight or no change.

The study was funded by Tikun Olam, a medical marijuana firm in Israel.  Israel has been a leader in medical marijuana research and development and the country has established a favorable legal environment for this industry to flourish.  This sharply contrasts with the environment here in the United States.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, Attorney General Jeff Sessions (who no longer serves as Attorney General) revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

Joyce-Blumenauer Amendment (previously referred to as the Rohrabacher-Farr Amendment)

Medical marijuana is now legal in 31 states plus the District Of Columbia, Guam, Puerto Rico and Northern Mariana Islands and recreational marijuana is legal in 9 states plus the District Of Columbia and Northern Mariana Islands. Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

This action by the House is not impacted by former Attorney General Jeff Sessions’ change of position with the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.

Fortunately for medical marijuana businesses in the last budget extension approved by Congress, this amendment was included. This means that the DOJ is precluded from spending funds to circumvent any of the foregoing states from implementing their medical cannabis laws.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

cannabis legalization

Is The U.S. Attorneys’ Office Poised To Help Support The Cannabis Industry?

On January 4, 2018, former U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”. Attorney General Nominee William Barr Appears Committed To Reverse This Stance And Leave State-Legal Marijuana Programs Alone.

In Senate testimony on January 15, 2019, nominee for Attorney General William Barr committed to not use the limited resources of the Department of Justice to prosecute state-regulated and compliant marijuana businesses. His statements came response to questions from Senators Cory Booker (D-NJ) and Kamala Harris (D-CA) — each of whom represent states where marijuana is legally regulated for either medical or recreational purposes.

Thirty-three states, Washington, D.C. and the U.S. territories of Guam, Puerto Rico and Northern Mariana Islands have enacted legislation specific to the medical use of cannabis. Almost one-third of these jurisdictions have also approved that recreational use of marijuana. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Rohrabacher-Blumenauer Amendment (f/k/a Rohrabacher-Farr Amendment)

Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Blumenauer, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.

Although Sessions is gone, his legacy of overriding the Cole Memo still continues and U.S. Attorneys in each Federal district still retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.  Now the Rohrabacher-Blumenauer Amendment still prevents the DOJ from prosecuting state approved medical marijuana businesses but not having safe harbor guidelines in place at a national level adds uncertainty as to how DOJ may come down on your business. So it is essential that you have legal counsel to back you up.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

Cannabis Bill

Congressman Introduces Cannabis Legalization Bill H.R. 420 – If You Can’t Beat Them, Then Join Them!

Under Federal law (Controlled Substances Act 21 U.S.C. 801) marijuana is designated as a Schedule I controlled substance due to the historical belief that it has a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to  $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

How things have changed –

  • Medical marijuana is now legal in 31 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Eight of those states (Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington) and the District of Columbia have also legalized marijuana for recreational use.
  • According to a 2017 Yahoo News/Marist Poll survey, 83% of Americans support legalization of marijuana.
  • Republican Congressman John Boehner has joined the advisory board of Acreage Holdings, a company that cultivates, processes and dispenses cannabis in 11 U.S. states.
  • Democratic Senator Dianne Feinstein now says the federal government should not interfere in California’s legal marijuana market. Feinstein’s office said her views changed after meetings with constituents, particularly those with young children who have benefited from medical marijuana use.
  • President Trump discusses with Republican Senator Cory Gardner how he would consider backing Congressional legislation that would protect states with legalized marijuana from the Department of Justice.

House Bill Introduced January 9, 2019

House Rep. Earl Blumenauer (D-Ore.) introduced a bill to remove marijuana from the controlled substances list and treat the drug like alcohol. The bill, known as the “Regulate Marijuana Like Alcohol Act”, is numbered as “H.R. 420” in reference to 4/20 (April 20), which is consider as a national holiday in cannabis culture. 

The bill would “de-schedule” cannabis, thus permitting state governments to regulate these activities as the states see fit. Further, cannabis would be removed from the enforcement power from the Federal Drug Enforcement Administration in matters concerning cannabis possession, production and sales, to a newly renamed Federal Department of “Alcohol, Marijuana, Tobacco, Firearms and Explosives” to ensure compliance with state laws and prevent illegal trafficking.

This is not the first attempt by Rep. Blumenauer to help the cannabis industry. He’s the founder and co-chair of the Congressional Cannabis Caucus, and he’s been a co-sponsor to the rider attached to every federal spending bill in recent years that disallows the Justice Department from using any federal funding to prosecute medical cannabis businesses operating in legal states.

The full text of the Regulate Marijuana Like Alcohol Act can be viewed here

Higher Taxes Still Remain

While the developments listed above are favorable for cannabis business, it still remains to be seen when favorable changes will be made to the Internal Revenue Code which treats businesses in the marijuana industry differently resulting in such business paying at least 3-times as much in taxes as ordinary businesses.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Reporting Of Cash Payments Still Remain

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis is still illegal under existing Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  While cannabis is legal in California, that is not enough to protect you.  It’s coming down that the biggest risk is TAXES.  Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

federal cannabis legalization bill

New Congressional Cannabis Caucus Co-Chairs Announced

The departure of Representatives Jared Polis and Dana Rohrabacher from Congress left vacant two seats on the bipartisan Congressional Cannabis Caucus (the “Caucus”) so on January 9, 2019, the new leadership team of the Congressional Cannabis Caucus was announced, with Representatives Barbara Lee (D-CA) and David Joyce (R-OH) joining founding members Earl Blumenauer (D-OR) and Don Young (R-AK).

The Caucus was first established in 2017to help shape the marijuana reform agenda in the House and build bipartisan support for legislation that would address issues facing the marijuana industry such as banking, taxation, de-criminalization, medical research and veterans’ healthcare.

The comments of three of the members of the Caucus on the work they hope the Caucus will accomplish, from addressing the racial injustices of the drug war to implementing commonsense policies to support medical research into marijuana were made in various press releases.

Representative Earl Blumenauer’s Press Release Statement

Representative Barbara Lee’s Press Release Statement

Representative Don Young’s Press Release Statement

Rep. Blumenauer stated:

“The Cannabis Caucus was the first of its kind to create a forum for elected officials to collaborate on ways to address our outdated federal marijuana laws.  Congress is clearly out of step with the American people on cannabis when national support for federal marijuana legalization is at an all-time high and we saw several states move toward with legalization last November.”

The addition of Rep. Lee adds diversity to the Caucus’s leadership as she will become the first woman and first African-American to serve as co-chair. Rep. Lee is no stranger to cannabis activism as she introduced the Marijuana Justice Act in the last Congress which received the highest number of co-sponsorships of any legislation that would remove marijuana from the Federal Controlled Substances Act in history.

Rep. Lee stated:

“For far too long, communities of color and women have been left out of the conversation on cannabis. I am committed to ensuring that marijuana reform goes hand-in-hand with criminal justice reform so we can repair some of the harm of the failed War on Drugs. We must also work to build an industry that is equitable and inclusive of the communities most impacted by cannabis prohibition,” said Rep. Lee.

Rep. Young stated:

“Since the initial launch of the Congressional Cannabis Caucus we’ve seen an exponential growth in interest, legislation, and membership many would not have expected.The idea of States’ Rights has been a central tenet of this movement and one that I believe will ultimately carry the day. I encourage all Members to join us in this debate and explore the varying issues.”

It is noteworthy that Rep. Joyce becomes the first leader in the Caucus to come from a state (Ohio) that has yet to pass an adult-use regulatory program. He nevertheless has been a long-time supporter of reform efforts introducing The States Act (legislation that would ease the tension between federal prohibition and state-legal cannabis programs), as well as was a cosponsor of the Ending Federal Marijuana Prohibition Act (legislation which would remove cannabis from the Controlled Substance Act entirely).

The Federal Controlled Substances Act

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law and other states that have legalized cannabis, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back though has no impact on the IRS which will likely start in 2019 to more aggressively target cannabis businesses with audits.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist.  Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

medical marijuana cannabis

Can Cannabis Help People With Alcohol-Induced Pancreatitis?

Pancreatitis is an increasingly common clinical condition that causes significant morbidity and mortality.

The pancreas is an organ/gland that is adjacent to the small intestine and behind the stomach. The pancreas has two major functions:

  • Producing and releasing digestive enzymes in the small intestine to help in the digestion process
  • Releasing glucagon and insulin into the bloodstream to help the body use energy properly

According to the US National Library of Medicine, pancreatitis occurs when the pancreas becomes swollen. Damage to the pancreas as a result of pancreatitis or some other issue occurs when digestive enzymes that are normally released by the pancreas are activated before they are released into the small intestine.

There are two forms of pancreatitis:

  • Acute pancreatitis is inflammation of the pancreas that only lasts for very short periods of time and then resolves. Its severity may range from life-threatening to mild. The majority of cases of acute pancreatitis result in complete recovery, but in severe cases, there can be tissue damage, infection, and even the formation of cysts.
  • Chronic pancreatitis is long-lasting inflammation of the pancreas that continues after acute pancreatitis. There are various potential causes of chronic pancreatitis, including chronic alcohol use.

Medical researchers recently published their results (Click here for abstract) in a study of habitual alcohol consumers who also use cannabis concluding that those consumers who also use cannabis are at less risk for either acute or chronic pancreatitis as compared to those who do not use the substance. The authors concluded in their report that “our findings suggest a reduced incidence of only alcohol-associated pancreatitis with cannabis use”.

Developments like this contradict the basis of classification of cannabis under Federal law which makes cannabis illegal.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back came from Department of Justice (“DOJ”) Safe Harbor Guidelines issued in 2013 under what is known as the “Cole Memo”.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

Since 2013, these guidelines provided a level of certainty to the marijuana industry as to what point could you be crossing the line with the Federal government.  But on January 4, 2018, Attorney General Jeff Sessions revoked the Cole Memo.  Now U.S. Attorneys in the local offices throughout the country retain broad prosecutorial discretion as to whether to prosecute cannabis businesses under federal law even though the state that these businesses operate in have legalized some form of marijuana.

Joyce-Blumenauer Amendment (previously referred to as the Rohrabacher-Farr Amendment)

Medical marijuana is now legal in 31 states plus the District Of Columbia, Guam, Puerto Rico and Northern Mariana Islands and recreational marijuana is legal in 9 states plus the District Of Columbia and Northern Mariana Islands. Building on the DOJ’s issuance of the Cole Memo, in 2014 the House passed an amendment to the yearly federal appropriations bill that effectively shields medical marijuana businesses from federal prosecution. Proposed by Representatives Rohrabacher and Farr, the amendment forbids federal agencies to spend money on investigating and prosecuting medical marijuana-related activities in states where such activities are legal.

The amendment states that:

None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

This action by the House is not impacted by Sessions’ recent change of position with the DOJ. However, unless this amendment gets included in each succeeding federal appropriations bill, the protection from Federal prosecution of medical marijuana businesses will no longer be in place.

Fortunately for medical marijuana businesses in the last budget extension approved by Congress, this amendment was included. This means that the DOJ is precluded from spending funds to circumvent any of the foregoing states from implementing their medical cannabis laws.

Clearly, to avail yourself of the protections of the amendment, you must be on the medical cannabis side and you must be in complete compliance with your State’s medical cannabis laws and regulations. You may not be covered under the amendment if you are involved in the recreational cannabis side even if legal in the State you are operating.

What Should You Do?

Given the illegal status of cannabis under Federal law you need to protect yourself and your marijuana business from all challenges created by the U.S. government.  Although cannabis is legal in California, that is not enough to protect you. Be proactive and engage an experienced Cannabis Tax Attorney in your area. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits.

IRS court ruling

U.S. Tax Court Deals Another Blow To The Cannabis Industry

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law.

Under IRC §280E, businesses that are engaged in trafficking controlled substances cannot take regular business deductions, so they end up paying taxes on their gross receipts less their allowed cost of goods sold (COGS). If an expense doesn’t fit into the category of COGS, a company that is considered to be “trafficking” would have to pay taxes as if the expense hadn’t been incurred in the first place. This is why cannabis businesses can end up paying a lot more in taxes than non-cannabis businesses.

One strategy that has been used for cannabis business is to set up operations using multiple companies with one of those companies being a “management company”. Most of the value of having a management company comes from the ability of the management company to get banking and enter into regular electronic transactions with third parties. Also, it was an untested way to avoid the harsh realities of IRC §280E – at least until now…

Alternative Health Care Advocates, et al v. Commissioner Of Internal Revenue

In the case of Alternative Health Care Advocates, et al v. Commissioner Of Internal Revenue, 151 T.C. 13 (Click here for the opinion), Alternative Health Care Advocates, Inc. (“Alternative Health”) operates a medical marijuana dispensary in West Hollywood, California. Related to this corporation is another company, Wellness Management Group, Inc. (“Wellness Management”), which provided management services to Alternative Health. These services included hiring employees and managing HR for those employees, paying wages for those employees, paying advertising expenses, paying rent, etc. Wellness Management did not provide services of that nature or any nature to any other business entity. Wellness Management made money by collecting fees for its services from Alternative Health.

Wellness Management recognized as income the management fees it charged to Alternative Health and Wellness Management deducted its expenses incurred in generating the management fees on the basis that Wellness Management was not engaged in the sale and purchase of marijuana but that it is a management services company that can engage in a separate line of business from the entity it manages.

While Tax Court recognized that Wellness Management and Alternative Health were legally separate entities, it was clear to the Court that Wellness Management’s employees were engaged in the purchase and sale of marijuana (albeit on behalf of Alternative Health); that was Wellness Management’s primary business. The Court did not read the term “trafficking” to require Wellness Management to have had title to the marijuana its employees were purchasing and selling going on further to state that neither IRC §280E nor the nontax statute on trafficking limits application to sales on one’s own behalf rather than on behalf of another. Therefore, the Court concluded that the management service company, Wellness Management, was engaged in the business of “trafficking in controlled substances” during the taxable years at issue and since Wellness Health was unable to identify any portion of its activities being non-related to marijuana activities, none of its expenses would be deductible.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

As long as marijuana remains a Schedule 1 controlled substance under Federal law, dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.


What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

IRS tax deductible cannabis business expense court win

Harborside Finally Gets A Win In U.S. Tax Court Getting Tax Penalties Abated

Having been beaten in an opinion issued by the U.S. Tax Court just weeks before where the Court ruled that IRC Section 280E does apply to Harborside (Click here for the Court’s opinion: Patients Mutual Assistance Collective Corp., dba Harborside Health Center v. Commissioner of Internal Revenue, 151 T.C. 11) which Harborside can appeal to the U.S. 9th Circuit Court of Appeals, it was a relief that this same Court ruled that the California dispensary is not liable for accuracy-related 280E penalties. Those penalties would have tacked on another 20% to the tax bill IRS is prepared to send to Harborside if the taxpayer does not appeal the previous decision.

The Anti-Federal U.S. Climate

The Federal Controlled Substances Act (“CSA”) 21 U.S.C. § 812 classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision. Although you can still face federal criminal charges for using, growing, or selling weed in a manner that is completely lawful under California law and other states that have legalized cannabis, the federal authorities in the past have pulled back from targeting individuals and businesses engaged in medical marijuana activities. This pull back though has no impact on the IRS which will likely start in 2019 to more aggressively target cannabis businesses with audits.

First Harborside Tax Court Opinion – IRS Code 280E will remain in effect for cannabis businesses

The Harborside case involved a dispute over the deductibility of business expenses taken by Harborside Health Center, recognized as the largest marijuana dispensary in the United States by revenue, and the IRS, which was enforcing the provisions of IRC Section 280E. Congress enacted this section back in the 1980’s so that taxpayers engaged in trafficking in a Schedule I or II controlled substances could not deduct any expenses other than Cost Of Goods Sold.

The Harborside dispensary introduced a novel argument about the inapplicability of IRC Section 280E to its activities and focused on two words in this code section – “consists of” – in making the case that this section of law does not apply to them. The Harborside dispensary highlighted the definition of “consists of” as it is used in IRC Section 280E when describing that business expense deductions are not allowed to taxpayers whose business “consists of” trafficking in a Schedule I or II controlled substance.  The Harborside dispensary pointed out, not without merit, that the phrase “consists of” generally introduces an exhaustive list. What this means is that when something is said to “consist of” a list of items, that list of items is the exclusive, exhaustive list, and no other unmentioned items can be said to be included in that list, since the enumerated list contains everything.

The Tax Court spent a considerable amount of time evaluating this argument and acknowledging that it had some merit based upon a review of the dictionary and other legal sources. However, what doomed the Harborside dispensary was the IRS argument, backed by case law, that a legal statute should not be read in such a constrained way so as to render it completely ineffective and toothless. The Tax Court, in ruling for the IRS on this issue, pointed out that if the Harborside dispensary’s reading of IRC Section 280E were correct, a drug dealer who also sold a single pack of gum could not have this same code section applied to him, as that drug dealer’s business would not consist solely of trafficking in a Schedule I or II controlled substance.

But since the Court did not establish a clear test as to when activities other than the sale of cannabis should be taxed differently that activities involving cannabis, there is still hope for cannabis businesses who invest in proper planning now can have the highest chance of prevailing should their tax returns be selected for audit.

Second Harborside Tax Court Opinion – Abatement Of Penalties

With the Tax Court’s previous ruling that IRC Section 280E denies all standard business deductions to businesses whose operations “consist” of activities that violate the CSA, we now turn to the Tax Court’s second opinion on whether Harborside should be subject to accuracy-related penalties.

IRC Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on the portion of an underpayment attributable to any substantial understatement of income tax or negligence or disregard of rules or regulations. Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Code, and disregard includes any careless, reckless, or intentional disregard. Sec. 6662(c). An understatement of a corporation’s income tax is substantial if it exceeds the lesser of $10 million or “10 percent of the tax required to be shown on the return for the taxable year (or, if greater, $10,000).” Sec. 6662(d)(1)(B). A taxpayer can avoid these penalties by showing that it acted with reasonable cause and in good faith. Sec. 6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. To decide whether a taxpayer acted with reasonable cause and in good faith, the Court look at all relevant facts and circumstances, such as the “taxpayer’s effort to assess the taxpayer’s proper tax liability” and his “experience, knowledge, and education.” Sec. 1.6664-4(b)(1), Income Tax Regs.

According to the Opinion issued by the Tax Court (Click here for the opinion: T.C. Memo. 2018-208), Harborside acted “reasonably and in good faith” when taking its tax positions for the years at issue. The Tax Court cited Harborside’s timely filing of its tax returns and its maintenance of accurate financial records as a key strength, along with a persuasive argument from Harborside co-founder and Chairman Emeritus, Steve DeAngelo, that he made good-faith efforts to comply with the law, despite a lack of clear legal authority to guide medical marijuana dispensary taxpayers.

This second ruling is relief for Harborside and shows the importance that with proper planning, taxpayers involved in cannabis should fare better in minimizing liability to IRS.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

This risk should be risk posing the greatest challenge to any cannabis business as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.


What Should You Do?

While more States are legalizing cannabis, risks to the cannabis industry still exist. Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.