IRS Rifles Through Cannabis Records

Author: Justin Hobson Lane Powell Portland OR

The IRS may enforce a summons when the following conditions are met:

  1. The investigation will be conducted pursuant to a legitimate purpose,
  2. The information sought may be relevant to that purpose,
  3. The information sought is not already in the IRS’s possession, and
  4. The IRS follows the required administrative steps.

In this particular case, the IRS asserted that it sought records from MED pertaining to the taxpayer’s federal tax liabilities to 1) verify financial records and 2) determine if the IRS could substantiate information contained in the taxpayer’s returns.

The taxpayer’s arguments against the summons focused on whether or not the IRS had a legitimate purpose for obtaining MED records. The taxpayer argued the IRS summons was pretext for a criminal investigation. The fact that an IRS summons could have a criminal investigation impact is not relevant to determining its validity when the summons has an otherwise valid and non-criminal basis such as revenue recognition or section 280E compliance.

The taxpayer also asserts that the IRS summons includes MED “Transfer Reports” that could be used by the IRS as a fishing exercise for determining other taxpayers in the cannabis industry and subject to section 280E. According to the court, the taxpayer’s argument did not put “much meat on the bone” because the summons applied to a single taxpayer. So-called John Doe summons are subject to section 7609(f) when a summons does not identify the person with respect to the potential tax liability.

IRS examination of taxpayers in the cannabis industry may lead to John Doe summons in the future. See U.S. v. Coinbase, Inc. 120 AFTR 2d 2017-5239 (DC CA), 07/18/2017. In general, an IRS John Doe summons is valid when:

  1. The summons relates to the investigation of a particular person or ascertainable group or class of persons,
  2. There is a reasonable basis for believing that such persons or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
  3. The information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

The first and third prong should not be much of an IRS obstacle. The validity of an IRS John Doe summons will likely depend on the second prong — whether or not the IRS can assert a reasonable basis for believing cannabis-industry taxpayers generally fail to report revenue includable under section 61 or comply with section 280E. A systemic failure of taxpayers to accurately report revenue or calculate taxable income may lead to widespread issuance of John Doe summons of MED (and other state’s) records.

The takeaway? Taxpayers subject to state seed-to-sale tracking requirements should expect and anticipate that the IRS (and state taxing authorities) have complete and full access to such records. Furthermore, taxpayers lucky enough to have access to bank accounts should expect their financial institution to perform due diligence including comparing seed-to-sale records to financial records and tax returns. See FinCEN memo — “BSA Expectations Regarding Marijuana-Related Businesses.” Any differences should be reconciled and explained.

The Pipeline: Cannabis Law Advisor Blog

Lane Powell’s Cannabis Team discusses the legal issues that impact the cannabis industry, including regulatory, banking, intellectual property and investing.

Justin Hobson is an associate at Lane Powell where he advises cannabis businesses on business, regulatory and tax matters.  He helps his clients make well-informed legal decisions that will benefit their businesses for the long haul and offers guidance on:

  • Entity selection,
  • Raising capital,
  • Regulatory compliance,
  • Tax planning,
  • Mergers and acquisitions, and
  • Drafting shareholder, operating and intercompany agreements.

 

Justin E. Hobson Attorney | Portland | 503.778.2136 | hobsonj@lanepowell.com

Areas of Practice

Justin Hobson is a member of Lane Powell’s Tax Practice Group. His practice includes all aspects of business taxation. He has particular experience counseling clients on a variety of cross-border tax matters, including global restructuring, cross-border transactions, entity formation, tax treaties, accounting for income taxes, transfer pricing, import and export taxes, customs duties, and value-added taxes.

Professional Experience

  • PricewaterhouseCoopers LLP
    • Manager (2012-2015)
    • Senior Associate (2009-2012)
    • Associate (2007-2009)

Admitted to Practice

  • Oregon
  • Washington

Academics

  • University of Oregon School of Law (J.D., 2007)
    • Oregon Law Review, Associate Editor
  • Pacific Lutheran University (B.B.A., Accounting, cum laude, 2004)
    • Beta Alpha Psi, Member
    • Pre-law Advisor

Practice Group and Specialty Team Memberships

  • Cannabis
  • FinTech
  • Private Investment Funds
  • Taxation
  • Transportation Client Team

Publications

  • “Brace for Lawsuits: Seattle’s Income Tax on High-Earners Will Likely Face Legal Challenges,” Puget Sound Business Journal, Co-author (July 11, 2017)
  • “Seattle’s Proposed Income Tax Is ‘Deep-Pocket Tax Fishing,’ Faces Legal Challenges,” Puget Sound Business Journal, Co-author (June 1, 2017)
  • “Portland the Trendsetter,” Journal of Multistate Taxation and Incentives, Author (May 2017)
  • “Don’t Bury Your Head in the Sand: Illinois Court Rulings on Use Tax for Shipping Charges,” Journal of Multistate Taxation and Incentives, Author (January 2017)
  • “Initiative Petition 28 — Changing the Oregon Corporate Excise Minimum Tax,” Journal of Multistate Taxation and Incentives, Co-author (August 2016)
  • “New Tax Guidance on Wrongful Imprisonment Damages,” Lane Powell White Paper, Co-author (June 30, 2016)
  • “Recreational Cannabis — Section 280E and Tax Efficient Structuring,” Lane Powell White Paper, Co-author (June 15, 2016)
  • “Rethinking Choice of Entity — Section 1202 Stock,” Oregon State Bar Taxation Section Newsletter, Co-author (Spring 2016)
  • “Legislative Update: Oregon Business Taxation,” Association of Corporate Counsel Oregon Chapter Q1 2016 Newsletter, Author (March 2016)
  • “Retroactive Tax Law Provides Tax Benefits for Victims of Wrongful Incarceration,” Lane Powell White Paper, Co-author (February 11, 2016)
  • “IRS Continues Focus on Corporate Inversions,” Lane Powell Legal Update (December 8, 2015)

More Information At:  https://www.lanepowell.com/24546/justin-e-hobson/