Welcome back to Higher Law, our weekly briefing on all things cannabis. I'm Cheryl Miller, reporting for Law.com from Sacramento, where state government it humming along, unlike its federal counterpart. At least furloughed federal lawyers may be getting a break from the Golden State on late fees for their unpaid bar dues.

This week we're looking at an engrossing oral argument session on marijuana and taxes in the U.S. Court of Appeals for the Tenth Circuit. A New York federal judge has some thoughts on medical marijuana, and small cannabis farmers in California are giving up their legal fight over permits. Scroll down for Who Got the Work.

Thanks as always for reading. I appreciate your feedback, story ideas and tips. Drop me a line at [email protected] or you can call me at 916-448-2935. Follow me on Twitter at @capitalaccounts.

Circuit Judge to Feds: 'Fish or Cut Bait' on Marijuana Tax Audits

This week, I wrote about the oral arguments in Feinberg v. Commissioner of Internal Revenue, a case in the U.S. Court of Appeals for the Tenth Circuit challenging the tax agency's denial of tax deductions initially taken by a Colorado-licensed marijuana dispensary. If you have some time, I urge you to listen to the oral arguments yourself. I've never heard a judge tee up the state-federal conflict over marijuana so colorfully—and then tee off on the IRS and federal prosecutors.

U.S. Circuit Judge Carlos Lucero accused IRS agents of “acting if they were somehow a law enforcement agency instead of a tax collector” when they audited Total Health Concepts and other state-legal marijuana businesses

Carlos Lucero

“The threat of prosecution is like a hammer over their heads whenever it comes time to pay the taxes,” said Lucero, a Clinton appointee. “The Department of Justice at some point ought to make a decision to either fish or cut bait on the issue. And if they're going to prosecute, then prosecute and bring the whole thing to a head. Or grant immunity and allow the tax operations to operate somewhat more smoothly.”

The plaintiffs' attorney, James Thorburn of Thorburn Walker in Colorado, declined to comment on the case. But Lucero's comments must have been music to his ears.

Thorburn's firm has been arguing in court for years—mostly unsuccessfully—that the feds are using Section 280E of the Internal Revenue Code instead of criminal prosecution to go after state-licensed marijuana operations. Lucero appeared to agree.

“What you're saying here is, 'OK, we're not only going to [collect] taxes, we are going to punish this business to the point of destruction,'” Lucero said to the federal tax attorney representing the IRS in Feinberg. “And you get into this huge mix of tax-raising and criminal law.”

Francesca Ugolini, assistant chief at the Department of Justice's tax division, argued that 280E has been in the tax code for years and its constitutionality has been upheld by the courts.

“So the businesses in Colorado and California and some of the other states that have decided to go into this business are, or at least should be, fully aware of the tax implications of deciding to enter this type of business.,” Ugolini said.

I did not hear two votes on the three-judge panel to restore the dispensary's tax deductions or to upend 280E. Circuit Judges Carolyn Baldwin McHugh and Nancy Moritz, both Obama appointees, seemed to agree with Ugolini's argument that federal law on marijuana and tax deductions is clear.

“This is a huge conflict between how the federal government treats marijuana and how some of the states treat marijuana,” McHugh said to Thorburn. “And so long as we have a supremacy clause, your clients are going to lose because it's still illegal under federal law.”

I'm predicting an interesting dissent from Lucero when the court's opinion comes down.

CA Growers Drop Permit Lawsuit

The California Growers Association, a seven-year-old coalition of cannabis farmers, has dropped a lawsuit challenging the state's practice of allowing a single person or business to amass multiple small-scale cultivation permits.

Association leaders said in a prepared statement, first reported by the Sacramento Business Journal, that they want “to create a clean slate and increase engagement” with the Newsom administration.

“While we still firmly believe the decision to not enforce the 1-acre cap directly conflicts with the intent of Prop 64, we also recognize the importance of direct dialogue with the agencies regulating California's cannabis industry” said Cal Growers treasurerSequoyah Hudson.

The growers group sued the state Department of Food and Agriculture last year, arguing that the practice of “stacking” permits allowed corporate operations to gain an advantage on mom-and-pop farmers even though California's marijuana-legalization initiative approved by voters in 2016 barred large cultivation permit sales until 2023.

Who Got the Work

• Duane Morris has expanded its cannabis industry group's leadership team. It now includes Philadelphia-based partner Seth Goldberg, David Feldman in New York and Jennifer Briggs Fisher in San Francisco.

• Fourth-quarter federal lobbying reports are coming in. Surterra Holdings Inc. of Atlanta spent $100,000 to support the STATES Act and to pursue legislation giving marijuana businesses access to banks, according to the company's filing. Canndescent, the California-based, self-described “ultra-premium” cannabis brand paid Washington, D.C. lobbying firm Federal Advocates Inc. $90,000 for work on trademark protection and DEA approval for marijuana research facilities.

In the Weeds…

>> Medical marijuana for a New Yorker on probation? Chief U.S. District Judge Colleen McMahon (above) of New York's Southern District said she would authorize marijuana use for a probationer with chronic back pain—if she could. “But I, as a federal judge, am constrained by the fact that federal law bans it,” McMahon wrote in her order. McMahon could not authorize the request “even if I think that medical marijuana is the greatest thing for pain (and I suspect it is).” [Marijuana Moment]

>> Florida's new governor wants to end the state's ban on smokeable medical marijuana. Gov. Ron DeSantis said he wants a new law by mid-March to end the ban and to ease limits on on treatment center licenses. If the legislature doesn't give it to him, DeSantis said he's ready to drop state challenges to lawsuits on both those issues. [Daily Business Review]

>> As California tries to tamp down unlicensed marijuana outlets, Weedmaps is giving state regulators heartburn. The state last year told the online dispensary-locator to stop listing unlicensed businesses. Weedmaps responded that, as a tech platform, it was not under the state's regulatory authority. In December, WIRED found hundreds of unlicensed operators still listed on Weedmaps. [WIRED]

>> Hemp-based CBD could be coming to California kitchens. Newly introduced state legislation would clarify that hemp-derived CBD can be included in food, drinks and cosmetics without violating California food-safety laws. The Department of Public Health issued an advisory last summer warning retailers that hemp-derived CBD is “not an approved food additive.” [Sacramento Business Journal]

>> Beer, oh yes. Marijuana, no. George Allen, president of cannabis firm Acreage Holdings, said CBS rejected his company's proposed Super Bowl ad. Allen told CNN Business that Acreage Holdings was willing to spend up to $5 million to air the 30-second ad, which linked medical marijuana to pain relief. “We're disappointed by the news but somewhat unsurprised,” Allen said. [CNN Business]

All the Things for Your Calendar

Jan. 28-30 - The North American Cannabis Summit will be held in Los Angeles. Scheduled speakers include Kerry Cork, senior staff attorney at the Public Health Law Center, and Lori Ajax, chief of the California Bureau of Cannabis Control.

Jan. 31-Feb. 2 -CannaCon Seattle runs for three days at the Washington State Convention Center. Tom Zuber, managing partner of Zuber Lawler & Del Duca, and Neil Juneja, principal of Gleam Law, are among the scheduled speakers.