Pubdate: Sun, 09 Mar 2014
Source: Arkansas Democrat-Gazette (Little Rock, AR)
Copyright: 2014 Arkansas Democrat-Gazette, Inc.
Note: Accepts letters to the editor from Arkansas residents only
Author: Peter Hecht, the Sacramento Bee


SACRAMENTO, Calif. - Sacramento's 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 
illegal drug traffickers.

In February, the U.S. Tax Court in San Francisco heard 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. However, 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 down his tax debt under 
the 280E tax code. Lee was the architect of Proposition 19, an 
unsuccessful 2010 bid to legalize recreational marijuana 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 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 as low as $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 don't pay.

Davies said the dispensary operates as a not-for-profit business 
under California 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 won't 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."

While the IRS doesn't comment on tax cases, court papers say 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 Equal Protection Clause of the U.S. Constitution. 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.

Henry Wykowski, a tax attorney 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."
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MAP posted-by: Jay Bergstrom