IRS and club Audits

As The American Independent has reported, perhaps the most effective of these tactics is a push within the IRS to audit the books of medical marijuana dispensaries and declare all business deductions ineligible (http://www.americanindependent.com/174351/irs-goes-after-medical-marijuana-in-california). If the move continues and isn’t overruled in court, it could mean that all but the largest dispensaries in the country could shut down within months.

Allen St. Pierre, Executive Director of the National Organization for the Reform of Marijuana Laws (NORML), tells The American Independent that he believes this is phase three in a federal push to stymie medical marijuana that began in 1996, when medical marijuana first became legal in California. St. Pierre says that federal investigators first went after doctors, threatening to convict any who discussed medical uses of marijuana with patients as accomplices in the procurement and possession of marijuana. That tactic was declared unconstitutional in the case Conant v. McCaffrey.

The next tactic was to prosecute landlords. “If you’re renting property to someone breaking federal law, the property can be taken,” says St. Pierre. “Unsurprisingly, a lot of landlords stopped renting to dispensaries.” Eventually, enough landlords found liability loopholes or simply decided it was worth the risk to rent to dispensaries that the government gave up, as the thousands of dispensaries that today populate California alone attest.

Now, the federal government is using a time-honored method that could just cripple the medical marijuana industry once and for all, St. Pierre says.

“Rather than the SWAT approach, they’re going the Al Capone approach. He didn’t go to jail for cutting off people’s testicles and shoving them down their throats as a calling card,” St. Pierre colorfully offers. “He went to jail for tax evasion. If past is prologue, that route is much more effective.”

There may be an answer as to whether that route will be effective this time around very soon. As TAI previously reported, at least one California dispensary has already received a final determination from the IRS demanding nearly $800,000 in back taxes from 2009 alone (http://www.americanindependent.com/174367/california-medical-marijuana-dispensary-plans-to-take-irs-to-court). The Marin Alliance for Medical Marijuana (MAMM) intends to take the IRS to court to dispute the claims within the next month, and the outcome of that trial will likely determine the course that medical marijuana throughout the country will take in the months and years to come.

St. Pierre believes that, though a 2007 case set a precedent for dispensaries being allowed standard business deductions, the IRS may be successful in making a collection this time around — and that’s why it’s pursuing these audits so vigorously all of a sudden. St. Pierre thinks that the IRS could easily point to the fact that marijuana isn’t treated like any other drug and, importantly, isn’t taxed at the production stage, all in order to make the claim that medical marijuana dispensaries shouldn’t get the same tax write-offs as other businesses.

Says St. Pierre, “Activists in the field will make the clarion call that medicine is not taxed,” and neither, they contend, should marijuana. “However, the corporations that make the medicine are taxed. Not surprisingly, the pharmaceutical industry is getting a little sick after ten years of people growing something in the closet, putting it in a mason jar, walking it across the street and selling it for 50 to 100 times the production value without even going through the medicine review process at the FDA.”

That could be the linchpin of the IRS’s argument — that dispensaries want special treatment with regard to marijuana’s medical status but expect to be treated like normal businesses when it comes time to file their taxes. “In some ways, it’s all part of the immaturity of the industry,” says St. Pierre. “Not many people show up in the newspapers screaming that they make millions of dollars and don’t want to pay taxes.” Only time will tell if the IRS indeed takes up this line of reasoning and, more importantly, if it works.

The larger aim of dispensary owners like MAMM’s Lynette Shaw in taking the IRS to court — namely, getting a judicial review of the legal status of marijuana as a Schedule I drug — St. Pierre dismisses out of hand. “Judges won’t rule against the federal government,” he says. “We’re really talking about the big enchilada here, which is Congress. They created this mess” by criminalizing marijuana through a series of 20th century laws, “and they’re the only ones who can fix it.”

“The most expedient route would be for Congress to pass a law taking an eraser to parts of the Controlled Substances Act. Is that going to happen? No,” says St. Pierre.

NORML and other advocacy groups hope instead to at least start a conversation about changing federal marijuana laws. To that end, they’re working with legislators to introduce five new marijuana reform bills in coming weeks: the “Truth in Trials” act, which would allow medical use of marijuana to be considered in federal drug trials (at present, any evidence relating to medical use is inadmissible in federal court); a bill that would reduce the classification of marijuana to Schedule II; a federal decriminalization bill that would impact very few actual court cases, as 98 to 99 percent of marijuana-related arrests are at the state and local levels; an outright legalization bill; and one that may take shape as a rider on a banking bill.

Rep. Jared Polis (D-Colo.) has already pledged his support to the banking bill and is due to introduce it in the House soon. It would reform those regulations that Drug War Chronicle reported on, absolving banks of liability or a responsibility to keep tabs on dispensaries.

St. Pierre gives all five bills a “snowball’s chance in hell” of passing. But he’s counting on them to push the conversation on decriminalizing marijuana that much further forward.

“Congress is the best chance we’ve got,” he says.