TaxProf Blog

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

Wednesday, August 9, 2017

IRS Lawyer Says The Agency Isn't Targeting Cannabis Lawyers

National Law Journal, IRS Lawyer Says the Agency Isn't Targeting Cannabis Lawyers:

A regional IRS executive told a gathering of cannabis lawyers on Friday that the agency is not out to target them, despite their work with clients whose marijuana businesses remain illegal under federal law.

Matthew Houtsma, associate area counsel for the IRS Office of Chief Counsel, said the tax agency’s Office of Professional Responsibility has held that “to the extent [a lawyer] is representing someone in the industry, that is not sanctionable.”

Those lawyers’ clients, even though they’re abiding with state laws regulating medical and recreational marijuana, may not enjoy such protections from federal tax collectors. The IRS, Houtsma told the Cannabis Law Institutegathering in Denver, has won a string of recent court victories clarifying the agency’s authority to inspect records from and question tax deductions taken by dispensaries operating legally under certain states’ laws.

At issue is Internal Revenue Code Section 280E, which forbids businesses from deducting certain business costs associated with the “trafficking” of Schedule 1 substances, including marijuana, which the federal government has deemed have no medical use. Missing out on those tax deductions can wipe out a large part, or even all, of a marijuana businesses’ profits, according to tax attorneys. Taking the deductions can trigger an audit by the IRS.

Houtsma said he sympathized with businesses trying to operate legally under state law. But “unlike the Department of Justice, which can potentially create their own priorities of what they’re going to go after and what they’re going to do and not do, the IRS doesn’t really have authority to simply ignore 280E,” he said. “If someone gets picked up in an audit and they are in the industry, it’s going to be an issue that the IRS is going to ask about.”

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