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Colorado Pot Dispensary Loses Tax Fight at 10th Cir.

By Jonathan R. Tung, Esq. on December 24, 2015 | Last updated on March 21, 2019

Federal prosecutors might look past pot dispensaries in Colorado, but the "tax man never will." This was the conclusion of Tenth Circuit Court Judge Neil Gorsuch who assumed a rather sympathetic tone when addressing the Colorado pot dispensaries. "Maybe we're missing something," he said. "Maybe a future party will show us what it is we're missing."

What cases like this aren't missing is a maddening inconsistency in spirit between state and federal law.

Crimes vs. Taxes

The controversy originally began when the IRS slapped Total Health Concepts (THC) marijuana dispensary with a big bill for a number of tax deductions that were denied. THC had also submitted a number of marijuana related business expenses that the IRS refused to grant. The running assumption is that if the expenses were not marijuana related, the IRS would have allowed the deductions and expenses.

Pot Is Still Illegal Under Federal Laws

Even though Colorado recently passed Amendment 64 which made the recreational use of marijuana legal under state law, pot is still regarded as "controlled substance" (fancy talk for "illegal") under the language of the Controlled Substances Act.

This distinction is relevant to the facts in the following way. The IRS asked THC to disclose the nature of their business. THC refused and asserted their right against self incrimination under the 5th Amendment. THC was aware that although THC was green-lit under Colorado law, it was still verboten under the CSA.

Mandamus? Now Them's Fightin' Motions

The IRS sought a motion to compel discovery of the nature of the business and was granted one. THC responded by taking the case out of tax court and seeking the Writ of Mandamus in federal appeals court to stop the discovery motion.

"Mixed Messages"

The Tenth Circuit, although obviously sympathetic to THC's rather confusing plight, sided with the IRS and denied the petition for writ. The reasoning turned not on this in fact being a criminal enforcement action yet, but really one of taxes. In light of currently changing laws, there has been a steadily advancing policy within federal law enforcement by the DOJ to discourage federal prosecution of state regulated marijuana dispensaries. This was noted by Judge Gorsuch. The strange ruling "owes its genesis to the mixed messages the federal government is sending these days about the distribution of marijuana."

Crime Is One Thing. Taxes Are Another

But, Judge Gorsuch said, although prosecutors will look away when it comes to state regulated distribution of pot, "the tax man never will." This is a tax matter, not a criminal one.

What can we say? It's still a costly thing to run a marijuana business these days. Business owners will have to contend with the Controlled Substances Act, always fearing that the IRS will bring in a little extra bite.

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