The Internal Revenue Code may be the single strongest enforcement weapon in the battle over legal sale and distribution of “medical marijuana”. The Opinion of the United Staes Court of Appeals for the Ninth Circuit , Oliver v. CIR is controlling in Alaska, Washington, Oregon, California, Arizona, Idaho, Nevada and Montana states in pertinent part:
“…the government is enforcing only a tax, which does not prevent people from using, distributing, possessing, or cultivating marijuana in California. Enforcing these laws might make it more costly to run a dispensary, but it does not change whether these activities are authorized in the state. In summary, the Tax Court properly concluded that I.R.C. § 280E precludes Petitioner from deducting, pursuant to I.R.C. § 162(a), the ordinary and necessary business expenses associated with his operation…”
The effect of this ruling may well be to drive some operators underground or back underground as the case may be. The Ninth Circuit and the Tax Court have made it quite clear that to change existing law will require Congress to act. In the meantime taxpayers who are running dispensaries licensed under a state or local statute may find the real after tax cost balanced against the range of potential federal crimes not worth the effort.
The real fight is in Washington. What the court in Oliver did is pave the way for big business to use its muscle to change licensing law to its favor, then squeeze out small operators before unleashing the lobbyists to bring about reform of the Schedule 1 and by inference IRC § 280E.
Now is the time to anticipate aggressive IRS audit action in this area. It is also the time to have sound representation for state, federal and local audits.