The IRS has no authority to declare that a taxpayer has violated federal anti-drug laws, a Colorado marijuana dispensary tells the U.S. Supreme Court in a new petition that takes the justices into a dispute over state legalization schemes and federal taxation.

The Green Solution Retail Inc., one of the largest retail marijuana chains in Colorado, petitioned the high court this week to overturn a U.S. Court of Appeals for the Tenth Circuit ruling in May that said federal law bars lawsuits challenging tax assessment activities.

Green Solution's 2013 and 2014 tax returns are the centerpiece of the dispute. The IRS audited the filings and determined that the company, though operating legally in Colorado, violated federal drug trafficking laws. The IRS demanded company financial records to determine if Green Solution improperly took credits and deductions that are not available to illegal drug merchants. Green Solution sued to keep the IRS out of its books, arguing the agency has no right to determine whether it broke federal drug laws.

“The IRS claims it is necessary and within its power to make administrative determinations that a person is criminally culpable under federal drug laws. Such a claim of power by the IRS is unprecedented,” Green Solution's lawyers, James Thorburn and Richard Walker of Colorado's Thorburn Walker, wrote in the Supreme Court petition.

The IRS did not immediately respond to a request for comment Tuesday. Thorburn declined to comment about the petition.

The petition comes at a perilous time for the marijuana industry. Twenty-nine states and the District of Columbia permit some form of legal marijuana, but questions persist about whether and how the U.S. Department of Justice under U.S. Attorney General Jeff Sessions might confront state regulatory schemes. Sessions has staked an anti-legalization position at the helm of Main Justice.

Political questions about the legalization of marijuana should not be answered by the IRS, Green Solution's lawyers told the U.S. Supreme Court.

“Answering the question of the extent of the IRS's administrative authority will also answer just how far the IRS can jump into these political questions,” Green Solution's attorneys said in their petition. “To this end, the court should not allow the IRS to administratively determine whether a person is violating federal criminal drug laws.”

Justice Neil Gorsuch. Credit: Diego M. Radzinschi / ALM

The petition quoted heavily from then-Tenth Circuit Judge Neil Gorsuch's 2015 opinion in Feinberg v. Commissioner of Internal Revenue. Now a Supreme Court justice, Gorsuch noted in that ruling, which upheld an IRS decision to strike business tax deductions taken by a Colorado dispensary, the federal government's “mixed messages” on marijuana enforcement.

The U.S. Justice Department under President Barack Obama had declined to prosecute marijuana retailers operating in accordance with state law, Gorsuch said, while the IRS refused to recognize tax deductions taken by those businesses because of their illegal operation under federal law.

“So it is that today prosecutors will almost always overlook federal marijuana distribution crimes in Colorado but the tax man never will,” Gorsuch wrote.

The IRS is also seeking information from the Colorado Marijuana Enforcement Division about the products Green Solution sells, their weight and the identity of purchasers. A case challenging the IRS request is pending in Colorado federal district court.

 

Green Solution's petition in the Supreme Court is posted below.