journalaz.com: “The city of Cottonwood is moving forward with changing its rules when it comes to governing medicinal marijuana growing facilities. . . . The new proposals eliminate size restrictions on cultivation and infusion facilities.”
The U.S. Tax Court in an October 22, 2015, memorandum decision called Canna Care, Inc., vs. Commissioner ruled that a California medical marijuana dispensary owed back federal income taxes of $229,473, $304,090, and $339,604 for 2006, 2007, and 2008, respectively. The IRS used Internal Revenue Code Section 280E to disallow deductions that would be otherwise have been deductible if Canna Care’s businesses did not involve “trafficing” in a controlled substance.
Section 280E states:
“
[n]o deduction . . . shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.It is indisputable that marijuana is a schedule I controlled substance.
Section 280E applies to deny deductions if all of the following facts exist: (1) there is a trade or business; (2) that involves trafficking in (3) a controlled substance. The Tax Court found that all three elements exited with respect to Canna Care, Inc., for the years at issue and denied all deductions.
Canna Care is a California mutual benefit corporation that is prohibited by California law from distributing marijuana for profit. Nevertheless, the non for profit medical marijuana dispensary business was very, very good to its shareholders Bryan Davies and Lanette Davies.
“Petitioner had 10 employees in 2006 and 2007 and 6 employees in 2008. Mr. Davies determined salaries. During the years at issue the shareholders’ salaries far exceeded the salaries paid to any other employees. Mr. Cowen was paid $88,700, $152,900, and $144,000 during 2006, 2007, and 2008, respectively. Mr. Davies was paid $79,200, $160,900, and $146,200 during 2006, 2007, and 2008, respectively. In addition to their salaries, petitioner made payments for its shareholders’ automobiles in the amounts of $31,459, $24,609, and $23,942 during 2006, 2007, and 2008, respectively. Petitioner’s manager, its highest paid nonshareholder employee, was paid $36,000, $55,600, and $52,000 in 2006, 2007, and 2008, respectively. Mrs. Davies was paid $27,000, $66,480, and $74,000 during 2006, 2007, and 2008, respectively. Petitioner’s other employees made an average of $24,494.17, $12,173, and $12,314.29 during 2006, 2007, and 2008, respectively.”
The Tax Court ruled that “section 280E prohibits petitioner from deducting any amounts paid or incurred during the years at issue in connection with its trade or business that respondent disallowed.”
Section 280E imposes a very heavy and some would argue an unfair price on businesses that sell marijuana in states that have legalized the drug.
The Range: “Now that Kalvin Catlin’s brother Kyle has been convicted on three felony drug charges, the 23-year-old doesn’t have much hope about the outcome of the trial the two will tackle together in December. . . . Three years ago, the brothers—both of whom are medical marijuana cardholders—partnered up in a caregiver project called Arizona Medical Marijuana Caregivers. They were arrested in late 2012, a few months after Kyle was arrested on separate counts. . . . Some of the felonies the brothers face are: Illegally conducting an enterprise; conspiracy to commit sale of marijuana; conspiracy to commit possession of marijuana for sale; possession of marijuana for sale; possession of drug paraphernalia. “
Phoenix New Times: “The blunt realities of the state’s medical-marijuana industry are exposed in a remarkable ruling on a lawsuit between business partners that features allegations ranging from a ‘lack of financial controls’ to a shady seed deal in a parking lot. The lawsuit’s between the two partners of Uncle Herbs of Payson, one of the state’s notable licensed medical-marijuana dispensaries. Andrew Provencio . . . and partner Tiffany Young have been engaged in a vicious civil war since late December over a company worth millions. Now, following Superior Court Judge Randall Warner’s ruling, Young has been found in contempt and has one week to turn over nearly $50,000 in funds allegedly spent on ultra-high-quality cannabis seeds in a transaction that occurred in a parking lot.”
The dispensary license is actually held by Desert Medical Campus, Inc., an Arizona for profit corporation (“DMC”) that was administratively dissolved by the Arizona Corporation Commission on 9/23/15. The lawsuit is between DMC’s shareholders.
The principals of DMC formed a lot of entities, but failed to operate them independent of DMC. As a result, the court disregarded the separate existence of the entities and found the assets and liabilities of the entities are assets and liabilities of DMC. Here’s some interesting statements found in the Judge’s ruling dated September 16, 2015:
“The court finds that A & T Management was operated as a part of DMC and not as a separate entity. Therefore, all assets and liabilities of A & T Management were and are assets of DMC subject to the receivership. . . .
the court finds that the finances and operations of Uncle Herb’s Gift Shop were not kept separate from that of DMC. Therefore, all assets and liabilities of Uncle Herb’s Gift Shop were and are assets of DMC subject to the receivership. . . .
The court therefore concludes that Uncle Herb’s Kitchen is a part of DMC. All assets and liabilities of Uncle Herb’s Kitchen were and are assets of DMC subject to the receivership. . . .
The Receiver therefore properly assumed control over the assets of M & T Management. . . .
Golden Tomatoes, though nominally owned by Mr. Provencio’s cousin as a straw man, was part of DMC. All of its assets are subject to the receivership. . . .
The preliminary injunction prohibited either Mr. Provencio or Ms. Young from acting in any way on behalf of DMC or causing DMC to do anything except with the other’s written consent. . . .
Between March 24 and April 6, Ms. Young took $47,274.46 in cash out of DMC. . . .
Ms. Young testified that the purpose of the cash withdrawal was to purchase marijuana seeds. She testified that she had an agreement with a seller to purchase those seeds. . . .
Ms. Young did not know the seller’s name. But she testified that she trusted the seller because she knew the person who referred her to that seller. . . .
Ms. Young testified that she exchanged the cash for marijuana seeds from the seller in a parking lot. . . .
On or about April 4, 2015, Ms. Young caused DMC to sell approximately $169,000 worth of products to ‘Harvest of Tempe’
[This is a tradename owned by Nowak Wellness, Inc., an Arizona corporation that was administratively dissolved on 8/8/14.] at a 90% discount. . . .Having found Defendant Tiffany Young in contempt, the court must determine the remedy. . . . First, with respect to the $47,274.46 in cash, the court will order that Ms. Young may purge the contempt by returning that money to the Receiver no later than October 15, 2015. . . .
With respect to the $169,000 in product sold at a 90% discount, the court will consider that transaction subsequently in whatever final accounting is made.”
Query: Did Tiffany Young violate Arizona’s medical marijuana laws when she purchased seeds for $47,274.46 from a person she did not know? When Tiffany sold $169,000 of her dispensary’s product was the buyer another licensed Arizona medical marijuana dispensary? If so, what is its name?
Phoenix New Times: “t the beginning of this month, Oregon became the third state where adults 21 and older can buy marijuana at retail stores — and Arizona may not be far behind. But the pro-legalization movement and even Arizona’s medical-marijuana program could still be derailed in the next few years by court rulings or by a new president, Maricopa County Attorney Bill Montgomery maintains. New Times asked the Republican politician and pot prohibitionist about the start of retail sales in Oregon, where he thinks the law still could be reversed, and about how such a thing could occur when all signs suggest that the United States is growing more, not less, cannabis-friendly.”
Tucson Weekly: “While marijuana advocates look to legalize in Arizona, concerns remain about medical marijuana program. Some supporters of the medical marijuana program—and the push for a potential recreational program—argue that a legal, taxed market helps curb drug cartels and illegal trafficking in the state. Federal and local officials said there’s no evidence Arizona’s medical marijuana program has hurt the black market. Phoenix Police Department Commander Brent Vermeer said via email that he didn’t have empirical data to show the impact of medical marijuana on law enforcement, but ‘it unequivocally has not impacted the cartels’ sales practices for marijuana.’ He wrote in an email that the department has investigated homicides related to marijuana, and burglars recently stole $500,000 worth of marijuana from one dispensary.”