Pubdate: Mon, 24 Feb 2014
Source: Washington Post (DC)
Copyright: 2014 The Washington Post Company
Author: Peter Hecht, McClatchy-Tribune


Sacramento - The Canna Care dispensary, an evangelical medical 
marijuana provider renowned for doling out buds with Bibles, is 
waging a public fight with the Internal Revenue Service over an 
$873,167 tax penalty sought under a tax code aimed at drug traffickers.

On Tuesday, the U.S. Tax Court in San Francisco is due to hear Canna 
Care's challenge over whether the IRS can impose the hefty tax demand 
under a 1982 law intended to close a loophole that allowed a 
Minneapolis cocaine and methamphetamine dealer to claim tax 
deductions for a scale, his apartment rent and telephone expenses.

In the case of Canna Care, the IRS has refused to accept $2.6 million 
in business deductions for employee salaries, rent and other costs 
after auditing 2006, 2007 and 2008 federal tax returns for the north 
Sacramento dispensary. But the IRS did allow the dispensary, which 
handles about $2 million in medical marijuana transactions a year, to 
deduct the costs of the marijuana itself.

The IRS has used the Reagan era tax code, known as 280E, to seek tax 
penalties against numerous California dispensaries under the argument 
that their business expenses constitute support of drug-trafficking operations.

Those targeted have included the state's largest medical marijuana 
provider, Harborside Health Center, which is negotiating with the IRS 
over the government's demand for $2.5 million in back taxes for 
Harborside's Oakland and San Jose dispensaries.

The IRS also played a role in sweeping crackdowns on medical 
marijuana businesses that California's four U.S. attorneys initiated 
in late 2011. IRS agents joined in the raids on the Oaksterdam 
University marijuana trade school and dispensary of Richard Lee as he 
was seeking to negotiate his tax debt under the 280E tax code. Lee 
was the architect of Proposition 19, an unsuccessful 2010 bid to 
legalize recreational marijuana use in California.

The agency also raided Sacramento's former El Camino Wellness 
dispensary and seized its bank accounts under federal 
money-laundering statutes used to target narcotics traffickers. No 
charges have resulted in either case.

Canna Care director Lanette Davies said she and her husband, Bryan 
Davies, the dispensary's chief executive, had no dispute with the IRS 
over any of the figures reported in their tax returns. She said the 
IRS made an offer of $100,000 to settle their tax case. But she said 
they decided to challenge the demand in court because they considered 
it a punitive tax against cannabis outlets that other businesses do not pay.

Davies, whose family-run dispensary runs radio ads inviting neighbors 
and medical marijuana patients for nightly prayer sessions, said the 
couple will not accept a settlement that calls for paying "a couple 
extra percent of your gross sales" to the government.

"To me, that's buying protection money," she said.

Davies said the dispensary operates as a not-for-profit business 
under California's medical marijuana laws and declared a modest 
business loss on its taxes in 2006. She noted that the IRS allows 
deductions for the business costs of acquiring marijuana - the one 
item that is illegal under federal law - but will not let the 
dispensary claim routine business deductions.

"They don't accept that I pay my employees well and that I provide 
them with full dental and medical insurance," Davies said. "They 
don't accept the rent of our place, our liability insurance, our 
workman's comp insurance, our phones or our security, a big expense for us."

The IRS does not comment on tax cases, but according to court papers, 
the agency demanded that Canna Care pay $229,473 in additional income 
taxes for 2006, $304,090 for 2007 and $339,604 for 2008.

In a petition challenging the IRS finding of tax deficiencies for 
Canna Care, attorney Spencer Malysiak argued that the agency's 
refusal to accept the dispensary's routine business expenses violates 
the 14th Amendment's equal protection clause. The petition argued 
that the IRS was "tacitly" working to enforce U.S. drug laws against 
the dispensary even as it allowed Canna Care to deduct its costs of 
goods, the marijuana.

The IRS action "amounts to a de facto prohibition against medicinal 
marijuana dispensaries, and is tantamount to a criminal prosecution," 
Malysiak wrote in the petition.

Henry Wykowski, a tax lawyer who is representing Harborside, said it 
is common for dispensaries to fight IRS tax claims in court with a 
goal of minimizing their financial burden. But he said Canna Care 
stands out by appearing to reject negotiations to reduce its taxes 
and penalties.

"I would say the big picture is they were offered the settlement, and 
for whatever reason they decided not to take it," Wykowski said. "Now 
they're set for trial with regards to the [tax] deficiency. I can't 
give you any idea of what their chances of success are."

Wykowski was one of the attorneys involved in a landmark California 
case in which the IRS tried - and failed - to win a $426,000 judgment 
for back taxes and penalties against a San Francisco medical 
marijuana provider, Californians Helping to Alleviate Medical 
Problems. The 2007 case resulted in a court ruling that the 
dispensary's biggest expense - the marijuana - was deductible because 
U.S. tax law allows businesses to deduct the cost of goods sold.

The tax court also ruled that the dispensary could deduct the 
majority of its employee costs as care-giving expenses, and the 
dispensary ended up paying a tax assessment of $4,905.

Davies said that Canna Care employs 12 people, her husband receives 
an average salary of $100,000 as the CEO, and she is paid $75,000 a 
year as the director and an advocate on medical marijuana issues. She 
said other employees make between $30,000 and $40,000, in addition to 
health benefits. She said the dispensary maintains its not-forprofit 
status in part by supporting charities, including cancer research and 
a community Christmas event in Sacramento.

"We're hoping to bring awareness to this statute and the fact it's 
unconstitutional," she said. "All cannabis businesses in the United 
States should be treated as legitimate businesses."
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MAP posted-by: Jay Bergstrom