Dykema Gossett PLLC

Cannabis Law Blog

The U.S. Supreme Court Denies Certiorari in Cannabis Case

Cannabis Law Blog

News and analysis focusing on the full spectrum of cannabis-related issues facing businesses, investors, financial institutions and all levels of government throughout the United States

Contributors

The U.S. Supreme Court Denies Certiorari in Cannabis Case

On June 24, 2019, the U.S. Supreme Court denied petition for a writ of certiorari to review the decision of the U.S. Court of Appeals for the Tenth Circuit in Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018). Alpenglow Botanicals, LLC (“Alpenglow”) is a medical marijuana business, which operates legally in the state of Colorado. After an audit of Alpenglow’s 2010, 2011 and 2012 tax returns, the Internal Revenue Service (the “IRS”) assessed a deficiency against Alpenglow by denying a variety of its business deductions under section 280E of the Internal Revenue Code (the “Code”) and by concluding that Alpenglow had “committed the crime of trafficking in a controlled substance in violation of the CSA.” Section 280E disallows business deductions and credits for businesses engaging in trafficking of a Schedule I or II controlled substances. The federal government claims that marijuana is a Schedule I controlled substance, the possession or distribution of which is generally a serious federal crime. 

Alpenglow sued the IRS for a tax refund, alleging that it exceeded its statutory and constitutional authority by denying Alpenglow’s business tax deductions under section 280E. Alpenglow argued that the IRS could not use section 280E to deny the deductions in the absence of a conviction from a criminal court that its owners had violated federal drug trafficking laws in that IRS lacked the authority to apply section 280E until after a federal prosecutor had investigated and charged the taxpayer with violating federal criminal law and a judge or jury in a criminal proceeding had issued a verdict of guilty.

However, both the District Court and the Tenth Circuit Court of Appeals affirmed the IRS’s administrative determination by ruling that the IRS has the power to investigate and make a determination that a taxpayer committed the crime of trafficking in a controlled substance in violation of the CSA. The IRS can make this determination despite the fact that 33 states and Washington, D.C., have legalized the sale of marijuana for medical purposes or for “adult use” and that Congress has defunded the Department of Justice from Prosecuting CSA crimes that involve otherwise lawful sales from medical marijuana states from 2014 going forward.  

Since the U.S. Supreme Court denied the writ of certiorari, the decision of the Tenth Circuit stands. Thus, until further guidance is provided by courts or Congress, marijuana businesses, although legal under state law, may be deemed unlawful criminal enterprises by the IRS and may be subject to deficiency assessments under section 280E of the Code.

As always, please stay tuned for the latest updates and developments on the Cannabis Law Blog.