In The Green Solution Retail v. U.S., Case No. 16-1281, 10th Cir, May 2, 2017, the Tenth Circuit agreed with the District Court that a marijuana dispensary was not entitled to injunctions intended to stop an IRS examination of the taxpayer’s books and records. After the IRS initiated an examination, the taxpayer filed injunction to prevent IRS from investigating its business records and also sought declaratory judgment that IRS was acting outside its authority because in applying Section 280E, it was attempting to determine whether the taxpayer violated the Controlled Substances Act. The IRS moved for dismissal based on lack of subject matter jurisdiction asserting the Anti-Injunction Act (“AIA”) prevents the court from hearing the case and Declaratory Judgment Act (“DJA”) prohibits declaratory judgments in certain federal tax matters. Both the District Court and the Tenth Circuit agreed with the IRS.
- The AIA prevents suits for the purpose of restraining the assessment or collection of any tax. Section 7421(a). The AIA is a jurisdictional statute which prevents the courts from entertaining suits which prohibit the collection of federal taxes. The taxpayer argued that the AIA did not apply because the IRS actions did not, yet, involve assessment of tax. However, pursuant to Lowrie v. United States, 824 F.2d 827, 830 (10th Cir. 1987), the AIA also bars “activities leading up to, and culminating in, such assessment and collection.” The Tenth Circuit and the District Court applied the holding in Lowrie to hold that the AIA barred a suit here.
- The DJA allows a federal district court to grant declaratory relief in a case of a controversy…except with respect to Federal taxes. 28 U.S.C. section 2201. The Tenth Circuit held “if AIA bars this suit, the DJA claims are likewise barred because the two Acts are coterminous.”
- The taxpayer argued that the Supreme Court’s decision in Direct Marketing Ass’n v. Brohl, 135 S. Ct. 1124 (2015), holding that the Tax Injunction Act deprived the Courts from jurisdiction to stop the implementation of Colorado’s sales tax reporting regime, overruled Lowrie. The Tenth Circuit concluded that while Direct Marketing called into question the holding in Lowrie, it did not clearly undermine Lowrie, and therefore Lowrie controls here.
- After concluding that Direct Marketing did not overrule Lowrie, the Court addressed the taxpayer’s arguments that the AIA was not applicable because the IRS was acting outside its jurisdiction and because section 280E is a penalty, not a tax. The Tenth Circuit disagreed with both of these arguments, reviewing the Colorado District Court’s recent decision in Alpenglow Botanicals v. U.S., discussed in our prior post available here, to determine that the IRS was not acting outside its jurisdiction. The Tenth Circuit also clearly held that “Section 280E is not a penalty,” primarily based on case law holding that disallowance of a deduction is not a penalty or punishment.
Followers of developments in this area should note that the taxpayer has also filed a petition to quash a summons issued to the Colorado Marijuana Enforcement Division. This case is pending in the United States District Court for the District of Colorado, Case no 1:16-mc-00137 (filed June 27, 2016).