The Tax Times: Third-Party Summons Rules Applies To Data on Taxpayer's Marijuana Business

Thursday, May 4, 2017

Third-Party Summons Rules Applies To Data on Taxpayer's Marijuana Business

The district court has made several rulings regarding Code Sec. 280E, the Code section that disallows deductions in carrying on a trade or business that consists of trafficking in controlled substances.

One such ruling was that Code Sec. 7609(c)(2)(E)(i), which provides an exception to the Code's third-party summons rules where the summons is issued by an IRS criminal investigator, doesn't apply when the summons is issued by a regular IRS agent to obtain information pertinent to enforcement of Code Sec. 280E. (High Desert Relief Inc., (DC NM 3/31/2017) 119 AFTR 2d ¶ 2017-621).

The Tenth Circuit declined to revive a Colorado marijuana dispensary’s efforts to keep the IRS from investigating its business records, finding that such a suit is barred by a law preventing courts from interfering with tax collection efforts.

The Green Solution Retail Inc. had sued to block the Internal Revenue Service from investigating its business records after the agency initially found, as part of an audit, that the dispensary had trafficked a controlled substance, which would disqualify it for federal tax deductions and credits. But a Colorado federal district court in June dismissed the company’s suit, citing in part the Anti-Injunction Act, which prohibits federal courts from taking actions that would restrict the collection of taxes.

In asking the circuit court to vacate and remand the dismissal order, Green Solution had argued that although the Tenth Circuit had ruled in Lowrie v. United States that the AIA applies to activities leading up to the collection of taxes, a subsequent U.S. Supreme Court ruling undermined that decision.

In that ruling, issued in March 2015 in Direct Marketing Association v. Brohl, the Supreme Court held that businesses weren't barred under the Tax Injunction Act from challenging the reporting requirements in Colorado’s “Amazon tax” law.

But in a published decision affirming the district court’s dismissal, a three-judge panel on found that there were significant differences in those two opinions. Direct Marketing involved the TIA, while Lowrie considered the AIA, the panel said, noting that those acts serve different purposes. The panel also ruled that the Declaratory Judgment Act, which prohibits declaratory judgments in certain federal tax matters, bars Green Solution’s suit.

Despite its legalization in 28 states and Washington, D.C., for medical use and in eight states and Washington, D.C., for recreational use, marijuana is still classified as a federal “controlled substance” under the CSA, the panel noted.

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