TIME Congress

House Republicans vs. Lerner: Questions About the IRS Targeting Scandal

A TIME guide to the controversy over IRS targeting

A panel of House Republicans voted on Thursday to hold former IRS official Lois Lerner in contempt of Congress, citing her refusal to answer questions about the agency’s targeting of conservative organizations for special scrutiny.

The 21-12 vote by the House Oversight and Government Reform Committee, which has been probing the alleged abuse since the scandal erupted last spring, broke along party lines: each of the panel’s Republicans voted to censure Lerner, while the Democrats on the committee opposed the resolution. The vote comes a day after Republicans on a separate committee formally requested the Department of Justice to open a criminal investigation of Lerner.

Like most political dramas, the ongoing outrage over the agency’s targeting of conservative groups sits at the intersection of legitimate concern and political opportunism. Since it can be difficult to separate one from the next, here is TIME’s handy guide to the so-called IRS scandal and the woman who has been made its public face:

Who is Lois Lerner?

Lerner, 63, used to run the IRS division in charge of reviewing applications from groups seeking tax-exempt status. Last May, she revealed at a legal conference that the IRS had inappropriately flagged conservative groups for special review, slowing down their application process. Republicans were incensed. Lerner was placed on paid leave as the brouhaha intensified. She retired in September.

What did Lerner do?

According to Republicans, Lerner used her position as head of the relevant IRS division to improperly influence the agency’s policy, singling out conservative groups—including influential outfits like Karl Rove’s Crossroads GPS—for special scrutiny. According to an investigation conducted by the House Committee on Ways and Means, 83% of the roughly 300 organizations whose applications for tax-exempt status were snarled held conservative views. While the division of Exempt Organizations was pursuing conservative groups like Crossroads, it appeared to ignore the actions of left-leaning counterparts like Priorities USA.

The panel alleges that Lerner displayed “extreme bias” toward conservative groups while “turning a blind eye” toward similar liberal organizations, made misleading statements during a Treasury Department investigation of the matter and may have disclosed confidential taxpayer information. Documents disclosed during the probe show that Lerner made a remark (perhaps in jest) in a January 2013 email about finding at a job at a top liberal social-welfare organization.

What does Lerner say about this?

Lerner was the first person to publicly acknowledge that the IRS behavior was “inappropriate.” Since then, she hasn’t said much. Called for testimony before the House Oversight Committee last May, she made an opening statement in defense of her actions. “I have done nothing wrong,” she said. Then she invoked the Fifth Amendment, and has since refused to testify.

Why is she being held in contempt?

Republicans argue that Lerner’s decision to speak in her own defense, albeit briefly, last year waives her Fifth Amendment privileges. Lawyers are split on whether this interpretation of the Fifth Amendment is accurate. But the GOP decided to hold her in contempt of Congress for refusing to comply with a subpoena.

What happens next?

The matter could go before the full House, which would be expected to approve a resolution holding Lerner in contempt.

Will she face criminal charges?

It’s unclear. It is unlikely the Department of Justice will be inclined to prosecute Lerner. It has rarely done so in the past. Democrats believe the campaign against Lerner is a partisan witchhunt, and U.S. Attorney General Eric Holder—who was held in contempt by the House in 2012 in connection with an investigation into the so-called Fast and Furious case—seems particularly unlikely to cave to the Congressional GOP. Congress could also ask a judge to enforce the subpoena. But it would be a time-consuming process that would almost certainly outlast this Congress.

Alternately, House Republicans could resort to a dusty gambit known as “inherent contempt” to put Lerner in jail. According to a Congressional Research Service report:

Under the inherent contempt power the individual is brought before the House or Senate by the Sergeant-at-Arms, tried at the bar of the body, and can be imprisoned or
detained in the Capitol or perhaps elsewhere. The purpose of the imprisonment or other sanction may be either punitive or coercive. Thus, the witness can be imprisoned for a specified period of time as punishment, or for an indefinite period (but not, at least by the House, beyond the end of a session of the Congress) until he agrees to comply.

In other words, Lerner could theoretically be held until January 2015. Republicans have not publicly ruled out the inherent contempt option, but it seems highly unlikely. The last such case appears to have been in 1935.

So what’s the likeliest option?

House Republicans continue making political hay of the issue in the run-up to November’s elections, in an attempt to highlight what they say is the Obama Administration’s systematic abuse of power. Lerner stays silent. The issue goes nowhere—but doesn’t go away. And the much-needed crackdown on political groups masquerading as social-welfare organizations becomes ever more unlikely.

TIME Congress

Republicans Vote to Hold Former IRS Official in Contempt

Internal Revenue Service official Lois Lerner refuses to answer questions as the House Oversight Committee holds a hearing to investigate the extra scrutiny the IRS gave Tea Party and other conservative groups that applied for tax-exempt status, on Capitol Hill in Washington, D.C., on May 22, 2013.
Internal Revenue Service official Lois Lerner refuses to answer questions as the House Oversight Committee holds a hearing to investigate the extra scrutiny the IRS gave Tea Party and other conservative groups that applied for tax-exempt status, on Capitol Hill in Washington, D.C., on May 22, 2013. J. Scott Applewhite—AP

Lois Lerner has plead the Fifth Amendment to accusations her IRS division targeted conservative groups for tax special scrutiny

House Republicans voted Thursday to hold in contempt of Congress the former IRS official at the center of a scandal over the tax agency’s alleged targeting of conservative groups.

House Oversight and Government Reform Committee voted along party lines to approve a resolution recommending Lois Lerner be held in contempt of Congress. Lerner, who oversaw the IRS division in charge of vetting applications for groups seeking tax-exempt status, came under fire when she admitted the agency had given scrutiny to requests from conservative political groups. The ensuing scandal briefly buffeted President Barack Obama in the early days of his second term, but ultimately fizzled without evidence of a connection to the White House and with revelations that liberal groups were also given scrutiny. Republicans have sought to keep the issue alive, though, and committee chairman Darrell Issa (R—Calif.) has sought to compel Lerner to testify about the matter, rejecting her claim to Fifth Amendment protections.

“We need Ms. Lerner’s testimony to complete our oversight work to bring the truth to the American people,” Issa said Thursday. “Why did she do certain things and who else was involved? … The American taxpayers certainly don’t get to plead the Fifth and escape all accountability when the IRS audits them.”

Rep. Elijah Cummings (D-Md.), the committee’s ranking Democrat, again decried Republicans for what he called a political witch hunt.

“Today this committee is trying to do something even Joe McCarthy did not do in the 1950s, something almost unprecedented,” Cummings said before the vote.

The outcome of Thursday’s vote was all but predetermined, as Issa’s GOP-controlled committee has been divided along the issue along stark partisan lines. The full House will have to vote on the contempt citation, but even if that passes it’s unclear if Attorney General Eric Holder would take any action.

The tax-writing House Ways and Means Committee sent a letter Wednesday recouting Lerner’s alleged crimes and insisting the Justice Department has “a responsibility to act, and Lois Lerner must be held accountable.”

TIME Congress

Emails Point to IRS Official’s Role in Targeting Conservative Groups

Lois Lerner
Internal Revenue Service official Lois Lerner during a hearing by the House Oversight Committee on Capitol Hill in Washington, May 22, 2013. J. Scott Applewhite—AP

Republicans are urging the pursuit of criminal charges of Lois Lerner after releasing documents showing her involvement in the targeting of conservative groups for special IRS scrutiny

The former IRS official at the center of a scandal over the targeting of conservative groups was directly involved in questioning the tax-exempt status of the groups, according to documents released Wednesday.

The release of emails sent by Lois Lerner was the latest attempt by congressional Republicans to keep focus on the scandal, which briefly buffeted President Barack Obama in the early days of his second term when it was revealed the IRS had closely scrutinized conservative political groups applying for tax-exempt status. The scandal ultimately fizzled without evidence of a connection to the White House and with revelations that liberal groups were also targeted, but Republicans have sought to keep it alive and compel Lerner to testify after she invoked her Fifth Amendment right not to do so.

The tax-writing House Ways and Means Committee on Wednesday sent a formal letter to the Department of Justice detailing what it called Lerner’s wrongdoings and urging prosecutors to pursue criminal charges. Committee Chairman Dave Camp (R-Mich.) said in a statement that the Department of Justice has “a responsibility to act, and Lois Lerner must be held accountable.”

“It is also important that the American people know what really occurred at the IRS, so this powerful agency cannot target American taxpayers ever again,” Camp added.

In 2013, Lerner admitted several conservative groups seeking 501(c) (4) status—which is reserved for social welfare groups that engage in political activity—got special scrutiny, but she denied she was directly involved with the decision making. She instead faulted employees in a IRS office in Cincinnati. But emails released Wednesday show Lerner acted to ensure denials for groups with conservative leanings, particularly Crossroads Grassroots Policy Strategies, a conservative group co-founded by political strategist Karl Rove.

In the emails, Lerner inquired why Crossroads had not been audited by the IRS and later detailed her plans to deny the organization tax-exempt status.“The organization at issue is Crossroads GPS, which is on the top of the list of c4 spenders in the last two elections. It is in the news regularly as an organization that is not really a c4,” one email dated Jan. 4, 2013 reads. “You should know that we are working on a denial of the application, which may solve the problem because we will probably say it isn’t exempt.”

Republicans say this proves that despite a finding by the IRS Administrative Review Board that Lerner didn’t act inappropriately, she is guilty of wrongdoing. The letter, which all Republicans on the committee voted to send, also says Lerner may have exposed taxpayer information by using her personal email to conduct business and providing “misleading statements” to questions from the Treasury Inspector General for Tax Administration.

The committee’s Democrats, 14 of whom voted against sending the letter, dismissed the latest Republican rhetoric as a political ploy. Ranking Democrat Sandy Levin (D-Mich.) said Republicans want to “declare this a scandal and keep it going until November.” The Department of Justice is already investigating the matter.

“I wish I could come up with some other rationale for what you are doing, but I cannot,” Levin said.

MONEY Taxes

Find Hidden IRA Savings

Illustration by Serge Bloch for TIME

These three lesser-known strategies can help you shelter even more income from Uncle Sam.

Tax day is fast approaching, and with it the deadline for one of the best opportunities to juice your retirement savings and cut your tax bill: an individual retirement account.

Unlike most tax breaks, which expire at the end of the tax year, you have until midnight on April 15 to make a 2013 IRA contribution — of up to $5,500, or $6,500 if you’re 50-plus.

Already putting money in? Pat yourself on the back: Only 15% of households saved in an IRA last year, according to the Investment Company Institute. But you may be missing opportunities to sock away even more. And if you’re not participating because you think your income doesn’t allow it? There’s a workaround for that too, which you ought to consider.

After all, the more you can put away in IRAs, the better. “They’re one of the best tax breaks you can take advantage of for retirement,” says New York CPA Ed Slott, founder of IRAHelp.com.

As you may know, contributions to a traditional IRA are fully deductible up to certain income limits — for 2013, $59,000 in modified adjusted gross income for single folks and $95,000 for couples filing jointly. With a Roth — eligibility for which starts phasing out at $178,000 for couples in 2013 — you get no write-off upfront, but get to withdraw funds tax-free in retirement.

In both types, your money grows without the drag of taxes. (President Obama recently announced another IRA for beginning savers, the MyRA.) Maximize these benefits with the tactics that follow, but you may want to hurry. Time’s running out to reduce your 2013 bill.

Save for a spouse

While the IRS says you must have earned income to stash cash in an IRA, there’s one exception: You can put money in on a spouse’s behalf if he or she has no income, so long as you file jointly. “The IRS doesn’t want to penalize a spouse for not working,” says Adam Glassberg, a financial planner in the Chicago area.

A spousal IRA can be either traditional or Roth, with the same contribution allowances. One big, important difference is that contributions made to a traditional spousal IRA are fully deductible up to a higher income — $178,000 in modified adjusted gross — than for joint filers who both have access to a 401(k). Assuming you qualify for that deduction, a $5,500 contribution will shave $1,540 off your 2013 taxes if you’re in the 28% tax bracket.

Stash self-employment income

Do you work for yourself? Or did you do a freelance gig or two on the side last year? The savings opportunity is especially good for you.

You can contribute as much as 25% of net self-employment earnings, up to $51,000 for 2013, to a simplified employee pension plan, or SEP IRA. That’s in addition to the $5,500 you can put in a traditional or Roth IRA, plus the $17,500 you can put in a 401(k) if you have one through a primary occupation. So it’s an especially worthwhile strategy for moonlighters who are already maxing out a workplace retirement plan. Plus, SEP contributions are fully deductible.

“It’s a really valuable way to save and reduce your taxes,” says Newport Beach, Calif., financial planner Dan Thomas.

Use the back door to a Roth

Even if you make too much to write off a traditional IRA contribution, you’re still eligible to stash money in such an account. Without the deduction, a traditional IRA can lag behind a brokerage account invested in index funds or other tax-efficient holdings. But you may still have good reason to open one: A nondeductible IRA allows you to sidestep your way into a Roth if you wouldn’t otherwise be eligible based on income.

You can convert a traditional IRA to a Roth at any time, no matter your AGI. Assuming you have no other IRAs and shift over the funds immediately — before you have gains — you won’t owe any taxes. (If you do have any existing deductible IRA savings, you will owe prorated tax based on the total balance, to essentially pay back the write-off you took upfront.)

Moving to a Roth can be especially beneficial if you think your tax bracket will be the same or higher in retirement. Unfortunately, this strategy won’t help you fend off Uncle Sam this month, but you might be quite thankful 20 years down the road.

TIME Bitcoin

The IRS Will Tax Bitcoin As a Property

The IRS has announced it will categorize virtual money as property, not as currency. The move will impose significant taxes and regulations on the fledging Bitcoin market, but will likely be a boon for investors, since trading profits will be treated as capital gains

The Internal Revenue Service announced on Tuesday that it will categorize virtual currencies like Bitcoin as property, and not as a currency, a move that will impose significant taxes and regulations on the fledging market, but will likely be a boon for investors.

Payments made to employees and workers with virtual currency will be subject to federal income tax, and any payment made using virtual currency will now have to be reported in the same way as other payments made in property.

But any gains investors make from Bitcoin will be treated as capital gains, meaning they could be subject to lower tax rates.

Bitcoin ‘miners’, who verify transactions made with the virtual currency and generate new currency using complex algorithms, will now be forced to pay income taxes on their earnings, as well as payroll taxes to any employees.

Governments are beginning to step up their regulation of Bitcoin as the virtual currency struggles to achieve legitimacy.

TIME Crime

IRS Phone Scam Is The Largest Ever

Thousands of people have lost more than $1 million to scammers who threatened them with arrest, deportation and the loss of business or driver's licenses if they did not make payments through credit cards or wire transfers

A government watchdog says that fake IRS agents have targeted more than 20,000 people in the largest phone scam in the history of the U.S.

Thousands of victims have lost over $1 million to fake IRS agents claiming that people owe more taxes, according to the IRS inspector general. The scammers call up taxpayers demanding that they make payments through prepaid credit cards or wire transfer, threatening arrest, deportation, and loss of business or driver’s licenses if those they scam do not comply.

IRS inspector general J. Russell George says people have been targeted in almost every state, according to the Associated Press.

[AP]

TIME viral

This Man Is Using Selfies as A Weapon To Fight Off The IRS

Instagram / @Internalrevenueselfies

Welcome to the best Instagram of this week

When Andrew Jarvis’ architecture firm opened up shop in New York in 2012 and the man began splitting his time between the city and his home in Philadelphia 49:51, respectively, he became haunted by a nightmare scenario. Since he rented an apartment in NYC, could the big bad New York Department of Revenue come after him to pay additional, steep taxes even though he lived in Pennsylvania? (Not an entirely implausible scenario.)

So Jarvis told TIME that he decided to fight off a hypothetical offensive by IRS auditors with “blizzards of receipts, Easy Pass records, train tickets” … and selfies. The old fashioned kind. At random intervals, Jarvis would program his camera —not camera phone — on an auto-timer, perch it on top of the post at the end of his driveway, put on a business-time face, and take a timestamped picture of himself standing in front of his home with the day’s Philadelphia Inquirer.

But when his social media savvy daughter Anne, 26, came across his camera Friday, the instantly viral InternalRevenueSelfies Instagram was born.

“I came across these photos and I literally had tears running down my cheeks, and I was on the floor laughing” she said. (Andrew had no idea what Instagram was prior to his celebrity.) Anne continued, “What’s so funny is how deadpan he is. He has such an earnest nature. I know where all of this is coming from is he’s just through and thorugh an honest stand-up guy and this is a manifestation of that.”

Andrew had no problem with Anne making the account — he thinks its popularity is proof that she has a good eye —although he doesn’t quite get the humor: “I just created a record as any citizen would do who is trying to be prudent… It’s kind of embarrassing.”

Some photos include props, like snow shovels for winter:

Umbrellas for the rainy season:

Suits when he’s feeling fancy:

And phones when he simply doesn’t have time for all of this:

“I hate to admit this but I sometimes take pictures of myself pumping gas [to prove I'm the one using the credit card at that location],” Jarvis said. “I would have liked to have smiled in a few of the pictures had I known people were going to be looking at them.”

But that might be why the photos have caught on. “No one was ever meant to see these, these were for his future imaginary conversation he might have hypothetically with the IRS,” Anne, who has an eye for design and currently creates window displays at Anthropologie, said. “And seeing that no one was supposed to see them made me want to show the world.”

Jarvis has yet to be flagged by the IRS, but he worries that he might now be tempting his fate: “It’s almost taunting them.” Still, an audit does have a certain ring of appeal. “I kind of wouldn’t mind because I’ve gone through an awful lot of trouble to document it, it would be nice to share it with someone to prove I’ve done my work and have paid my taxes correctly.”

TIME Taxes

Uncle Sam Has $760 Million in Tax Refunds Just Waiting To Be Claimed

If Americans don't claim the money they're owed by April 15, it becomes the property of the U.S. government. The money comes from people who didn’t file tax returns in 2010, but were eligible for tax refunds

Nearly one million taxpayers have left $760 million in unclaimed tax refunds with the IRS, which, if left unclaimed, will soon become government property.

The money comes from people who didn’t file tax returns in 2010 but were eligible for tax refunds, CNN Money reports. Much of the unclaimed money belongs to people who earn so little they aren’t required to file tax returns, but are eligible for refunds through tax credits like the Earned Income Tax Credit. The IRS estimates that more than half of the unclaimed refunds total over $571 each.

The final deadline for filing a 2010 tax return and claiming the money is April 15.

“The window is quickly closing,” an IRS commissioner said in a statement. “We encourage students, part-time workers and others who haven’t filed for 2010 to look into this before time runs out on April 15.”

[CNN Money]

TIME Drugs

Christian Marijuana Dispensary Reconciles Dogma and Dope While Battling the IRS

Bryan Davies, owner of medical marijuana dispensary Canna Care, leads supporters in prayer before facing the Internal Revenue Service in tax court on Feb. 24, 2014.
Bryan Davies, owner of medical marijuana dispensary Canna Care, leads supporters in prayer before facing the Internal Revenue Service in tax court on Feb. 24, 2014. Katy Steinmetz—TIME

"I prayed to the Lord and God said ‘Open up a pot shop'"

Early in the morning on Feb. 24, a large man with a long white beard and big cowboy hat gathered with about a dozen other people to pray outside the San Francisco branch of the United States tax court. In a kettledrum voice, Bryan Davies led the group in the Lord’s Prayer before asking, “If there is any evil here, let it be sent to the lake of fire!” Then Davies strode into the federal building, where he and his wife, Lanette, took on the Internal Revenue Service in a case that could set an important precedent for the nation’s rapidly growing legal marijuana industry.

At issue is a nearly $875,000 tax bill that the Davies’ have refused to pay on the grounds that a 1982 law meant to prevent drug traffickers from deducting business expenses should not apply to Canna Care, their small “Christian-based” medical marijuana dispensary in Sacramento—or any other marijuana dispensary legal under state law. Even if the Davies’ don’t win that argument, there are legal precedents for the dispensary to get a big discount on that bill if owners can prove they’re involved in two trades. So for two days of testimony, the usually staid federal tax court was given over to a detailed examination of what, exactly, constitutes a Christian cannabis business that claims to spend as much time serving the community as it does selling weed-infused lollipops.

The idea for merging marijuana and ministry came through prayer, the couple said during testimony. They had been exposed to medical marijuana when a doctor recommended Lanette Davies’ daughter use it to alleviate symptoms from a bone disease and it “made her life livable,” she said. Bryan Davies became a convert after finding it helped ease an arthritic condition that affects his spine. Trying to live on Social Security benefits and short on cash, Davies says he asked God for guidance. “I got on my knees, and I prayed to the Lord,” he told the court. “And God said … ‘Open up a pot shop.’”

Davies Canna Care

Katy Steinmetz / TIME

The Davies’ set up that shop in 2005, in the back corner of a small industrial complex in a neighborhood of Sacramento called Del Paso Heights. The dispensary is marked only by an illustration of an aluminum can with the word care wrapped across the front. Inside, a security guard mans the door to a windowless lobby. A table offers pamphlets on using medical marijuana to treat chronic pain next to bibles that are given away for free. The walls are a crowded tapestry of American flags, cannabis leaves, eagles, crucifixes and the “Don’t Tread on Me” gear favored by Tea Partiers (though Lanette says she’s a staunch Democrat and Bryan calls himself a libertarian). In the back room, employees sell strains of weed like Hindu Kush, Green Candy and L.A. Confidential, starting at $3.95 per gram.

That work of selling dope, the couple said in response to questioning from IRS lawyers, is consistent with the dispensary’s broader mission to help and heal. A patron might arrive having been diagnosed with Lou Gehrig’s Disease or terminal cancer, Bryan said: “They’ve been told they have so much time to live … and they’re angry with God.” He and other Canna Care employees would often pray with those patients, they testified, in what he said was an attempt to bring them back from the “precipice.” Bryan also said during testimony that he could exorcise patients who “don’t realize they’re hosting a demon.”

Marijuana is an unlikely form of outreach to Christians. A new survey of Americans’ attitudes about marijuana released Wednesday by the Public Religion Research Institute found that the majority of the 3,390 Christians polled, 52%, said they are against legalization. Opposition is strongest among Hispanic Catholics (67%) and white evangelical Protestants (61%), while lowest among Jewish Americans (23%) and the unaffiliated (27%). Robert Jones, CEO of the firm that conducted the survey, partly attributes the opposition among Christians to their view of the body “as a temple” that shouldn’t be soiled with substances like illegal drugs or alcohol or cigarettes.

The Davies’ use the Bible to reconcile selling marijuana with their faith, believing that cannabis was among the “seed-bearing plants” the book of Genesis says God gave man on the sixth day. “You’ve got to remember who created it,” Bryan said recently, shortly after the dispensary employees finished their daily 6 p.m. prayer.

DSC00747

Katy Steinmetz / TIME

Prevailing in tax court will require a different standard of proof. The provision at the heart of the case is an obscure bit of federal tax code known as 280E, which states that taxpayers who are involved in drug trafficking are not allowed to deduct any business expenses—like payroll or rent or health benefits—that would be standard for other legal businesses. The law, put on the books more than a decade before any state legalized medical marijuana, has become an expensive reality for dispensaries; while medical marijuana is now legal in 20 states, and recreational marijuana is legal in two, pot is still a Schedule I controlled substance in the eyes of the federal government. And that means that regardless of state law, all dispensaries are drug traffickers as far as the IRS is concerned.

Canna Care’s disputed tax bill comes from $2.6 million in business expenses that the IRS has disallowed under that code. Getting a ruling that 280E should be revisited and no longer applied to medical marijuana dispensaries, as the Davies’ lawyer argued, would be a landmark decision for the burgeoning marijuana industry. But by the time testimony ended Feb. 25th, that appeared unlikely.

Throughout the two day hearing, the Davies’ were rebuked for using the witness stand as a soap box and rambling rather than giving forthright answers. One of their witnesses was disallowed because the IRS had not been notified of her appearance in advance, and their lawyer could not immediately recall what “THC”—or tetrahydrocannabinol, the mind-altering ingredient in cannabis—stood for. Canna Care employees testified that they did not know how their salaries were determined or by whom. Meanwhile, other attorneys arguing related cases have expressed concerns that a ruling against Canna Care might be “very detrimental” to their efforts to see the code reformed.

A ruling from judge Diana Kroupa may not be forthcoming for at least six months. As testimony ended, Kroupa seemed to acknowledge the shift in popular opinion in favor of legal marijuana, but implied that it would have little bearing on the outcome of a case that hinges, at its core, on an interpretation of fine-grained tax law. “The court is aware that there is a trend,” Kroupa said as the hearing concluded, “but the law is the law.”

Exiting the courtroom, the Davies’ remained upbeat. “I know what we’re doing is the right thing,” Lanette said, “Whether it goes for us or against us, that’s in God’s hands.”

TIME Marijuana

Christian Pot Dispensary Takes on IRS

Some Congress members are advocating marijuana be removed from the federal government's list of hard drugs.
Nick Adams—Reuters

A business touting Christ and cannabis takes a stand over dispensaries' awkward tax status

At Lanette Davies’ shop in Sacramento, everyone stops what they’re doing at 6 p.m. Some patrons come especially for this moment in the day, while others just happen to be there. “We have prayer every night, for our community and our patients,” she says. And those patients are all taking at least one of the same prescriptions: medical marijuana. Her shop, Canna Care, is a “Christian-based dispensary,” where the owners believe in both the powers of Christ and cannabis.

The not-for-profit dispensary has a rare mix of messages, but it might also be on the verge of setting a new precedent for the marijuana industry. On Feb. 24, Davies and her husband Bryan will face the Internal Revenue Service in tax court over disputes about business deductions. A ruling in their favor could help pull dispensaries like hers out of a legal limbo—in which states view them as legitimate businesses but the IRS continues to view them as aiding in drug trafficking.

Federal law defines pot as a controlled substance, and that is the law that the IRS follows, even after 20 states and Washington, D.C., have legalized medical marijuana. “The tax law is grossly unfair,” says San Francisco-based tax attorney Robert Wood, who has written extensively about the issue. “Whether you think dispensaries are a good idea or not, if they’re lawful businesses under state law, they should be able to deduct their business expenses like anybody else.”

So far, courts have ruled that dispensaries can’t do that. Businesses like Canna Care aren’t eligible for what would normally be routine deductions like payroll expenses and rent, because of a section of the federal tax code known as 280E, which dates back to 1982—more than a decade before California became the first state to legalize medical marijuana in 1996. When Davies’ filed her taxes in 2006, 2007 and 2008, she listed $2.6 million in such deductions. The IRS, which has repeatedly pursued dispensaries using that section of the code, came knocking with an audit in 2011 and refused to accept those deductions, levying nearly $875,000 in additional taxes on Canna Care.

As it has with other dispensaries, the IRS offered to settled the case for about $100,000, Davies says, but she refused on principle. “I could have settled this and walked,” she says, “but it would have been morally and ethically wrong to do so.” Davies believes her company is being unfairly targeted while providing a valuable service for people with serious ailments, including her husband and daughter, she says. (Her husband’s chronic arthritis converted them on the subject of cannabis.)

The IRS declined to comment.

Courts have issued rulings that suggest dispensaries are eligible for some tax deductions. In 2007, a California judge ruled that if a medical marijuana dispensary also provides extensive care-giving services, the owner may treat those businesses as separate for tax purposes. In a 2012 case, another California judge affirmed that a dispensary could deduct the cost of goods sold—i.e. the cost of the marijuana. The tax code, the judge ruled, “disallows deductions only for an expense of a business,” like providing health care plans for employees or advertising or legal services, and that does not include product. In this case, the IRS allowed Canna Care to deduct the cost of its marijuana, too.

While Wood sides with the Davies’ in spirit and says “it’s an appealing argument” that dispensaries legal under state law should be taxed like any other business, he says Congress, not the courts, will likely have to make that clarification in the tax code. “What the tax court has done is make sympathetic noises but act as if their hands are tied,” he says.

Davies remains hopeful. “It’s in God’s hands now,” she says.

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