United States: The High Court Could Review The IRS' Power To Investigate And Determine Whether Cannabis Dispensaries Engage In Illegal Activities

In October 2017, Green Solution Retail, Inc., a cannabis retailer, petitioned the U.S. Supreme Court (SCOTUS) to review a decision which held that the Anti-Injunction Act and Declaratory Judgment Act barred Green Solution's request to enjoin the IRS from enforcing § 280E of the Internal Revenue Code.

Internal Revenue Code § 280E states that businesses are prohibited from claiming tax deductions or credits for expenditures made in carrying out a trade or business that consists of trafficking in controlled substances. Cannabis is classified by the federal government as a Schedule I controlled substance, which means federal law makes it illegal to knowingly or intentionally manufacture, distribute, or dispense it.

Here, the IRS audited Green Solution's 2013 and 2014 tax returns after it claimed deductions for business expenses. The IRS determined that the expenses were subject to IRC § 280E, which forbids federal tax deductions and credits to companies trafficking in controlled substances. Green Solution sought declaratory and injunctive relief, challenging the IRS' administrative authority to determine whether taxpayers violate the Controlled Substances Act. A federal district court found that Green Solution's request for declaratory relief was barred by the tax exception to the Declaratory Judgment Act. The Tenth Circuit affirmed.

Green Solution then petitioned SCOTUS to review its claims, arguing that the Anti-Injunction Act and Declaratory Judgment Act allow courts to prevent the IRS from going beyond its power. Green Solution contends that Congress did not give the IRS authority to administratively determine whether taxpayers have violated federal criminal drug laws.

In response, the Government argued that, "the relevant internal revenue code provisions do not authorize the IRS to initiate or conduct criminal prosecutions under the Controlled Substances Act, but simply authorize the agency to determine, for civil tax purposes, whether taxpayers may claim credits or deductions for particular expenses." Accordingly, any investigation by the IRS of Green Solution's activities is part of its assessment of the retailer's allowable deductions and tax liability.

SCOTUS has yet to decide whether it will grant certiorari, we'll continue to provide updates on these budding developments.

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