The Federal Government Has Bitcoin To Sell To You!

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U.S. marshals in recent months having confiscated over 2,000 bitcoin in conjunction with federal prosecutions has announced the sale of this bitcoin to commence March 19th.

Feds Don’t Mine – They Confiscate.

When the Federal Government shuts down any illegal operation including cannabis enterprises (which despite State law legalizing cannabis, it is still illegal under Federal law), the Federal Government is allowed to confiscate all assets of the illegal operation which includes the plants, equipment, property, cash and bitcoin.  Handling and custody of these assets are managed by the U.S. Marshals Service.  It’s not a well-known fact that because of these seizures in shutting down illegal operations, the Federal Government is the biggest auctioneer of bitcoin and manages one of the world’s biggest wallets with as much as $120 million worth of BTC. In 2013, the FBI seized 144,336 bitcoins, valued at just over $48 million, connected to Silk Road which was a notorious online drug market that the FBI shut down.

Next On-line Auction Of Bitcoin By the Feds.

The Federal Government announced that it has 2,170 bitcoins set to be auctioned off this month. The coins were seized from a variety of sources: criminal, civil, administrative. Details according to the government’s press release state to be eligible for the March 19th auction, potential bidders must complete all registration requirements by noon EDT March 14. Registered bidders only will get a chance to make offers via email. A $200,000 deposit is required to participate. Deposits will be returned to non-winning bidders.  The Bitcoin will be served up in chunks or blocks: “two blocks of 500 bitcoins, 11 blocks of 100 bitcoins and one block of approximately 70 bitcoins,” for a total of 14 blocks. The winner will be contacted on the 19th. The government believes that in total it should get $25 million from the auction. About a month ago the Federal Government auctioned 3,600 bitcoin for which it collected close to $30 million.

War On Drugs Includes Bitcoiners

The U.S. Marshals’ auction site lists all upcoming auctions, with about 75% of those cases coming from illegal activity shut down by the Drug Enforcement Administration (DEA). The DEA is the most dreaded federal agency of the cannabis industry putting state-law abiding cannabis businesses in the same category as narcotics traffickers.  Bitcoin has been hot on the DEA’s radar and as recently as late last year the agency released a report, National Drug Threat Assessment, which contends that bitcoin is used an illicit means of finance.

Charges Include Tax Crimes

For individuals nabbed by the Federal Government, it is not surprising that the IRS gets involved and they are also charged with tax crimes.

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

What Should You Do?

It is risky enough to be involved in cannabis or crypto-currency, so imagine how much riskier it is combining both.  It is important to control this risk which you can do by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario) and other California locations.  We can come up with solutions and strategies to these risks and protect you and your business to mitigate criminal prosecution, seek abatement of penalties, and minimize your tax liability.

 

 

 

Weedmaps Now Pinned On California’s Enforcement Map

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According to reports from the Sacramento Bee and Marijuana Business Daily, Lori Ajax, chief of the California Bureau Of Cannabis Control, issued on February 16, 2018 a cease and desist order to Weedmaps.com, an internet company based in Irvine that maps marijuana dispensaries, to immediately stop promoting cannabis businesses that do not have state licenses. It is Ms. Ajax’s position that the business of Weedmaps allegedly is aiding and abetting in violation of state cannabis law (the California Medicinal and Adult-Use Cannabis Regulation and Safety Act) by advertising canna-businesses without proper state license numbers and if the company doesn’t immediately drop advertisements for unlicensed businesses, Weedmaps could face criminal and civil penalties, including civil fines for each illegal ad.

While Weedmaps does not sell cannabis but merely serves that industry by providing an advertising service, such action by the State to go after third parties providing ancillary services to the cannabis industry is very chilling. Despite California legalizing medical use and recreational use marijuana, cannabis businesses must still be licensed by the State. This license requirement started January 1, 2018. The California Bureau Of Cannabis Control has identified at least 900 cannabis businesses operating without the proper licenses and many of these businesses are listed on Weedmaps.

Cannabis Is Illegal Under Federal Law.

It is enough that a cannabis businesses have to face the fact that under 21 U.S.C. § 812 (known as the Federal Controlled Substances Act), the Federal government classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically but the fact that a cannabis business is properly licensed by the State can be a mitigating factor decreasing these penalties.

Risk To Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real and for those cannabis businesses that are not licensed by the State, not only will they rise to the top of the Federal District Attorney’s list but also by State authorities. Criminal prosecution is also possible at both the Federal and State levels so it is important to have qualified legal counsel lined-up and available to intervene.

What Should You Do?

Considering this risks of cannabis you need to protect yourself and your investment, especially if you are not holding a valid license with the State. Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

canada canabis industry

How Canada Is Profiting From The United States Federal Government Punishing The Cannabis Industry

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While the United States federal government refuses to make any use of marijuana legal and maintains banking and taxing roadblocks to the cannabis industry despite 29 states plus the District Of Columbia making Medical marijuana legal and 8 states plus the District Of Columbia making recreational marijuana legal, Canada is making huge strides into the United States market effectively pulling profits out of the United States into Canada.

It has only been since 2001 that Canada legalized medical cannabis but the Canadian government has embraced this industry and major publicly-traded companies have evolved led by Canopy Growth Corp., Aphria, MedReleaf, and Aurora Cannabis. These companies having substantial capital resources have the ability to acquire licensed cannabis businesses in the United States to tap into new suppliers of cannabis and a growing U.S. consumer market. We have advised U.S. cannabis businesses who have been lucky enough to receive offers from Canadian companies which typically propose a large down payment, stock options and lucrative compensation terms.

If anyone or any company approaches you with an offer to buy or takeover your cannabis business, consider that the acquiror’s attorney represents the buyer – not you. It would be a conflict of interest for the acquiror’s counsel to advise you on how the deal could be best structured for you. You should hire your own Board Certified Tax Attorney to review the acquisition documents and confirm the tax burden you may face and negotiate the best deal possible to make sure that you are getting what you are expecting from the sale and to minimize your tax bill.

As for those U.S. businesses not accepting any solicitations of offers, its business as usual. In the U.S. that business is to face the ongoing challenges of running a cannabis business that while is legal in by the state where operating, is illegal under Federal law. Those challenges being: your local Federal District Attorney shutting down your business and seizing assets; losing all bank privileges; and getting a big tax bill from IRS that you cannot pay.

Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real. Criminal prosecution is also possible so it is important to have qualified legal counsel lined-up and available to intervene.

Risk Of Losing All Bank Privileges

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels. On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the Department Of Treasury issued guidance (FIN-2014-G001) clarifying how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance issued by the Department Of Treasury was following the Cole Memo issued by the DOJ. But now that the Cole Memo has been rescinded, the FinCEN guidance is not has persuasive leading many banks to turn away cannabis businesses. For those cannabis businesses that have eluded banks with their true business activity (which such misrepresentation is also a Federal crime), those businesses run the risk of having their bank accounts shut down by the bank when the bank learns of their true business activity so it is important to secure qualified legal counsel to come up with solutions that will allow you to still conduct business and meet financial obligations.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

Of the three big risks, by far this is the one posing the greatest challenge as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

How Do Marijuana Businesses Explain To IRS A Cash Stash Accumulated From The Past?

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With the proliferation of licensed cannabis businesses sprouting in the State Of California in 2017, a lot of cannabis business will be filing tax returns with the IRS starting next year. But beware, the IRS is well aware that successful cannabis businesses don’t just sprout overnight and now that your business is on the radar screen you can bet that the IRS will be inquiring how you accumulated all that cash before 2017. We refer to this accumulation of cash as “legacy cash”.

Legacy Cash Is A Big Problem For Successful Cannabis Businesses

In the early days of cannabis operations, the biggest issue was what to do with all the cash? Cash is bulky and risky, but you have to do something with it and cannabis entrepreneurs can’t just take it to their local bank and make a deposit like every other kind of business can. So what have cannabis entrepreneurs been doing for all these years? For the most part they are keep the cash and where that income was never reported on prior tax returns, they now run the risk of being caught by IRS and prosecuted for tax evasion.

Yes – Marijuana Businesses Have to Report Income To IRS And Pay Taxes!

Regardless of whether a marijuana businesses operates in a State that has legalized cannabis, these businesses have to pay taxes under I.R.C. §280E, the same category reserved for illegal drug traffickers. Cannabis is categorized as a Schedule I substance under the Controlled Substances Act, 21 U.S.C §812. While more than half of the states in the U.S. have legalized some form of medicinal marijuana, and several others have passed laws permitting recreational cannabis use, under federal drug laws the sale of cannabis remains illegal.

Supporting Business Documents

It is outrageous that the $6.7 billion U.S. cannabis industry is forced by disparities in state and federal law to conduct nearly all transactions in cash. Experts believe that by 2021 the cannabis industry is expected to balloon to $21 billion. The lack of banking opportunities for marijuana business and being forced to deal in cash creates challenges for these business to not only manage the cash but how to substantiate expenses paid in the event the business is select for audit by the IRS.

In any typical business, purchases, sales, payroll, and other transactions will generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. Keeping them in an orderly fashion and in a safe place will assure that if the time should come that you are selected for an IRS audit, you will be able to produce them and preserve the deductions claims.

Proof of Payments

Proving deductions to the IRS is a two-step process:

First, you must substantiate that you actually paid the expense you are claiming.

Second, you must prove that an expense is actually tax deductible.

Step One: Incurred And Paid The Expense

For example, if you claim a $5,000 purchase expense from a marijuana distributor, offering a copy of a bill or an invoice from the distributor (if one is even provided) is not enough. It only proves that you owe the money, not that you actually made good on paying the bill. The IRS accepts canceled checks, bank statements and credit card statements as proof of payment. But when such bills are paid in cash as it typical in a marijuana business, you would not have any of these supporting documents but the IRS may accept the equivalent in electronic form.

That is where it becomes essential that an accounting system be developed early on to track these transactions.

Step Two: Deductibility Of The Expense

Next you must prove that an expense is actually tax deductible. For marijuana businesses this is challenging because I.R.C. §280E states: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act) which is prohibited by federal law or the law of any state in which such trade or business is conducted.”

In reading I.R.C. §280E one would think that no deductions are allowed in a marijuana-related business but if that were the case, the U.S. Tax Court has stated that this statute would have been stricken as unconstitutional as the Sixteenth Amendment to the U.S. Constitution prohibits the Federal government from taxing “gross receipts”. Reading vs. Commissioner Of Internal Revenue, 70 T.C. 730 (1978). So the way I.R.C. §280E operates is to allow marijuana-related businesses to deduct Costs Of Good Sold but not “ordinary and necessary” business expenses. This tax treatment prevails regardless that you are conducting a marijuana business that is duly licensed in a State that has legalized marijuana because such business is still illegal under federal law.

It should be apparent that the cost of acquiring the marijuana itself is part of Costs Of Good Sold but what if you produce the marijuana? We advocate that producers can also capitalize the direct material costs (marijuana seeds or plants), direct labor costs (planting, cultivating, harvesting and sorting), and certain indirect costs that include repairs, maintenance, utilities, rent, taxes, depreciation, employee benefits and officer’s salaries). Resellers too should consider a more expansive view of Cost Of Goods Sold that includes capitalizing the costs of transportation and other necessary charges incurred in acquiring possession of the marijuana and maintaining the inventory for resale.

That is why it becomes essential that a proper accounting system be developed to capitalize as much of your expenses into inventory in a manner acceptable by the IRS.

Dealing With The Cash Legacy Problem

The IRS has not yet announced a specific tax amnesty for people who failed to report their income from cannabis but coming forward under Voluntary Disclosure could result in non-compliant taxpayers avoiding criminal prosecution and lower penalties.

What Should You Do?

Don’t wait to be selected for an IRS investigation or audit. Be proactive and consider voluntary disclosure for the past and implement the proper cash management and accounting systems for the future. Marijuana businesses who hire an experienced attorney-CPA should benefit in paying the least amount of tax under the tax code and if audited, the least audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario) and other California locations maximize your net profits and get you the best possible result.

Risks Facing The Cannabis Industry

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Banks won’t touch you, IRS just wants to tax you and the Feds want to close you down – despite California legalizing marijuana, these are the risks marijuana businesses face every day.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics. However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

When consulting with people looking to go into the cannabis business or people who are already into this industry, there are three risks that everyone is most concerned about, namely:

1. Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

2. Risk Of Losing All Bank Privileges

3. Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Risk of Being Shut Down And Assets Seized By Your Local Federal District Attorney

On January 4, 2018 Attorney General Jeff Sessions rescinded what was known as the “Cole Memo”.

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that the Cole Memo has be rescinded, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws. While State law and public acceptance of marijuana usage may temper federal prosecutors’ aggressiveness, this risk of seizure and shutdown is still real. Criminal prosecution is also possible so it is important to have qualified legal counsel lined-up and available to intervene.

Risk Of Losing All Bank Privileges

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels. On February 14, 2014, the Financial Crimes Enforcement Network (“FinCEN”) which is a division of the Department Of Treasury issued guidance (FIN-2014-G001) clarifying how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This FinCEN guidance issued by the Department Of Treasury was following the Cole Memo issued by the DOJ. But now that the Cole Memo has been rescinded, the FinCEN guidance is not has persuasive leading many banks to turn away cannabis businesses. For those cannabis businesses that have eluded banks with their true business activity (which such misrepresentation is also a Federal crime), those businesses run the risk of having their bank accounts shut down by the bank when the bank learns of their true business activity so it is important to secure qualified legal counsel to come up with solutions that will allow you to still conduct business and meet financial obligations.

Risk Of Getting A Big Tax Bill From IRS That You Cannot Pay

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses. A cannabis business that has not properly reported its income and expenses and not engaged in the planning to minimize income taxes can face a large liability proposed by IRS reflected on a Notice Of Deficiency or tax bill.

Of the three big risks, by far this is the one posing the greatest challenge as the Federal taxation of cannabis businesses is consistent in all states and not dependent on whether local Federal prosecutors are aggressive in enforcing the illegality of cannabis or the banks unwilling to do business with the cannabis industry. This unexpected liability can put you out of business so it is important to secure qualified tax counsel to be proactive with tax planning to minimize taxes and to defend you in any tax examinations, appeals or litigation with the IRS.

What Should You Do?

Considering this risks of cannabis you need to protect yourself and your investment. Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits.

california marijuana canabis growing

How Some California Localities Are Putting Cannabis Businesses Out Of Business.

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Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. In 2000, 70% of Americans believed marijuana should be illegal. Attitudes have since dramatically changed with a complete flip as a 2017 Yahoo News/Marist Poll survey showed that 83% support legalization.

Key State Of California Legal Developments

California was the first state in the country to legalize medical marijuana in 1996. Over the following two decades, a thriving medical marijuana industry became firmly rooted in the state despite frequent overhauls to California’s legal and regulatory framework for medical marijuana. State lawmakers addressed the confusion in the 2016 Medical Cannabis Safety and Regulation Act, an expansive piece of legislation that overhauled California’s licensing processes and regulations for patients, dispensaries, growers, manufacturers, and transporters of medical cannabis. Then on November 8, 2016, California voters passed Proposition 64, or the Adult Use of Marijuana Act (AUMA) which now starting January 1, 2018 makes it legal to engage in the recreational marijuana business.

Local Enabling Legislation Still Required

Despite this expansive mandate by the State Of California, legally going into the marijuana business still requires local enabling legislation which through county/city zoning and public safety laws permits local governments to make it easy or hard for marijuana businesses to operate in their areas. Many California counties and cities have yet to enact these local laws and for those who have, many have been issued on a temporary basis.

Two years ago, the Calaveras County Board of Supervisors saw marijuana farming as an answer to the agriculture industry devastated by the massive wildfires that occurred in the Sierra foothills. The Board Of Supervisors passed laws to encourage marijuana growers to relocate to that county. But that now all appears to have changed as a new Board Of Supervisors has voted to ban commercial cannabis cultivation. This decision that will affect about 200 permitted growers and others that have permits pending with the county.

Calaveras County is not the only county government in the Sacramento Area now banning cannabis business but so are Placer County and El Dorado County. Such a move will likely prompt lawsuits but most businesses will likely move to other counties like Sacramento County and Yolo County where cannabis commercial cultivation is still legal.

But The Feds Can Still Close You Down

Marijuana though is still illegal under Federal law. The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that as of January 4, 2018 Attorney General Jeff Sessions rescinded the Cole Memo, federal prosecutors in cannabis legal states including California will now be free to decide how aggressively they wish to enforce federal marijuana laws.

What Should You Do?

Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations. We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.

Thinking About Using Medical Marijuana While On Federal Supervised Release Or While Serving Federal Probation?

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Medical marijuana is now legal in 29 states (including California) plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

Federal Law

21 U.S.C. § 812 known as the Federal Controlled Substances Act (“CSA”) classifies marijuana as a Schedule 1 substance with a high potential for abuse, no currently accepted medical use in treatment, and lack of accepted safety for use under medical supervision.

The federal penalties for possession of any amount of marijuana are as follows:

  • First Offense – Misdemeanor involving up to one year of incarceration and $1,000 in fines
  • Second Offense – Misdemeanor punishable by 15 days to 2 years behind bars and $2,500 in fines
  • Third and subsequent offenses – Misdemeanor or felony punishable by 90 days to 3 years of incarceration and fines of up to $5,000.

The penalties for the sale of marijuana depend on the amount of marijuana you have been accused of selling or attempting to sell:

  • Less than 50 kilograms – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 kilograms – Felony punishable by up to 20 years in prison and/or fines of up to $1,000,000
  • 100 to 999 kilograms – Felony involving 5 to 40 years incarceration and/or fines of up to $2,000,000
  • 1000 kg and up – Felony carrying a sentence of 10 years to life in prison and/or up to $4,000,000 in fines

As for the cultivation of marijuana, the federal authorities punish it on the basis of the number of plants you were caught growing:

  • Less than 50 plants – Felony punishable by up to 5 years in prison and/or up to $250,000 in fines
  • 50 to 99 plants – Felony punishable by up to 20 years in prison and/or up to $1,000,000 in fines
  • 100 to 999 plants – Felony carrying a 5 to 40-year prison sentence and/or fines of up to $5,000,000
  • 1,000 plants or more – Felony involving 10 years to life in prison and/or fines of up to $10,000,000

With aggravating factors such as a trafficking activity that results in an injury or death, a sale within 1,000 feet of a school, or a case involving five grams sold to a minor, the above penalties may increase dramatically.

Probation vs. Supervised Release

Probation and Supervised Release are imposed at sentencing. Probation is imposed as a substitute for imprisonment. Supervised Release is imposed in addition to imprisonment. At the Federal level, Probation and Supervised Release are both administered by the U.S. Probation and Pretrial Services System. Federal Probation has existed since 1909. Federal Supervised Release has only existed since 1987, when it replaced federal parole as a means for imposing supervision on individuals that have been released from jail.

The U.S. Probation and Pretrial Services Office interviews and monitors all individuals from pre-sentencing until their period of Probation or Supervised Release is completed. At the pre-sentencing interview the individual will be questioned on what prescriptions or other medication he or she is taking and reminds the individual that the use of illegal drugs and medical marijuana will violate the terms of his or her freedom from incarceration. It does not matter that the state where the individual resides has legalized medical marijuana and the individual is following state law in obtaining and using the marijuana. On January 4, 2018, Attorney General Jeff Sessions announced that in the course of federal prosecutions of people who violate federal law that outlaws marijuana, he will leave it up to the local Federal prosecutors as to what cases should be prosecuted. Likewise, the U.S. Probation and Pretrial Services Offices are following the same stance where they warn individuals that using medical marijuana will violate the terms of their release and they will be reported to the Federal District Court.

What This Means For Individuals Under Probation Or Supervised Release

Unfortunately because medical marijuana is illegal under federal law, medical marijuana patients who are on federal Supervised Release or Federal Probation do not have the right to use their medicine. Violations of conditions of probation or supervised release can result in said revocations being reported to the court and a revocation hearing being held resulting in an individual being put back under custody or other sanctions imposed.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and preserve your freedom if you have been using marijuana and you are on probation or supervised release.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario) and other California locations protect you.

Adding To The Turmoil For The Marijuana Industry – Federal District Attorney For Southern District Of California Endorses Attorney General Sessions’ Revocation Of The Cole Memo

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On January 4, 2018, U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”.

It is surprising that the Trump Administration known for its pro-business stance, allowed for such an anti-business decision to be made by Attorney General Sessions.  Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

United States Attorney’s Office for the Southern District of California Is The First Office In California To Officially Announce It Will Not Follow The Cole Memo

There are four federal districts in California with each district headed by a chief federal prosecutor.  The office of the Federal Southern District Of California which covers San Diego is the only one so far issuing an official statement.  So while federal prosecutors in States like Colorado stated that they won’t change their approach to prosecuting marijuana crimes, federal prosecutor, Adam Braverman, announced that the office of the Federal Southern District Of California is committed to enforcing the laws enacted by Congress, which treats marijuana as an illegal controlled substance.  He goes on in his written statement that “The Department of Justice is committed to reducing violent crime and enforcing the laws as enacted by Congress. The cultivation, distribution, and possession of marijuana has long been and remains a violation of federal law. We will continue to utilize long-established prosecutorial priorities to carry out our mission to combat violent crime, disrupt and dismantle transnational criminal organizations, and stem the rising tide of the drug crisis.”

What Is The Cole Memo?

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

What This Means For Marijuana Businesses

Hopefully the federal prosecutors in the Southern District of California will change its stance and follow the same position as other federal prosecutors like in the State of Colorado in reaffirming a commitment to prioritizing violent and other serious federal crimes.  Look to us for future updates on this.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and your marijuana business from all challenges created by the Federal government.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and other California locations protect you and maximize your net profits.

The Woes Of The Cannabis Industry

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Banks won’t touch you, IRS just wants to tax you and the Feds want to close you down – despite California legalizing marijuana, these are the challenges marijuana businesses face everyday.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia. Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics. However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.  

Banks Won’t Touch You

While states are opening their markets to marijuana, the illegality under Federal law still restricts cannabis businesses access to banking channels.  However, guidance issued by the Financial Crimes Enforcement Network (“FinCEN”) on February 14, 2014 (FIN-2014-G001) clarified how financial institutions can provide services to marijuana-related businesses consistent with their Bank Secrecy Act (“BSA”) obligations, and aligned the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. Whilethis FinCEN guidance (which has yet to be revoked or changed)should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses, banks being conservative by nature are still overwhelmingly reluctant to provide banking services to this industry.

IRS Just Wants To Tax You

Generally, businesses can deduct ordinary and necessary business expenses under I.R.C. §162. This includes wages, rent, supplies, etc. However, in 1982 Congress added I.R.C. §280E. Under §280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is prohibited by Federal law. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana have to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

Feds Want To Close You Down

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

But now that as of January 4, 2018 Attorney General Jeff Sessions rescinded the Cole Memo, federal prosecutors in cannabis legal states will now be free to decide how aggressively they wish to enforce federal marijuana laws.

What Should You Do?

Level the playing field and gain the upper hand by engaging the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and other California locations.  We can come up with solutions and strategies to these challenges and protect you and your business to maximize your net profits.

california marijuana canabis growing

Big Win For The Marijuana Industry – Colorado District Attorney’s Office Rebuffs Attorney General Sessions’ Revocation Of The Cole Memo

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On January 4, 2018, U.S. Attorney General Jeff Sessions announced the revocation of what is known in the cannabis industry as the “Cole Memo”.

It is surprising that the Trump Administration known for its pro-business stance, allowed for such an anti-business decision to be made by Attorney General Sessions.  Just in California alone with the change in law allowing both medical and recreational marijuana, the marijuana industry in California is expected to be a $3.7 billion market in 2018 and could rise to $5.1 billion in 2019 according to the cannabis industry research firm BDS Analytics.

Medical marijuana is now legal in 29 states plus the District Of Columbia and recreational marijuana is legal in 8 states plus the District Of Columbia.  However, under Federal law marijuana is designated as a Schedule I controlled substance and therefore is illegal under Federal law.

Colorado DA’s Office First To Officially Announce Continued Support Of The Cole Memo

The State Of Colorado legalized recreational marijuana in 2012.  It is big business in Colorado so it is not a surprise that the Federal District Attorney’s Office in that state was quick with its announcement stating “The Attorney General rescinded the Cole Memo on marijuana prosecutions, and directed that federal marijuana prosecution decisions be governed by the same principles that have long governed all of our prosecution decisions.  The United States Attorney’s Office in Colorado has already been guided by these principles in marijuana prosecutions — focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state.  We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”

What Is The Cole Memo?

The Cole Memo which came out of the Department Of Justice (“DOJ”) under the Obama administration in 2013, directed U.S. Attorneys to use discretion to prioritize certain types of violations in prosecuting cannabis operators, but, strictly speaking, it did not make operations in cannabis legal. The DOJ told its prosecutors that prosecuting medical marijuana cases in states where is has been legalized would no longer be a priority.

The Cole Memo included eight factors for prosecutors to look at in deciding whether to charge a medical marijuana business with violating the Federal law:

  • Does the business allow minors to gain access to marijuana?
  • Is revenue from the business funding criminal activities or gangs?
  • Is the marijuana being diverted to other states?
  • Is the legitimate medical marijuana business being used as a cover or pretext for the traffic of other drugs or other criminal enterprises?
  • Are violence or firearms being used in the cultivation and distribution of marijuana?
  • Does the business contribute to drugged driving or other adverse public health issues?
  • Is marijuana being grown on public lands or in a way that jeopardizes the environment or public safety?
  • Is marijuana being used on federal property?

What This Means For Marijuana Businesses

Hopefully other U.S. district attorney office’s will follow the same stance as the U.S. Attorney for Colorado in reaffirming a commitment to prioritizing violent and other serious federal crimes. As of this writing none of the four Federal district attorney offices in California have yet made any statement on whether they will still apply the Cole Memo.  Look to us for future updates on this.

What Should You Do?

Given the greater disparity in treatment between the Federal and California governments you need to protect yourself and your marijuana business from all challenges created by the Federal government.  Be proactive and engage an experienced attorney-CPA in your area.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Long Beach and other California locations protect you and maximize your net profits.