Marijuana and the IRS: How a Reagan Era Law Impacts the Cannabis Industry 

By  Lanny Swerdlow

Marijuana and the IRS: Democratic Resolution Calls on Trump to
Expand Obama's Doctrine of Non-Interference

The California Democratic Party has passed a resolution condemning the use of an IRS code section that disallows marijuana dispensaries from deducting most of their business expenses from their federal income taxes. As a consequence marijuana dispensing businesses are required to pay taxes on almost every dollar taken in. This results in usurious and unsustainable taxation rates that would drive any business into bankruptcy.

Al Capone was brought down for not reporting income from the sale of alcohol during prohibition and not for the actual sale of alcohol. In a similar manner in 1984, at the height of the Reagan Administration’s escalation of the War on Drugs, the United State Congress directed the IRS to disallow businesses that illegally distribute schedule 1 drugs from deducting business expenses from their federal taxes.

Since marijuana is a schedule one drug, the IRS has interpreted this directive to mean that they are to deny business expense deductions to any business that distributes marijuana even if they are allowed to distribute under state law. The IRS continues to follow this policy even though the United States Congress has, through the Rohrabacher/Farr amendment, prevented the Dept. of Justice and DEA from expending any funds to investigate and prosecute marijuana businesses and the Obama Administration has directed the DOJ not to prosecute marijuana dispensaries in states that have allowed its use.

The original sponsor of 280E, former Rep. Pete Stark (D-CA) has criticized the IRS for its actions stating it "...undercuts legal medical marijuana dispensaries by preventing them from taking the full range of deductions allowed for other small businesses [and] punishes the thousands of patients who rely on them for safe, legal, reliable access to medical marijuana as recommended by a doctor."

marijuana news, Congressman Dana Rohrabacher (R, CA)

Congressman Dana Rohrabacher (R, CA)

Co-sponsored with Rep. Dana Rohrabacher (R-CA), Rep. Barbara Lee (D-CA) and others, Stark introduced the Small Business Tax Equity Act of 2011 which would allow for business tax deductions by businesses selling medical marijuana. The bill has not come up for a vote as it has been blocked by Republican legislators in the House Ways and Means Committee.

The IRS has in many instances used its powers to enforce this onerous provision against high profile marijuana dispensary operators such as Lynette Shaw, who opened California’s first legal medical marijuana dispensary in Fairfax and Steve DeAngelo, who operates the state’s largest collective, Harborside in Oakland, with over 100,000 members.

There is a personal angle here as I have also be targeted by the IRS in my role as founder of the Inland Empire Patients Health and Wellness Center, the collective whose case for violating the zoning ordinances of the city of Riverside went to the Supreme Court resulting in the decision that allowed cities and counties to ban medical marijuana collectives under their zoning ordinances.

I believe my targeting by the IRS was the result of a letter sent to the Department of Justice by the city of Riverside during the time the lawsuit against the collective was working its way up to the Supreme Court. In that letter asking the DOJ to take action to close the collectives operating in Riverside, City Attorney Greg Priamos and Chief of Police Sergio Diaz singled me out as the only person named in the letter and specifically calling attention to my activism to legalize marijuana.

Although the DOJ took no direct action, it is not uncommon for the DOJ to pass on such information to the IRS. There were at least a hundred people operating collectives in the Inland Empire, many significantly larger than the IEPHWC and I was the first one targeted by the IRS for investigation.

The IEPHWC never had any taxable income as expenses exceeded income as was reflected in their tax return filings. The IRS, however, has disallowed almost all expense deductions under Section 280E and now claims I am personally responsible for paying over $321,000 assessed against the collective’s aggregate income.

Recognizing this is wrong, hurts people and makes a mockery of California’s medical marijuana laws as well as Prop. 64 that makes recreational marijuana distribution legal, the California Democratic Party passed a resolution at its Eboard meeting in November 2016 that:

“requests the President of the United States of America to direct the Internal Revenue Service to cease denying the ability to deduct business expenses from their federal tax returns to businesses and individuals furnishing medical marijuana and adult-use marijuana, as permitted by state law, in the same manner that President Obama directed the Department of Justice to suspend criminal prosecutions against businesses and individuals that furnish marijuana as permitted by state law”


Due to its policy of not naming specific pieces of legislation or government code sections in a resolution, the California Democratic Party describes what section 280E does in its resolution without specifically naming the section.

The sponsor of the resolution, the Brownie Mary Democrats of California, a statewide chartered organization of the California Democratic Party, will be distributing the resolution to all Congressional Democrats in California requesting their assistance to bring about the implementation of this resolution.

As president and founder of the Brownie Mary Democrats of California, I am concerned that the new Trump administration and the selection of anti-marijuana law reform proponent Jeff Sessions as Attorney General may continue to allow the use of section 280E against marijuana dispensaries. This is wrong and I hope Trump realizes that most Americans support medical marijuana and the legalization of marijuana and will not think favorably of any government actions that run counter to their beliefs.

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