IRS headquarters in Washington, D.C. (Photo: Mike Scarcella/ ALM)

A Colorado law firm is pressing claims that the Internal Revenue Service wields too much power over the cannabis industry, urging a federal appeals court to curb the agency's authority to unilaterally determine that state-legal businesses are breaking federal law.

Thorburn Walker LLC, a firm that has become go-to tax counsel for many Colorado dispensaries, has asked the U.S. Court of Appeals for the Tenth Circuit to reconsider a panel decision in Alpenglow Botanicals v. United States of America. The three-judge panel on July 3 said a taxpayer does not have to be convicted of a drug crime for the IRS to revoke its ability to deduct marijuana business expenses.

“The court has taken the unprecedented step of empowering the IRS to not only investigate nontax crimes for tax administration purposes but to administratively determine that the crimes have been committed,” James Thorburn and Richard Walker wrote in their rehearing petition. “No court has previously given the IRS such administrative power.”

The request for rehearing is the law firm's latest attempt to find judicial relief for cannabis clients hurt by tax auditors' findings under Section 280E of the Internal Revenue Code. The law bars companies from deducting ordinary business expenses if the filer is found to be “trafficking” in Schedule 1 substances. While Colorado and other states allow licensed marijuana businesses to operate legally, the IRS has determined that the activity is illegal for tax purposes.

Thorburn and Walker's previous efforts to curb the IRS power have faced similar obstacles in federal court.

In Standing Akimbo v. United States of America, a magistrate judge of the U.S. District Court for Colorado recommended this month that a dispensary's owners push to quash a summons for business records be denied. The owners argued that providing the records, without absolute immunity from criminal charges, would be a violation of their Fifth Amendment rights.

The U.S. Supreme Court in March denied review in Green Retail Solution v. United States of America, a dispensary chain's unsuccessful challenge to the IRS' authority to investigate whether a state-legal business is engaged in illegal federal drug trafficking.

In Alpenglow Botanicals, the father-son owners of a Colorado “farm to flame” cannabis operation sued to block the IRS' finding that they owed a combined $53,000 for improper tax deductions taken for their state-licensed business. Charles Williams and Justin Williams argued that Section 280E violates the Eighth and Sixteenth amendments and that the IRS can't cite 280E unless there has already been a criminal finding of trafficking. The court rejected those arguments.

“Alpenglow offers no reason why we should conclude the IRS has the authority to assess taxes under Section 280E, but cannot impose excess tax liability under Section 280E,” the appeals panel wrote. “There is also no evidence that Congress intended to limit the IRS's investigatory power.”

Thorburn and Walker called the reach of the appeals court ruling “dangerous” and “unprecedented.”

Jim Hunt, an attorney at Harris Bricken in Seattle noted in a July 20 blog that the Tenth Circuit's ruling—that Congress expressed no intent to limit IRS power—goes even further than the court did in Green Retail.

“This decision is going to shift how cannabis businesses pay their taxes and how cannabis tax lawyers view cannabis tax obligations,” Hunt wrote. “And not in a good way.”

 

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