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July 15, 2012

IRS Bogarts Medical Marijuana Pharmacy's Deductions, Drives Founder Into Bankruptcy

Following up on my earlier post:? Forbes: Owner of Nation's First Marijuana Pharmacy Now Broke and Fighting IRS, by Janet Novack:

Lynnette M. Shaw, the colorful pot activist who opened the first licensed medical marijuana dispensary in the United States, is fighting an IRS bill for $1.27 million in back income taxes and penalties and has filed for personal bankruptcy, listing $276,000 in state sales taxes among her debts.

Shaw was forced to shut her Marin Alliance for Medical Marijuana in Fairfax, Ca. late last year, after U.S. Attorney for Northern California Melinda Haag wrote a letter to her landlord threatening to seize the building that housed her operation. The letter was part of a coordinated crackdown by four U.S. Attorneys in California on marijuana dispensaries. ...

Shaw?s personal income tax troubles stem from an IRS decision to deny business expense deductions to marijuana dispensaries under a provision Congress passed in 1982 (? 280E) that disallows deductions for ?trafficking in controlled substances? as ?prohibited by Federal law or the law of any State in which such trade or business is conducted.? Surprisingly, Shaw never incorporated the dispensary?as either a for-profit or not-for-profit corporation. Instead, she ran it as a sole-proprietorship, reporting its $1 million plus in annual sales and all its expenses on Schedule C of her individual 1040 tax return.

Shaw?s previously unreported lawsuit filed in U.S. Tax Court late last month, shows that rather than reporting profits, she reported losses totaling $186,826 in 2008 and 2009. After denying all her expenses for everything from cannabis to utilities, IRS auditors calculated Shaw had taxable income of $2.83 million for those years. This past March it sent her a bill for $1.27 million n back taxes and penalties, plus an as yet uncalculated amount of interest. Shaw says she owes nothing. (Harborside, which is incorporated, has reportedly been hit with a $2.5 million IRS bill; according to the U.S. Tax Court docket, it filed suit challenging the assessment in December.)

Shaw?s suit argues that the IRS is ignoring state laws legalizing medical marijuana as well as a 2007 U.S. Tax Court decision (Californians Helping To Alleviate Medical Problems, Inc.) that was decided largely in favor of another, now closed, marijuana dispensary. In the CHAMP case, the IRS conceded that 280E doesn?t preclude deducting the cost of goods sold (i.e. the cost of the cannabis). The court also ruled that CHAMP could deduct the cost of providing extensive counseling and caregiving services to its members, although not the cost of actually distributing the marijuana.

The title of this blog post is courtesy of Country Joe and the Fish:

Don't bogart that joint, my friend
Pass it over to me.
Don't bogart that joint, my friend
Pass it over to me.

July 15, 2012 in Celebrity Tax Lore, Tax | Permalink

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