Now he walks in quiet solitude
The forests and the streams
Seeking grace in every step he takes
His sight has turned inside
Himself to try and understand
The serenity of a clear blue mountain lake
And the Colorado Rocky Mountain high
I’ve seen it rainin’ fire in the sky
Talk to God and listen to the casual reply
Rocky mountain high (Colorado)
Rocky mountain high (Colorado)
John Denver- 1972
John Denver was a famous singer songwriter in the 1970s. One of his most popular songs was Rocky Mountain High in which he described the beauty and majesty of living in Colorado. He presumably was talking about the mountains, lakes, silver clouds, and the snow and trees reflecting God’s majesty.
But today we are going to talk about another kind of rocky mountain high, and that is the legalization of marijuana in Colorado. That’s right folks, Colorado has legalized marijuana. That creates an interesting conflict between state and federal tax laws. While selling marijuana may be legal under the state law of Colorado, it remains illegal under the federal drug trafficking laws. As a result, there are significant federal tax consequences to those who sell marijuana in the state.
Here’s why. The federal tax law provides that a legal business can deduct its cost of goods and also the expenses of that business. For example, a car dealership can deduct the cost of the automobile that it acquires from the manufacturer and can also deduct the expenses of selling that car. Those expenses can be salaries, advertising, rent and utilities, etc.
However, the federal tax law provides that an illegal business can deduct only the cost of the product, it cannot deduct the expenses of selling that product. As a result, these so-called “legal” businesses in Colorado have to file federal tax returns that accurately reflect the cost of sales but must not claim the cost of the expenses of selling that marijuana. You can imagine how significant these selling of marijuana expenses can be and the amount of taxes that are being generated by not being allowed to deduct them.
There has been some recent judicial pronouncements on this that I find to be significant which I wanted to share with you.
In one recent district court case in Colorado, the Internal Revenue Service was investigating a marijuana selling business. It was trying to determine whether or not its tax returns it were accurate, that is whether or not it had deducted the expenses for selling marijuana. This was a criminal investigation for filing false returns.
In order to obtain accurate information on the activities of the marijuana business, the IRS agent sought information from the state regulatory agency which regulates the legal marijuana businesses, in particular information forms in its files. The state agency refused to turn over those documents and notified the marijuana business. The marijuana business filed suit in federal court claiming that the IRS did not have the authority to issue a summons for such information for a variety of reasons not worth discussing here. The court ruled that the IRS did have the authority to access the state records on the activities of the legal – illegal marijuana selling business. The point of the case is:
– First, it goes to the scope of the IRS authority to obtain information, administratively and judicially.
-Second, it goes to the fact that the information that is being provided to them may very well be information from you. That is, you may actually have provided the information that is used being used to tax and/or prosecute yourself.
The second case involves an IRS collection agent who was attempting to collect taxes. She needed additional information of the assets, income, etc. and sought the accountant’s records to determine what the collection potential was. The IRS issued a summons to the taxpayer’s accountant who refused to turn over the information. The client filed suit in federal court to prevent the IRS from executing on that summons. The court held against the Taxpayer and said that the IRS does have the authority to see seek information from Taxpayer’s accountant
I want to state the obvious. We have seen Hillary Clinton absolutely crucify herself because of the content of her emails. We also saw the same thing from John Podesta and many others. These emails and other information that you send to your accountant, as well as the information returns you provide to others- including state agencies, may well be discoverable by the IRS and may be used against you to determine the amount of your tax liability, to help find assets to seize for collection of taxes, and also to determine whether or not you were criminally liable.
So whether you are high on life or high on marijuana, think about what you are writing/emailing and how it may be used against you if and when a federal agency accesses it.
David Leeper is a Board Certified federal tax attorney with 38 years of experience. He can be reached at 915-581-8748, by email at email@example.com, or visit leepertaxlaw.com