TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, July 15, 2012

IRS Bogarts Medical Marijuana Pharmacy's Deductions, Drives Founder Into Bankruptcy

Marijuana Following up on my earlier post:  Forbes: Owner of Nation's First Marijuana Pharmacy Now Broke and Fighting IRS, by Janet Novack:

Lynnette M. Shaw, the colorful pot activist who opened the first licensed medical marijuana dispensary in the United States, is fighting an IRS bill for $1.27 million in back income taxes and penalties and has filed for personal bankruptcy, listing $276,000 in state sales taxes among her debts.

Shaw was forced to shut her Marin Alliance for Medical Marijuana in Fairfax, Ca. late last year, after U.S. Attorney for Northern California Melinda Haag wrote a letter to her landlord threatening to seize the building that housed her operation. The letter was part of a coordinated crackdown by four U.S. Attorneys in California on marijuana dispensaries. ...

Shaw’s personal income tax troubles stem from an IRS decision to deny business expense deductions to marijuana dispensaries under a provision Congress passed in 1982 (§ 280E) that disallows deductions for “trafficking in controlled substances” as “prohibited by Federal law or the law of any State in which such trade or business is conducted.” Surprisingly, Shaw never incorporated the dispensary—as either a for-profit or not-for-profit corporation. Instead, she ran it as a sole-proprietorship, reporting its $1 million plus in annual sales and all its expenses on Schedule C of her individual 1040 tax return.

Shaw’s previously unreported lawsuit filed in U.S. Tax Court late last month, shows that rather than reporting profits, she reported losses totaling $186,826 in 2008 and 2009. After denying all her expenses for everything from cannabis to utilities, IRS auditors calculated Shaw had taxable income of $2.83 million for those years. This past March it sent her a bill for $1.27 million n back taxes and penalties, plus an as yet uncalculated amount of interest. Shaw says she owes nothing. (Harborside, which is incorporated, has reportedly been hit with a $2.5 million IRS bill; according to the U.S. Tax Court docket, it filed suit challenging the assessment in December.)

Shaw’s suit argues that the IRS is ignoring state laws legalizing medical marijuana as well as a 2007 U.S. Tax Court decision (Californians Helping To Alleviate Medical Problems, Inc.) that was decided largely in favor of another, now closed, marijuana dispensary. In the CHAMP case, the IRS conceded that 280E doesn’t preclude deducting the cost of goods sold (i.e. the cost of the cannabis). The court also ruled that CHAMP could deduct the cost of providing extensive counseling and caregiving services to its members, although not the cost of actually distributing the marijuana.

The title of this blog post is courtesy of Country Joe and the Fish:

Don't bogart that joint, my friend
Pass it over to me.
Don't bogart that joint, my friend
Pass it over to me.

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I could see if she didn't pay the State of California taxes. But the Feds are coming after her? When they legalize weed, then they can collect sales tax. Otherwise, kiss it long and hard Ignorant Retarded Sh*theads!

Posted by: Stan Sikorski | Jul 15, 2012 11:38:45 AM

A natural plant is banned but the distillation of spirits such as vodka, gin, etc. is perfectly fine. Somehow the logic escapes me.

Posted by: rikki Doxx | Jul 15, 2012 12:10:34 PM

Good, I'm tired of this "lets get everyone high" bullshit. Stoners piss me off to no extent. It's legalized for medical use. That's what it's there for, that's what it does. Now shut the fuck up. Stop crying because you can't buy it at the god damn gas station.

"It's all natural!" So is EVERYTHING IN EXISTENCE. Chemicals are derived from nature, cocaine is derived from nature, alcohol is derived from nature, now please SHUT UP. It's not a fucking miracle plant, and like any other mind altering substance it is bad for you. Go grow some or buy some and stop bothering the rest of society. It does not matter if you unwashed hippies buy a suit and try to look professional, we all know what you are. I don't give a fuck about the plant. I'd just rather it stay illegal just to piss off you dumb ass stoner kids.

Posted by: Grant | Jul 15, 2012 4:18:18 PM

They aren't crying because it isn't at the gas station, they're crying because the pharmacy that is legally mandated to sell the crap for medical use has been shitkicked by the federal government. I know this is going to piss off you dumb right wing kids but: you can't have states rights for marriage definitions, but ignore states rights for determining marijuana policy. On that same token, as long as EVERYTHING IN EXISTENCE is natural, I guess two guys or two girls getting it on is finally natural as well right? RIGHT?
Besides, have you ever seen a stoned person? I have. It isn't pretty, but not bad. Just kinda pitiable. A drunk person? Dangerous, cruel & out of control. I don't use either (or any) substances, but I'd rather everyone be high.

Posted by: George Will | Jul 15, 2012 6:42:28 PM

You seem tense, rikki. Have another beer.

Posted by: Dead Lenny | Jul 15, 2012 7:33:44 PM

Grant, nice way to show your intelligence by attacking someone for not agreeing with you get a life and get off the internet. It's sad that you agree with the government on something that is completely asinine, how about you look at prohibition and learn some history and then you would understand why the legality of marijuana is more than just legalizing it. When you have drug dealers and the government agreeing on something any rationally minded person would see the problem but again grant you have showed your total lack of intelligence by attacking people you don't even know and stereotyping them based of...well I can't figure that out because your post is so incoherent.

Posted by: steve | Jul 16, 2012 4:57:18 AM

She's entitled to deduct the cost of the cannabis -- the CHAMP case makes it clear that sec. 280E denies deductions, but does not bar the allowance of COGS. That will make a dent in her federal tax liability, but probably not enough to stave off bankruptcy.

The 'logic' of the legal ban on pot is a result of lobbying by the alcohol industry way back in the 1930s.

I hope this on-topic comment does not provoke Grant to another rant.

Posted by: eli | Jul 16, 2012 4:59:18 AM


It's people like you that make me want to get high.

Posted by: BobH | Jul 16, 2012 5:33:07 AM

"pursuit of happiness" Don't legislate against my ability to "harm myself", legislate against my ability to harm others. Protect me from others, don't try and protect me from myself. Natural selection works.

It's good to make anything I do with the drug "extra illegal" but not good to say I can't use it. For example, driving under the influence of pot should hold heavy community service penalties. This way, you don't make someone broke, or unable to get to work, make them wear happy pink bunny mascot-style costumes with their faces exposed. Shame them in such a way that current music won't glorify them, while also aiding the community.

On a side note: this permits people to learn from their mistakes and move on, rather than literally force them into illegal activity to survive when they make a mistake. Try holding down a job (with adequate pay) 30 miles away without a drivers license in an area where you can't safely take the bus. Try paying any bills, when you're already living paycheck-to-paycheck and a fine arrives that is double what you make in a week, and have no car to use to get to work. Is the intent to force lawbreakers into the welfare system, and/or into committing illegal acts to survive?

Anyway, I don't use pot, but why should laws try and force me not to? Are there laws against injesting large amounts of drywall? Natural selection is my friend. Make it legal to grow, use your own, and share, but keep it illegal to sell/trade anything beyond seeds, and/or to modify/"cut" it beyond it's natural, leafy state, for any form of ingestion without medical licensing/regulation.

Posted by: Mike | Jul 16, 2012 6:18:23 AM

I don't care if it's legalized or not. I know smoking weed really does help some people with chronic illnesses. But everyone who uses "I have pain" as an excuse to get legally high is packed to the brim with bullshit, and that's what I have a problem with.

Posted by: John | Jul 16, 2012 6:31:55 AM

"have you ever seen a stoned person? I have. It isn't pretty, but not bad. Just kinda pitiable."

Pitiable? Go fuck yourself.

Posted by: Tom | Jul 16, 2012 9:32:38 AM

Getting a kick out of Republicans yelling at "Dirty Hippies In Suits" for selling marijuana for medicinal purposes within the state laws of California. You know, this is a case of the Federal Government not respecting state laws and selectively enforcing federal laws to collect what they believe to be money owed to them. This is a case about state's rights, not about selling weed. You should be supporting the state, and the dispensary in this case. Or continue to make an ass out of yourself and complain about something you do not understand, either one.

Posted by: Sigh | Jul 16, 2012 10:04:48 AM