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Are the IRS and SEC Stepping in for the DEA?

While the marijuana industry’s attention has remained focused on what the new Trump administration means for state-level cannabis legalization – specifically on whether Attorney General Jeff Sessions, a vehement anti-marijuana crusader, will instigate a federal crack-down against states that have legalized marijuana and implemented regulatory models – other federal agencies have been quietly taking their own steps to quash the industry, using methods at their departments’ disposal to penalize and tax business owners in a myriad of ways.

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For example, in the first half of 2017 alone, the Securities and Exchange Commission and the Internal Revenue Service have respectively suspended or audited numerous cannabis businesses. The results for business owners and investors have ranged from expensive setbacks to devastating financial blows. Such actions have sent a forceful message from federal agencies: even if the DEA and DOJ won’t enforce marijuana laws, other departments can – and will.

On May 19, the SEC temporarily suspended trading for two marijuana stocks on the OTC markets. Both of the SEC’s orders cited the companies “neglecting to provide accurate and up-to-date information” in press releases that each had recently issued.

One, Eco Science Solutions, Inc. (OTC: ESSI), had issued a press release on May 5 relating to its announcement that it had signed a letter of intent to acquire Ga-Du Bank, Inc., with the goal of the bank providing the cannabis industry with various services. The other company, Holy Grail Company (OTC: HGRL), was suspended by the SEC for “a lack of company information made available to the public,” particularly regarding the company’s controlling interests.

Both companies’ suspensions lasted from May 22 to June 5.

Meanwhile, the IRS has increasingly enforced a federal tax statute, 280-E, against cannabis businesses. 280-E, enacted by Congress in the 1980’s, denies standard deductions such as employee payroll, rent, and other expenses to those who traffic in controlled substances and limits deductions to “the cost of goods sold.” In other words, cannabis dispensaries and other businesses can only deduct the amount they paid to purchase marijuana, which essentially renders operating a cannabis business financially unsustainable.

Furthermore, once the IRS determines that a business is operating illegally in controlled substances and attempts to collect the back-owed taxes, federal tax courts place the burden on the investigated business to prove the IRS wrong – not on the IRS to prove its claim. If a business owner is unable to show that the IRS erred in its determination – which has overwhelmingly been the case thus far – the business must pony up the tax difference, which can easily amount to tens of thousands of dollars for each tax year alone.

Suspensions and audits can jeopardize business models, funding, and even the personal finances of those involved or invested in the cannabis industry. In addition to these concerns, business owners may also face the risk of other federal enforcement, such as DEA raids, criminal liability, and civil asset forfeiture. If the first half of the year is any indicator, the number of federal agencies willing to enforce federal marijuana laws may very well be on the rise. Ensuring that you know your rights can not only help protect your business: it can protect your personal liability and finances as well.

Charles Feldmann is the Managing Partner of Cantafio & Song PLLC a Denver based international cannabis law firm and a leader of the firm’s cannabis practice. Contact him at Feldmann-Nagel.com for assistance or guidance in mitigating the ever-growing federal risk to the marijuana industry.

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