Think medieval ex post facto and bill of attainder targeting of dissidents a thing of the past in the US?
Story shows how not only right-wing extremist officials but the US Congress manipulated statutes and made surprise policy interpretations to wreak havoc on pioneer Libertarian social entrepreneur who revolutionized marihuana care while many official doctors remained silent –who has created a showdown between Citizen and state autonomy versus federal oppression of rights–and who is now fighting back in the courts and exposing the astonishing tale of abuse in legal filings…
The 58-year-old Lynette Shaw is credited with playing a key role in promoting the voter referendum (Proposition 215) that legalized medical marijuana in California in 1996. She opened the first licensed dispensary in the state in 1997, and ran as the Libertarian party nominee for California Lieutenant Governor in 2006 with the endorsement of country singer Willie Nelson…
Janet Novack, Forbes Staff
I write from D.C. about tax and retirement policy and planning.
7/13/2012 @ 11:47AM |1,739 views
Owner Of First U.S. Marijuana Pharmacy Now Broke And Fighting IRS
Lynnette M. Shaw, the colorful pot activist who opened the first licensed medical marijuana dispensary in the United States, is fighting an Internal Revenue Service bill for $1.27 million in back income taxes and penalties and has filed for personal bankruptcy, listing $276,000 in state sales taxes among her debts.
Shaw was forced to shut her Marin Alliance for Medical Marijuana in Fairfax, Ca. late last year, after U.S. Attorney for Northern California Melinda Haag wrote a letter to her landlord threatening to seize the building that housed her operation. The letter was part of a coordinated crackdown by four U.S. Attorneys in California on marijuana dispensaries they say violate California law by, for example, locating too close to schools or parks. The same crackdown led Haag to file two lawsuits this week seeking to seize buildings in Oakland and San Jose housing the state’s largest dispensary, Harborside Health Center, which was the subject of the Discovery Channel’s “Weed Wars”. Harborside has said it will keep operating and has received public support from Oakland and other officials. The crackdown, ironically, comes at a time when 17 states and the District of Columbia have legalized at least some medical use of marijuana and Massachusetts residents are preparing to vote in November on a referendum—backed by the billionaire Progressive Corp.founder Peter Lewis—to legalize medical marijuana there too.
The 58-year-old Shaw is credited with playing a key role in promoting the voter referendum (Proposition 215) that legalized medical marijuana in California in 1996. She opened the first licensed dispensary in the state in 1997, and ran as the Libertarian party nominee for California Lieutenant Governor in 2006 with the endorsement of country singer Willie Nelson. (A 2006 video interview with her is here.) According to her LinkedIn bio, Shaw was handpicked by John Belushi to sing with the Blues Brothers just before he died from a drug overdose in 1982. “I was Hollywood’s weed girl; I supplied pot for the biggest names in show business,’’ Shaw reminisced in a Marin Magazine story published last year. After Belushi’s death, Shaw told the interviewer, she was falsely accused of involvement in supplying the drugs that left to his death, attempted suicide, was briefly jailed on a possession charge and, was homeless, before landing in Marin County. Her LinkedIn listing, in which she uses her stage name of Bluesetta, reports her blues band has just finished a recording and she’s looking for work as a singer. (See comments from Shaw, who returned an earlier call for comment after this story was published, at the bottom.)
Shaw’s personal income tax troubles stem from an IRS decision to deny business expense deductions to marijuana dispensaries under a provision Congress passed in 1982 (U.S. Tax Code section 280E) that disallows deductions for “trafficking in controlled substances” as “prohibited by Federal law or the law of any State in which such trade or business is conducted.” Surprisingly, Shaw never incorporated the dispensary—as either a for-profit or not-for-profit corporation. Instead, she ran it as a sole-proprietorship, reporting its $1 million plus in annual sales and all its expenses on Schedule C of her individual 1040 tax return.
Shaw’s previously unreported lawsuit filed in U.S. Tax Court late last month, shows that rather than reporting profits, she reported losses totaling $186,826 in 2008 and 2009. After denying all her expenses for everything from cannabis to utilities, IRS auditors calculated Shaw had taxable income of $2.83 million for those years. This past March it sent her a bill for $1.27 million n back taxes and penalties, plus an as yet uncalculated amount of interest. Shaw says she owes nothing. (Harborside, which is incorporated, has reportedly been hit with a $2.5 million IRS bill; according to the U.S. Tax Court docket, it filed suit challenging the assessment in December.)
Shaw’s suit argues that the IRS is ignoring state laws legalizing medical marijuana as well as a 2007 U.S. Tax Court decision (Californians Helping To Alleviate Medical Problems, Inc.) that was decided largely in favor of another, now closed, marijuana dispensary. In the CHAMP case, the IRS conceded that 280E doesn’t preclude deducting the cost of goods sold (i.e. the cost of the cannabis). The court also ruled that CHAMP could deduct the cost of providing extensive counseling and caregiving services to its members, although not the cost of actually distributing the marijuana.
CHAMP was organized as a California not-for-profit corporation and charged its members a fee that covered not only weed, but also the right to receive various services and participate in activities and support groups (e.g. for wellness and for those with HIV/AIDs.) David M. Hellman, Shaw’s tax attorney, said in an interview that while his client never charged a separate fee for counseling buyers, “80 % to 90% of her time was spent helping clients,’’ and that under the CHAMP ruling her expenses related to such work should be deductible. As for the cost of marijuana, Heller said, the auditor took the position that her records were inadequate and summarily denied all of those expenses too. Asked about Shaw’s reported losses, Heller said that in years past she “made a marginal profit, but she never made a lot of money, she made a little bit of money over time.”
Heller described the audit as part of a broader federal campaign to put the medical dispensaries out of business. “It’s the same approach they took with organized crime. If you’ can’t get them on something else, you find a way to nail them on taxes,’’ he said. Shaw’s suit argues that the IRS is targeting medical marijuana dispensaries in an “unconstitutional attempt to close down a legally licensed business activity” and that the campaign is inconsistent with October 2009 Department of Justice guidance stating that “as a general matter” federal resources shouldn’t be focused n “individuals whose actions are in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana.” The suit also contends section 280E shouldn’t apply at all since “there is no evidence the taxpayer in the business of `drug trafficking’.” In the CHAMP decision, however, the Tax Court Judge David Laro agreed with the IRS that despite California’s 1996 law, supplying medical marijuana does qualify as “trafficking” for the purposes of 280E—which he defined, based on Webster’s Dictionary, as simply meaning to “engage in commercial activity: buy and sell regularly”.
In her Chapter 7 bankruptcy filing last month, Shaw reported she has $641,275 in assets (primarily a house worth $620,000) and $991,000 in debts, including a $630,000 mortgage, $10,000 owed on a Honda Insight hybrid; $9,700 owed to the IRS for delinquent taxes (separate from the bill she’s fighting); and $276,000 owed to California’s Board of Equalization, which administers the state sales tax. Only already assessed taxes dating from sufficiently old years can be discharged in bankruptcy—meaning that the filing won’t help Shaw get away from the disputed $1.27 million IRS bill for 2008 and 2009.
As for the state sales tax, according to Heller, Shaw had been under the impression that the marijuana she sold was exempt from the state’s sales tax as a medicine and once the CBOE made it clear the sales tax was applicable, started collecting it. In February 2007, the CBOE put out a Special Notice warning sellers of medical marijuana that they should be collecting sales tax and then, in June of 2007, issued yet another Special Notice declaring it had expected sellers to begin collecting sales tax after an October 2005 meeting with advocates and sellers—a meeting which led to the CBOE to finally begin issuing the dispensaries permits.
Last year the CBOE ruled that the Berkeley Patients Group, Inc, a private
not- for-profit company, owed $6.5 million in back sales tax and interest for the period July 1, 2004 through June 30, 2007, despite what was arguably justifiable confusion about CBOE’s position during much of that period. (A transcript of a hearing on that case is here.) In May, the Berkeley Patients Group was forced to close its storefront operation after its landlord also received a letter from the U.S. Attorney threatening seizure. According to a report last month by California Watch, despite describing itself as a collective, the Berkeley group paid its three co-directors/owners a total of $911,000 in 2009.
Update: In an interview after this story was published, Shaw said she was forced to file for bankruptcy because California was threatening to seize her home over the sales tax bill. “I have no money, no bank accounts, no retirement accounts, no jewelry…I’ve been unemployed for six months,” she said. She explained she had operated as a sole proprietor because when she first started the dispensary the state wouldn’t allow incorporation for the purposes of selling medical marijuana. Moreover, incorporation at that time would have required more than one corporate member and others didn’t want to take the legal risk of putting their names on the incorporation papers with her. She noted that her license from the town of Fairfax had come with 83 separate conditions and had required her to be audited by the town twice a year and that she never had troubles with those audits. “I played by the rules,” she said. ..more at: http://www.forbes.com/sites/janetnovack/2012/07/13/owner-of-nations-first-marijuana-pharmacy-now-broke-and-fighting-irs/