Tax Planning for Marijuana Dealers

AuthorBenjamin Moses Leff
Pages523-569
523
Tax Planning for Marijuana Dealers
Benjamin Moses Leff
ABSTRACT: In recent years, many states have legalized marijuana while
the federal government has not. But marijuana industry insiders consider
not federal criminal law but federal tax law to be the biggest impediment to
the development of a legitimate marijuana industry. State-sanctioned
marijuana sellers are required to pay federal income taxes pursuant to
I.R.C. § 280E, a formerly largely symbolic provision that Congress enacted
to punish drug dealers, but which now could potentially drive legitimate
marijuana sellers underground.
This Article proposes a tax strategy that enables state-sanctioned marijuana
sellers to avoid the impact of § 280E by qualifying as a tax-exempt
organization. The IRS has already stated that a marijuana seller cannot be
exempt under I.R.C. § 501(c)(3) because the so-called “public policy
doctrine” does not permit a charity to have purposes that are contrary to
law. This Article proposes for the first time that the public policy doctrine
does not apply to § 501(c)(4) organizations, which opens the door for
marijuana sellers to qualify as tax-exempt. The organization would have to
be operated to improve the social and economic conditions of a neighborhood
blighted by crime or poverty by providing job training, employment
opportunities, and improved business conditions for commercial
development in the neighborhood, just like many existing community
economic development corporations that run businesses.
This novel argument is more than just a “tax loophole” to avoid the impact
of § 280E. Rather, IRS recognition of tax-exempt status for marijuana
sellers could actually provide a mechanism to resolve the federalism issues
raised by the conflict between state and federal marijuana laws. A federal
policy that incentivizes marijuana sellers to be nonprofit, neighborhood-
based organizations in effect ties federal approval to local support.
Associate Professor of Law, American University Washington College of Law. The
author would like to thank Howard Abrams, Jonas Anderson, Jessica Billingsley, Lilian
Faulhaber, Amanda Frost, Brian Galle, Philip Hackney, Daniel Halperin, Amanda Leiter,
Jennifer Bird Pollan, Steven Shay, David Snyder, Lindsay Wiley, the participants of the Harvard
Tax Policy Seminar, the Junior Tax Scholars Workshop, the Harvard Law School Tax Policy
Workshop, and the American University Washington College of Law Faculty Speaker S eries, as
well as Sean Griffin for research assistance.
524 IOWA LAW REVIEW [Vol. 99:523
INTRODUCTION ...................................................................................... 525
I. THE FEDERAL TAX PROBLEM: SECTION 280E ....................................... 530
II. ONE POSSIBLE SOLUTION: TAX-EXEMPT STATUS .................................. 534
A. PURPOSES TEST: COMMUNITY ECONOMIC DEVELOPMENT
CORPORATIONS ................................................................................ 537
B. NO INUREMENT REQUIREMENT ......................................................... 543
C. LIMITED LOBBYING, NO CAMPAIGN ACTIVITIES ................................. 546
D. SCOPE OF COMMERCIAL OPERATIONS/COMMERCIALITY DOCTRINE ..... 547
E. PUBLIC POLICY DOCTRINE ................................................................ 550
1. Public Policy Doctrine and § 501(c)(3) Organizations ...... 550
2. Public Policy Doctrine and § 501(c)(4) Organizations ...... 551
3. Would a § 501(c)(4) Marijuana Seller Promote Social
Welfare? .................................................................................. 558
4. Social Welfare and Illegality .................................................. 562
III. FEDERALISM AND MARIJUANA POLICY .................................................... 563
CONCLUSION ......................................................................................... 568
2014] TAX PLANNING FOR MARIJUANA DEALERS 525
INTRODUCTION
In the past decade and a half, twenty states and the District of Columbia
have legalized medical marijuana.1 Last November, Colorado2 and
Washington3 became the first states to legalize the sale and use of
recreational marijuana, and more states are considering following their
lead.4 The trend appears to be toward liberalization of state marijuana laws
not just for medical purposes, but to advance a number of other state policy
goals, including reducing crime, improving blighted neighborhoods, giving
opportunities to youth impacted by the drug trade, increasing marijuana
users’ safety, and raising state and local government revenue.5
Currently, federal laws prevent states from achieving their policy
objectives. Legal scholars have focused on the conflict created by the fact
that selling marijuana is a federal crime.6 But, marijuana industry insiders do
not cite federal criminal law as the biggest impediment to the development
of a legitimate marijuana industry. Instead, the marijuana industry’s lead
trade publication reports that “[t]he federal tax situation is the biggest
threat to [state-sanctioned marijuana] businesses and could push the entire
industry underground.”7 To date, very little scholarly attention has been
1. See 20 Legal Medical Marijuana States and DC: Laws, Fees, and Possession Limits, PROCON,
http://medicalmarijuana.procon.org/view.resource.php?resourceID=000881 (last updated
Sept. 16, 2013, 11:41 AM) (describing the laws pertaining to medical marijuana in Alaska,
Arizona, California, Colorado, Connecticut, DC, Delaware, Hawaii, Illinois, Maine,
Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon,
Rhode Island, Vermont, and Washington).
2. See COLO. CONST. art. XVIII, § 16.
3. See WASH. INITIATIVE MEASURE No. 502 (July 8, 2011).
4. See Paul Szoldra, The Next 8 States That Could Legalize Marijua na, BUS. INSIDER (Mar. 23,
2013, 2:00 PM), http://www.businessinsider.com/legalize-marijuana-2013-3?op=1 (suggesting
that Rhode Island, Vermont, Massachusetts, Maryland, Nevada, Maine, Oregon, and
Pennsylvania may legalize marijuana for recreational purposes in the near future).
5. See, e.g., LEGISLATIVE COUNCIL OF THE COLO. GEN. ASSEMBLY, RESEARCH PUBLN NO. 614,
2012 STATE BALLOT INFORMATION BOOKLET AND RECOMMENDATIONS ON RETENTION OF JUDGES 7
(2012) [hereinafter COLORADO VOTER GUIDE], available at http://www.colorado.gov/
cs/Satellite?blobcol=urldata&blobheader=application/pdf&blobkey=id&blobtable=MungoBlobs&
blobwhere=1251822971738&ssbinary=true; OFFICE OF THE SECY OF STATE, STATE OF
WASHINGTON VOTERS PAMPHLET 31 (2012) [hereinafter WASHINGTON VOTER GUIDE], available at
https://wei.sos.wa.gov/agency/osos/en/press_and_resea rch/PreviousElections/2012/General-
Election/Documents/22-%20Stevens.pdf.
6. See, e.g., Sam Kamin, Medical Marijuana in Colorado and t he Future of Marijuana
Regulation in the United States, 43 MCGEORGE L. REV. 147, 152–53 (2012); Robert A. Mikos, On
the Limits of Federal Supremacy: When States Relax (or Abandon) Marijuana Ba ns, 714 CATO INST.:
POLY ANALYSIS, Dec. 2012, at 1 (presenting an updated and revised version of Robert A. Mikos,
On the Limits of Supremacy: Medical Marijuana and the States’ Overlooked Power to Legalize Feder al
Crime, 62 VAND. L. REV. 1421 (2009)).
7. Marijuana Business Conference Wr apup: 36 Tips, Lessons & Takeaways for the Cannabi s
Industry, MED. MARIJUANA BUS. DAILY (Nov. 15, 2012), http://mmjbusinessdaily.com/marijuana-
business-conference-wrapup-36-tips-l essons-take-aways-for-the-cannabis-industry/ [herei nafter 36
Tips] (emphasis added).

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