Lawyer who won landmark medical marijuana decision against IRS weighs in on current crackdown

Henry Wykowski (Image: Wykowskilaw.com)

As the IRS continues to expand audits demanding millions of dollars in back taxes from medical marijuana dispensaries across California, many dispensaries are turning to one man to aid them in the fight against federal crackdowns.

Henry Wykowski, a San Francisco lawyer and former U.S. Justice Department prosecutor, represented Californians Helping to Alleviate Medical Problems (CHAMP) in that dispensary’s landmark 2007 case against the IRS. Now, many of the growing number of California dispensaries facing what could amount to debilitating audits have sought out Wkyowski’s services.

Only a handful of the dispensaries being audited have gone public with their tax woes, but Wykowski estimates that there are dozens being targeted in the IRS’s latest sweep. Wykowski tells The American Independent that he is currently representing around two dozen (he declined to name a specific figure, citing client confidentiality concerns) dispensaries as they prepare to appeal the IRS decisions, and that several more have sought his advice.

Wykowski is in such demand because this spate of new cases represents the same tactic the IRS used when it claimed in 2007 that CHAMP owed the government nearly half a million dollars given a clause in the U.S. tax code that disallows business deductions for any entity connected to trafficking Schedule I or Schedule II drugs (marijuana is a Schedule I drug). Wykowski was CHAMP’s lawyer at the time and took the IRS to court when the agency refused to negotiate on the assessments it had made. Wykowski successfully argued that CHAMP was allowed to deduct the cost of goods sold, and then further lowered the final amount CHAMP had to pay on its overall federal tax assessment by convincing U.S. Tax Judge David Laro that CHAMP should be allowed to make standard business deductions on all services — in CHAMP’s case, largely HIV/AIDS therapy — not directly tied to the procurement of marijuana. In all, CHAMP had to pay just over 1 percent of what the IRS had originally demanded: $4,905 out of $426,000.

If Wykowski is successful, dispensaries like his highest-profile client, Oakland’s Harborside Health Center (HHC), the largest medical marijuana dispensary in the world, could benefit from CHAMP’s precedent. The fact that a large portion of HHC’s revenue comes from ancillary services like acupuncture and yoga instruction rather than marijuana sales alone certainly may help its odds. But smaller operations without as many services may be facing a tougher fight.

“I think they might not be approaching this in the best way,” says Wykowski. “The most successful dispensaries do more than strictly offer cannabis.”

But for those clients of his that aren’t in the yoga business, he’s banking on the argument that that the definition of counseling services extends to pharmacological study and recommendations — of different strains of marijuana, depending on patients’ symptoms, for example — made by staff. He didn’t make that argument in the CHAMP case simply because he didn’t have to, so assuming the IRS doesn’t go for it in preliminary negotiations, it’ll be up to whoever presides over the case to accept or reject it.

Meanwhile, his legal instincts tell him that until turned down by the U.S. Supreme Court, none of the dispensaries receiving tax demands from the IRS should consider the battle lost.

“You don’t have a final determination until the court rules,” he says. “I see them as still in the audit process. In my opinion, they should take advantage of that.”

Wykowski, however, is less optimistic about any attempt to tackle the problem that goes deeper than taking the IRS to court and surgically removing only trafficking-related expenses from the list of permissible business write-offs. Loosening Section 280E of the tax code, the law that the IRS is applying to dispensaries in making these assessments, “would take an act of Congress,” says Wykowski. “It’s part of the Internal Revenue Code. Even if the IRS wanted to interpret it differently, it’s in the code.”

And even something as dramatic as a rescheduling would potentially have little effect on the strain this is putting on dispensaries. Wykowski continues, “Unless it’s also made retroactive, it provides no relief for what’s going on now. For the years you’re being audited, you were still trafficking in a Schedule I substance.”

Still, the question remains: Why this? Why now? If the IRS already failed to get their demands met in the CHAMP case, what’s the point of going through that whole process all over again, dozens of times over?

Wykowski has a theory: “Because I’m involved in so many of these [cases], I’ve learned that the IRS is doing what they call a project on cannabis dispensaries. A determination has been made to audit a substantial number of dispensaries.”

And why now? Wykowski thinks that the Obama administration’s decision not to attack dispensaries through the Department of Justice has something to do with it. “I think the IRS looked at that and internally made a decision that if that was the tactic the administration was going to take, they’re going to audit these businesses just like they audit any other business.”

Says Wykowski, “I personally believe that a large part of the government decided that because they had not been successful through the DEA to shut [the dispensaries] down, maybe they could tax them out of business.”

1 COMMENT

  1. […] Taxes.com:  “Henry Wykowski . . . represented Californians Helping to Alleviate Medical Problems . . .  in that dispensary’s landmark 2007 case against the IRS.  Now, many of the growing number of California dispensaries facing what could amount to debilitating audits have sought out Wkyowski’s services. . . . ‘The most successful dispensaries do more than strictly offer cannabis.’  Says Wykowski, ‘I personally believe that a large part of the government decided that because they had not been successful through the DEA to …‘.” […]

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