IRS in Washington. Credit: Mike Scarcella

A federal appeals court on Tuesday again upheld the U.S. Internal Revenue Service’s authority to audit state-licensed marijuana dispensaries, rejecting a New Mexico outlet’s argument that the tax agency is acting as a surrogate for criminal prosecutors.

The U.S. Court of Appeals for the Tenth Circuit affirmed two district court rulings refusing High Desert Relief Inc.’s request to quash IRS summonses seeking records from the dispensary’s banks, its local utility and New Mexico’s medical marijuana regulator. A unanimous three-judge panel found the tax agency acted in good faith in pursuing audits of High Desert Relief’s 2014 and 2015 tax filings.

High Desert Relief, or HDR, “fails to present any evidence that the IRS has operated with criminal prosecution in mind,” Judge Jerome Holmes wrote for the unanimous three-judge panel. “For one … the IRS had not referred the matter to the DOJ for prosecution under the [Controlled Substances Act]. For another, there is no plausible reading of the record that would indicate that HDR had in fact been investigated, charged, or prosecuted criminally under the CSA for business activities stemming from fiscal year 2014 or 2015.”

The court also rejected the dispensary’s argument that Section 280E of the Internal Revenue Code, which bars drug traffickers from taking business expense deductions on their taxes, requires a judge to find the taxpayer guilty of a crime first.

“Indeed, as the district court in Alpenglow stated in a helpful opinion: ‘If Congress had wanted such an investigation to be carried out or conviction to be obtained, then it could easily have placed such language in § 280E,’” Holmes wrote.

Tuesday’s ruling was the latest blow for marijuana-related businesses seeking to take the full range of tax deductions available to other companies. The Tenth Circuit has already affirmed the IRS’s broad authority to audit state-licensed dispensaries in cases such as Alpenglow Botanicals v. United States of America and The Green Solution Retail v. United States of America.

The Greenwood Village, Colorado, firm of Thorburn Walker represents High Desert Relief as well as the dispensary-plaintiffs in Alpenglow and Green Solution. Attorney James Thorburn could not immediately be reached for comment.

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Michael Huangs, an attorney in the Department of Justice’s tax division, argued on behalf of the IRS in the High Desert Relief case.

According to the court, the IRS opened a review of High Desert Relief’s tax filings in February 2016. Owners of the Albuquerque, New Mexico, dispensary declined to meet with an IRS agent because of their “concern that the IRS’s investigation into § 280E would be equivalent to a criminal investigation.” The owners also refused to provide the agent with any tax records or give her a tour of the business.

The investigating agent then sent summonses for information to the dispensary’s two banks, the New Mexico Department of Health’s medical cannabis program and the local electric utility, Public Service Company of New Mexico.


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