Alpenglow at It Again

Brief Background

As discussed in more detail in my prior post, Alpenglow Botanicals (“Alpenglow”) is a state licensed Marijuana dispensary based in Colorado. Alpenglow was audited for several tax years and the IRS made adjustments, denying Alpenglow’s deductions for ordinary and necessary business expense under §280E. The company’s two principals paid the assessed liability under protest and filed a refund suit. The district court dismissed the suit for failing to state a claim upon which relief could be granted. Alpenglow appealed to the 10^th Circuit, which ultimately affirmed the district court’s dismissal.

Supreme Court Petitioned

On February 21^st, Alpenglow filed its cert petition,[1] asking the U.S. Supreme Court to consider whether:

• by enacting §280E, Congress empowered the IRS to investigate federal drug crimes and administratively determine whether a taxpayer is criminally culpable under federal drug laws and
• 280E is a penalty for crime.

The U.S., as Respondent, could have acquiesced to the petition, submitted its brief in opposition, or waived its right to respond. The U.S. elected to waive its right to file an opposition brief—leading me to conclude that they (a) thought the Court would quickly dead list the petition or (b) are confident that they’re correct but they can’t quite put their finger on (and are completely incapable of articulating) why . . . . I think it’s the latter.

The Court accepts approximately 2% of the new cases filed each year. That’s a lower acceptance rate than any of the elite universities (even when controlling for bribery by B-list celebrities). While that means the chance of the Court reviewing the case is low, the U.S. must have been assuming that it would receive some attention. The Court generally considers certain factors when evaluating whether to review a case: is there a circuit split or conflict of law; is this an important issue; has there been disregard of a prior Court decision by the lower court; is this a topic of special interest. It seems to me that Alpenglow checks off three of the four.

• While there isn’t technically a circuit split or conflict of law, it may be coming soon. To-date, most §280E cases have originated in states where marijuana legalization had earlier roots (California, Colorado, etc.) The 9^th and 10^th Circuit Courts of Appeal haven’t necessarily diverged in their interpretation of §280E. However, many more states have legalized marijuana, in some form or fashion, over the last several years. If the §280E trend continues, there could be a split sooner rather than later. Maybe it’s good enough that there is a conflict between the states and the federal government? Alpenglow did insert that hook in the petition’s introductory paragraph.
• The application of §280E is most certainly an important issue. The cannabis industry is growing exponentially and attracting huge amounts of domestic and foreign capital. It’s unacceptable to leave taxpayers wondering what the proper application of §280E is. Section 280E was not drafted with the current legalization trend in mind and it requires clarification.
• This may very well be a topic of interest to the Justices. As a tax attorney, sadly, it’s the only work related topic I can discuss at social gatherings that doesn’t cause everyone to slowly move away.

Either way, the U.S. will have to come up with something because the petition was distributed for conference and the Court has ordered them to submit their brief in opposition by April 19^th.

What’s In the Petition

While Alpenglow’s petition is not an in depth analysis (that will hopefully come later in their brief on the merits), it does outline the key arguments. First, Congress did not empower the IRS to determine whether a taxpayer has committed a drug offense. In order for Congress to empower the IRS to do so, it must “speak distinctively” because criminal statutes are for the courts to construe, not the government. There must be a very specific grant of power. There has been no such grant of power with respect to §280E. Because §280E isn’t applicable unless there has been a determination that the taxpayer has violated federal or state drug laws, it can only apply to a taxpayer that has been convicted of such violations by a state or federal court.

Second, application of §280E requires a determination that the taxpayer has violated criminal drug laws. The imposition of a tax on criminals and no others is a form of punishment or a penalty, bolstering the argument that the IRS does not have authority to make such determinations. Further, excessive fines and penalties are in violation of the Eight Amendment. The application of §280E produces a result for taxpayer’s that amounts to an excessive criminal penalty—for example, $300,000 of tax when the taxpayer derived no compensation from the operations or tax liability equal to 329% of a businesses’ net income.

Fingers crossed for Alpenglow’s petition, it could bring us all much needed clarity.

[1] Alpenglow Botanicals LLC v. U.S., case number 18-1122.