In Alpenglow Botanicals LLC v the United States of America the United States Court of Appeals for the Tenth Circuit just ruled that the IRS has the authority to determine that a cannabis business is trafficking in a controlled substance for purposes of applying IRC §280E. This decision is going to shift how cannabis businesses pay their taxes and how cannabis tax lawyers view cannabis tax obligations. And not in a good way.
Alpenglow Botanicals LLC is a medical marijuana business. The IRS audited Alpenglow’s tax returns and determined Alpenglow was trafficking in a controlled substance and so it denied the company’s business deductions under IRC §280E. Alpenglow paid the tax assessment and filed for a refund, which was subsequently denied by the IRS. Alpenglow then went to federal court to recover its refund claim. In court, Alpenglow made the following three arguments:
- The IRS does not have authority to disallow deductions under IRC §280E unless the taxpayer has a criminal conviction for trafficking;
- IRC§280E violates the 16th Amendment of the U.S. Constitution; and
- IRC §280E violates the 8th Amendment of the U.S. Constitution.
The Court rejected all of these arguments.
The Court determined that a criminal conviction is not a prerequisite for the IRS to apply IRC 280E and that the IRS has the authority to determine on audit that a taxpayer is trafficking in a controlled substance. The Court relied on its earlier decision in Green Solutions Retail Inc. where it stated that “the IRS’s obligation to determine whether and when to deny deductions under IRC §280E, falls squarely within its authority under the tax code.” The Court in Alpenglow went further than Green Solutions in ruling that there’s no evidence Congress intended to limit the IRS’s investigatory power here.
Alpenglow cited a line of U.S. Supreme Court cases for the proposition that courts have invalidated regulations involving the taxation of illegal conduct — these cases strike down the imposition of a tax as a violating a taxpayer’s 5th Amendment right against self-incrimination. The Tenth Circuit Court distinguished those cases, noting that Alpenglow is challenging the IRS’s very authority to tax and investigate illegal activity at all and held that this prior line of cases don’t apply to the denial of a tax deduction as opposed to the imposition of a tax.
The Court also determined that IRC §280E does not violate the 16th Amendment, which grants Congress the power to tax “income,” or the 8th Amendment, which prohibits the federal government from imposing “excessive fines.” The Court ruled that IRC §280E is not an unlawful penalty and disallowing a deduction is not a “punishment.”
Most importantly, this court’s decision on IRC §280E is going to have real life implications for many cannabis businesses. Every cannabis business that has filed a tax return challenging the application of IRC §280E should immediately review its tax returns and reevaluate their options.