In recent years, more than half the states and the District of Columbia have adopted legislation either decriminalizing or legalizing cannabis, giving rise to numerous for-profit businesses. Congress, however, has not seen fit to join this movement toward liberalized controlled substance laws, which means that while growing and distributing cannabis is lawful in certain states, individuals engaged in such conduct remain subject to prosecution under federal laws.

Proponents frequently argue that legalization will, among other things, transform the cannabis industry into a legitimate, regulated business sector, thereby generating significant state tax revenues. However, under both the Obama Administration (which declined to enforce federal criminal laws banning the distribution of marijuana outside certain priority areas) and the Trump Administration (which has resumed general enforcement of those laws), the Internal Revenue Service has consistently applied a provision of the Internal Revenue Code that precludes the deductibility of expenses associated with operating an illegal drug trade. This conflict between state laws legalizing the cannabis industry and federal tax law precluding participants in that industry from deducting business expenses disadvantages cannabis businesses from a federal tax perspective, and has given rise to a series of cases exploring the Fifth Amendment implications of the disallowance of business deductions for state-sanctioned businesses.

Evidentiary Burdens

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