Advertisement Sacramento marijuana dispensary challenges IRS in federal court Decision to be announced in about 2 months Share Shares Copy Link Copy

A local medical marijuana dispensary is facing off Monday against the Internal Revenue Service in U.S. Tax Court in San Francisco over a decision that will likely impact pot dispensaries across the country.Canna Care is challenging an 1980s law aimed at preventing illegal drug traffickers from writing off expenses for the illegal activity, that the IRS has applied to the non-profit dispensary’s taxes. Court documents show that after three audits of the dispensary from 2006 to 2008, Canna Care owes the IRS more than $800,000 in income taxes because the dispensary was not allowed to deduct some business expenses.“They include employee (salaries), rent, electricity – normal, everyday expenses are what they disallow,” said Lanette Davies, Canna Care director. However, she pointed out that that the IRS did allow her to deduct the one item that is illegal under federal law: The marijuana.“That says something is backwards. If you’re going to allow what you consider to be illegal, why would you allow it on the tax form and nothing else?” Davies told KCRA 3.At issue is a 1982 statute known as 280E, that bans the deduction of expenses for “trafficking in controlled substances” that was originally meant to prevent drug dealers for claiming tax deductions.The IRS has applied it to pot dispensaries.“The net effect is if the IRS is successful … it would drive legitimate dispensaries underground because only the kind of people who would want to engage in illegal activity anyway will participate in dispensaries,” said Michael Vitiello, a law professor at Pacific McGeorge Law School.Vitiello said the decision from this case will not be as definitive and on-point as a Supreme Court decision, but will still have a national impact.“It will send shock waves through the industry -- people look at legal developments elsewhere,” he explained.Davies said the IRS offered to settle her case for $100,000 but she said she is refusing out of principal.“Nobody, nobody in their right mind – especially when you’re dealing with cannabis – wants to take out a fight with the federal government,” she said. “But I just think it’s morally and ethically wrong with what they’re doing.”KCRA 3 could not reach an IRS spokesperson for comment.A decision on the case won’t be announced for another 60 days after arguments in court Monday.