Global Ganja Report

The IRS is believed to have opened audits on at least 12 medical cannabis dispensaries in California under the determination that past deductions are invalid because of a clause in the federal tax code prohibiting any enterprise that traffics in Schedule I or II drugs from making business deductions. The move could bankrupt every dispensary that it targets. The first dispensary to receive a final audit decision from the IRS is the Marin Alliance for Medical Marijuana (MAMM) in Fairfax.

Lynette Shaw, founder and owner of MAMM, is hoping to strike back before the IRS can deliver any more "final determinations" to other dispensaries. Shaw intends to file an appeal in US Tax Court, citing precedent for such a case. In 2007, a San Francisco dispensary primarily catering to terminal AIDS patients got its payment cut down to just over 1% of what the IRS originally said it owed in back taxes.

Shaw is prepared to take the case to the Supreme Court if necessary. A successful appeal of a ruling against her could guarantee that neither MAMM nor any other dispensary in California or any other state would have to worry about future IRS audits.

Shaw calls the IRS applying regulations meant for illicit drugs ton herb considered medication by state governments "an abrogation of states' rights." She also intends to challenge the very classification of marijuana that has allowed the IRS to go after MAMM and other dispensaries.

"The Constitution says that all American laws shall be based upon a rational basis," she said. “I’ve got a truckload of evidence to argue that this doesn't pass the muster of rational basis."

Cannabis joins heroin and ecstasy, among others, as a Schedule I drug on the Drug Enforcement Agency's list of drug classifications. Cocaine, in contrast, is classified less harshly as a Schedule II drug. Shaw hopes that cannabis will be reclassified as Schedule III, next to ketamine and steroids, or even IV, like a slew of prescription drugs. The tax deduction disqualification applies only to Schedule I and II drugs.

Indeed, the federal criteria for Schedule I drugs seems not to describe marijuana on any count. The US Code reads:

(A) The drug or other substance has a high potential for abuse.

(B) The drug or other substance has no currently accepted medical use in treatment in the United States.

(C) There is a lack of accepted safety for use of the drug or other substance under medical supervision.

Drugs are supposed to meet all three criteria before being classified as Schedule I, yet cannabis has an accepted medical use in 15 states, plus Washington, DC, and there is no evidence that it poses a safety risk, except for the threat of certain types of cancer that cannabis may share with tobacco.

Shaw fears that if a tax judge rules against her and no appellate court will reverse the ruling, California's dispensaries could be out of business. Drug scheduling affects more than just tax allowances; the potential impact of rescheduling on mandatory minimum sentences might keep judges from wanting to open that can of worms. But Shaw insists that she’s not asking for a lot. "This is a very conservative action," she said. "We're not trying to end the drug war. We just want reclassification." (The American Independent, March 18)