In a recent Federal District Court decision, Alpenglow Botanicals, LLC — a Colorado cannabis dispensary — protested the IRS’ disallowance of their business expenses under the oppressive Section 280E, which denies ordinary and necessary business expenses for operators in the cannabis industry.
The IRS had asserted that Alpenglow Botanicals owed additional taxes. The dispensary paid the taxes in question and then sued for a refund in federal court. In a motion for summary judgment, the taxpayer stated that the IRS did not have the authority to investigate whether the taxpayer violated the Controlled Substance Act (CSA), that Section 280E violated the Sixteenth Amendment, that the taxpayer had properly deducted their expenses, and that the IRS did not produce evidence that Section 280E applied to the taxpayer. The dispensary also stated that the application of 280E violated the taxpayer’s Fifth Amendment rights, as well as its Eighth Amendment rights — which should protect against excessive fines and fees.
The Court denied all requests.
In another recent case, a different Colorado company — also alleged by the IRS to be a cannabis dispensary — attempted to make the same arguments while filing a similar lawsuit.
In this case, the District Court ruled that:
- the IRS’ application of Section 280E to a business it determined was selling marijuana was within its authority to apply the Internal Revenue Code;
- the IRS’ application of Section 280E was a “purely tax-based determination” that did not violate the taxpayer’s Fifth Amendment rights;
- the taxpayer did not allege that the IRS disallowed costs other than cost of goods sold and therefore the court could not determine that the Sixteenth Amendment was not violated;
- the taxpayer did not allege enough facts for the court to determine whether Section 280E is an excessive fine and penalty in violation of the Eighth Amendment; and
- the taxpayer did not allege any facts to show that the IRS lacked evidence to show that the taxpayer was violating the CSA.
The taxpayer has filed a motion for reconsideration and an amended complaint to add allegations necessary to support their claims, so the case may move forward based on those new allegations. However, the taxpayer’s attempt to stop the IRS from enforcing Section 280E was ultimately unsuccessful under the facts of this case.
Interestingly, as this case moves forward, a slew of cannabis-related bills are making their way through Congress, including:
- Better Drive Act
- Small Business Tax Equity Act (bicameral)
- Marijuana Revenue and Regulation Act (bicameral)
- The Veterans Equal Access Act
- Regulate Marijuana Like Alcohol Act
- Ending Federal Marijuana Prohibition Act of 2017
- Respect State Marijuana Laws Act of 2017
- LUMMA (Legitimate Use of Medicinal Marijuana Act)
- Compassionate Access Act
- States’ Medical Marijuana Property Rights Act
Hopefully, Section 280E will soon become a thing of the past.
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