Pubdate: Sat, 04 Aug 2012
Source: Sacramento Bee (CA)
Copyright: 2012 The Sacramento Bee
Contact: http://mapinc.org/url/0n4cG7L1
Website: http://www.sacbee.com/
Details: http://www.mapinc.org/media/376
Author: Michael Doyle

TAX DEDUCTIONS FOR MEDICAL POT BUSINESS GO UP IN SMOKE, COURT RULES

WASHINGTON  A once-thriving San Francisco pot shop forced to close 
this week is also on the hook for a serious IRS bill, following a new 
U.S. Tax Court decision that could complicate life for others in the 
medical marijuana business.

Call it a precedential bummer; or, perhaps, a rational application of tax law.

For businesses and consumers in the 17 states that permit medical 
marijuana use, the ruling quietly issued Thursday certainly goes well 
beyond the facility formally called the Vapor Room Herbal Center. In 
particular, the Vapor Room ruling could squeeze pot operations that 
claim deductions for caregiving services.

"The dispensing of medical marijuana, while legal in California, 
among other states, is illegal under federal law," Tax Court Judge 
Diane L. Kroupa noted. "Congress has set an illegality under federal 
law as one trigger to preclude a taxpayer from deducting expenses 
incurred in a medical marijuana dispensary business. This is true 
even if the business is legal under state law."

The ruling means Vapor Room owner Martin Olive owes Uncle Sam a lot 
of money, although it is unspecified and less than the $2.1 million 
the Internal Revenue Service originally sought. More broadly, other 
medical marijuana dispensaries could have a harder time securing 
valuable tax deductions; particularly if, as in the case of the Vapor 
Room, they keep unreliable records.

"In the end, it's going to be very important," Las Vegas-based tax 
expert Russell Clayton said of the ruling in an interview Friday. 
"This is going to have a major impact on medical marijuana (operations)."

California alone is home to untold hundreds of medical marijuana 
dispensaries, although for confidentiality and other reasons the 
state's Board of Equalization does not maintain records.

Located in a comfy Victorian house on San Francisco's storied Haight 
Street, the Vapor Room operated for more than eight years before 
closing Tuesday. Justice Department officials had advised the 
operators that the facility was too close to a neighborhood playground.

The shutdown order was part of the Obama administration's generally 
hard line against medical marijuana operations, a policy that 
prompted protests in Oakland last month when Obama visited for a 
fundraising event. The order to close the Vapor Room, though, was not 
directly related to the tax court case begun several years ago.

Instead, owner Olive had gone to court to challenge the IRS' 
determination that he owed more than $1.8 million in taxes, plus 
about $378,000 in penalties, for 2004 and 2005.

Olive had reported the Vapor Room had gross receipts of $1 million in 
2004 and $3.1 million in 2005.

Tax investigators subsequently concluded that Olive had underreported 
his income, and that the Vapor Room really collected $1.9 million in 
2004 and $3.3 million in 2005.

Olive sought to deduct his various business expenses, ranging from 
rolling papers to zip-close bags. He also wanted to subtract the 
price he paid for the marijuana, as a cost of goods sold, from his total income.
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MAP posted-by: Jay Bergstrom