Recently, a Colorado business protested the IRS’ disallowance of their business expenses.  The IRS alleges that the taxpayer was a Colorado medical marijuana dispensary to which Section 280E applies, as a result the IRS asserted that the taxpayers owed additional tax.  The taxpayers paid the tax and sued for a refund in Federal Court.  In a motion for summary judgment, the taxpayer asserted that the IRS did not have the authority to investigate whether the taxpayer violated the Controlled Substances Act (“CSA”), that Section 280E violates the Sixteenth Amendment, that the taxpayer properly deducted its expenses, and that the IRS did not produce evidence that Section 280E applies to the taxpayer.  The taxpayer also asserted that the application of Section 280E violated their Fifth Amendment rights and that Section 280E violates the Eighth Amendment prohibition against excessive fines and penalties.

The District Court ruled that:

  • the IRS application of Section 280E to a business it determined was selling marijuana was within its authority to apply the Internal Revenue Code;
  • the IRS’ application of Section 280E was a “purely tax-based determination” that did not violate the taxpayer’s Fifth Amendment rights;
  • the taxpayer did not allege that the IRS disallowed costs other than cost of goods sold and therefore the court could not determine that the Sixteenth Amendment was not violated;
  • the taxpayer did not allege enough facts for the court to determine whether Section 280E is an excessive fine and penalty in violation of the Eighth Amendment; and
  • the taxpayer did not allege any facts to show that the IRS lacked evidence to show that the taxpayer was violating the CSA.

The taxpayer has filed a motion for reconsideration and an amended complaint to add allegations necessary to support its claims, so the case may move forward based on those new allegations.   However, the taxpayer’s attempt to stop the IRS from enforcing Section 280E was not successful under the facts of this case.

The case is Alpenglow Botanicals, LLC v. U.S., Colorado Dist. Ct. Case No. 16-cv-00258-RM-CBS.  Opinion and Order Continue Reading Colorado District Court: IRS Enforcement of Section 280E Is Not A Criminal Investigation