Medical marijuana dispensaries that have taken federal tax deductions are about to be gut-checked by the Internal Revenue Service (IRS), thanks to a recent ruling by the U.S. Tax Court in Washington, D.C.

In Olive v. Commissioner (PDF), judges unanimously found that the owner of the Vapor Room Herbal Center, one of San Francisco’s largest and most profitable dispensaries, was not allowed to take business deductions because the business was trafficking in a controlled substance.

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The tactic has been increasingly favored by the IRS since 2008, when the U.S. tax agency began conducting audits of major California dispensaries. One of the first businesses targeted by the IRS was the Martin Alliance for Medical Marijuana, which was forced to shut its doors after the IRS cited § 280E of the federal tax code, which prohibits deductions on sales of controlled substances, and demanded millions of dollars in back taxes.

“Every dispensary in the nation, past, present and future is dead if this is upheld,” the Lynette Shaw, owner of the Martin Alliance dispensary, told The Martin Independent Journal.

The Harborside Health Center in Oakland and the Oaksterdam medical marijuana “university” were also targeted using similar IRS claims. While federal drug enforcement agents raided Oaksterdam and forced its founder to step down, the Harborside clinic remains open today even as it faces a massive tax bill and appears to be losing a battle with prosecutors who are attempting to seize their buildings for violating local zoning guidelines.

Tax attorney Paul McKenney, speaking to MLive reporter Garret Ellison, said similarly that the decision is “a real problem” for medical marijuana business owners, who may now find it impossible to reap profits from sales of the drug going forward.

While the news is indeed grim for medical marijuana shops and drug reform advocates, a lawsuit that could force a change in the government’s classification of marijuana is just around the corner. That case, Americans for Safe Access v. Drug Enforcement Administration (DEA), could force marijuana to be rescheduled by the DEA, opening the door for the pharmaceutical industry to pursue research on numerous potential new drugs, effectively supplanting small-time pot purveyors around the nation.

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Photo: Shutterstock.com, all rights reserved.

(H/T: The Associated Press)