Denver Medical Dispensary Petitions Supreme Court in IRS Lawsuit

A Denver dispensary wants to take the Internal Revenue Service to the United States Supreme Court in what has become an ongoing conflict between federal tax collectors and the legal marijuana industry.

In April, the Tenth Circuit Court of Appeals ruled in favor of the IRS against owners of medical marijuana dispensary Standing Akimbo, finding that a 2017 audit of the shop's owners didn't overstep the IRS's investigative authority, and that marijuana businesses are not entitled to federal tax deductions. Grasping one of their last straws in a years-long legal battle against the IRS, Standing Akimbo owners Peter Hermes, Kevin Desilet and John Murphy filed a petition with the Supreme Court on November 6 to appeal the Tenth Circuit decision from earlier this year.

Because marijuana is federally illegal, the commercial pot industry is prohibited from claiming tax deductions under IRS tax code 280E, which bans deductions from applicants whose revenue “consists of trafficking in controlled substances.” Under a different law that also cites the Controlled Substances Act, federally regulated banks and insurance companies are blocked from serving marijuana businesses.

Chances of the case being heard are slim, but if successful, it could allow state-legal marijuana businesses to file tax deductions and access banking services.

In May 2017, the IRS opened an audit into Standing Akimbo under suspicion that the medical marijuana company claimed business deductions in tax filings in 2014 and 2015. The IRS requested tax returns and financial documents from Standing Akimbo, but ownership held back state Marijuana Enforcement Division tracking and compliance reports, claiming that the IRS was investigating a federal drug crime rather than a tax crime.

The IRS didn't stop there, however, and requested the state tracking reports via a third-party summons with the MED. In Colorado Federal District Court, the owners of Standing Akimbo filed a petition to stop the IRS document summons, arguing that the agency’s request to the MED was an overreach of investigative power, and that the document inquiry didn't satisfy requirements set forth by a previous corporate tax case. After back-and-forth legal proceedings, a district court judge dismissed Standing Akimbo's petition to quash, enforcing the IRS summons. Standing Akimbo appealed the case to the Tenth Circuit Court of Appeals, but the circuit judges upheld the decision of the lower court, as well.

The newest development in the case asks the Supreme Court to decide several different questions challenging the relationship between federal and state marijuana laws, according to Standing Akimbo's attorney, Jim Thorburn.

“The federal government, on the one hand, is saying that production and sales of state-legal cannabis is a criminal act...[yet] 37 states and the District of Columbia are saying, ‘No, it’s legal,’” Thorburn says.

The Standing Akimbo petition asks four questions: Does state-legal marijuana violate the Controlled Substances Act under the Supremacy Clause in the U.S Constitution? Does IRS tax code 280E violate the Sixteenth Amendment? Does the Fourth Amendment apply to IRS summons of confidential information that could be shared with law enforcement agencies? And did the Tenth Circuit Court gather evidence appropriately?

This is not the first lawsuit from marijuana companies challenging the IRS and tax code 280E, nor is it the first to be petitioned to the Supreme Court. In 2017, the Tenth Circuit court oversaw a lawsuit by Colorado marijuana chain the Green Solution that sought to stop IRS investigations into company tax returns. The court ruled in favor of the IRS.

Thorburn represented another Colorado medical marijuana company, Alpenglow Botanicals, in a 2018 lawsuit against the IRS, which the U.S. Supreme Court declined to hear. In 2019, the United States Tax Court threw out a marijuana tax-related lawsuit against the IRS from a small-business organization in northern California.

Although the string of lawsuits have been failures so far, Thorburn says the losing record doesn't mean it's impossible to successfully challenge federal policy surrounding cannabis law.

Thorburn points to victories in smaller courts as a starting point for change, as when a successful circuit court case brought by Alpenglow Botanicals established constitutional rights protecting pot businesses from paying taxes on sales of goods after experiencing net losses. And it's not like these tax issues with legal weed are going away, either: After the November 3 elections, five more states legalized medical or recreational marijuana, reaching a total of fifteen states with recreational marijuana and 35 with medical marijuana programs.

“These are all chipping away to allow the industry to act as a normal business. Changing public policy is not something that happens overnight. It takes time, it takes effort. We’re hoping that public policy will change in this regard,” he says. “I would hope so, but unfortunately, my crystal ball has a big crack in it. I really don’t know.”

The Supreme Court will likely decide within thirty days of Standing Akimbo's petition, or by December 6.