High Desert Relief, Inc. v. United States of America
MEMORANDUM OPINION AND ORDER by District Judge William P. Johnson GRANTING 4 Respondent's Motion to Dismiss for Failure to State a Claim. (mag)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO
HIGH DESERT RELIEF, INC., A NEW
MEXICO NONPROFIT CORPORATION,
No. 16-cv-1255 WJ/KBM
UNITED STATES OF AMERICA,
MEMORANDUM OPINION AND ORDER
GRANTING RESPONDENT’S MOTION TO DISMISS
FOR FAILURE TO STATE A CLAIM
THIS MATTER comes before the Court upon Respondent’s (“the Government”) Motion
to Dismiss for Failure to State a Claim, filed January 17, 2017 (Doc. 4). Having reviewed the
parties’ briefs and applicable law, the Court finds that Respondent’s motion is well-taken and,
therefore, is GRANTED.
Petitioner High Desert Relief, Inc., (“High Desert Relief”) is a New Mexico non-profit
corporation and a medical marijuana dispensary in New Mexico. The petition seeks to quash an
administrative summons issued to Southwest Capital Bank and asserts that the Internal Revenue
Service (“IRS”) is abusing its authority under its civil audit power to conduct essentially a
criminal investigation of the Controlled Substances Act, 21 U.S.C. §801 et seq. (“CSA”).
Petitioner contends that such an inquiry is outside the United States Tax Code and outside of the
civil and even criminal authority of the IRS. Petitioner seeks to quash the summons because it
was not issued for a legitimate purpose.
Respondent IRS has previously issued three other summonses to third parties concerning
High Desert Relief: to My Bank, Public Service Company of New Mexico (“PNM”) and the
New Mexico Department of Health (“NMDOH”) seeking various materials including
examination books, savings and checking accounts, and loans or safe deposit boxes held by
Petitioner. Petitioner has filed two other separate lawsuits in connection with the issuance of
those summonses: one to quash the summonses issued to My Bank and the NMDOH, High
Desert Relief, Inc. v. United States of America, No. 16-cv-469 MCA/SCY; and the other
subsequently to quash the summons issued to PNM, High Desert Relief, Inc. v. United States of
America, No. 16-cv-816/SCY. These two cases were consolidated into No. 16-cv-469 on joint
motion of the parties. See High Desert Relief, Inc. v. United States, (“HDR I”), No. 16-cv-469,
Docs. 1 &14.
On March 27, 2017, this Court entered an Order to Show Cause why this lawsuit should
not be consolidated with the other the other two consolidated cases. Doc. 13. On April 5, 2017,
the Government timely filed a response to the Court’s Order to Show Cause, stating that it did
not object to the consolidation. However, four days after this Court’s Order to Show Cause was
filed (and five days before the Government filed its response to the Order to Show Cause), the
presiding judge in the consolidated cases, Chief U.S. District Judge M. Christina Armijo, issued
a Memorandum Opinion and Order in HDR I granting the Government’s Motion to Dismiss
Petitioner’s Petition to Quash and Motion to Enforce the Summons and entering an Order
Enforcing Summons. No. 16-cv-469, Docs. 28 & 29 (filed March 31, 2017).
In the Government’s response to the Order to Show Cause, in addition to not objecting to
consolidation, the Government further states that if the Court does not consolidate this case with
HDR I, it requests that this Court follow the HDR I decision and dismiss the petition to quash
and enforce the IRS summons to Southwest Capital Bank.
Petitioner has not submitted any response to the Court’s Order to Show Cause.
As the Court noted in its Order to Show Cause, this case appears to be identical to HDR I
except that the IRS summons is directed to another entity.
Petitioner’s position and the
arguments presented by both sides are the same arguments raised in HDR I. Petitioner contends
that neither the CSA nor the Tax Code gives the IRS authority to determine whether a taxpayer
has violated federal drug laws. The Government contends that Petitioner is under an obligation
to pay all federal taxes that are due on activities that are legal as well as illegal and that if High
Desert Relief is in the business of selling marijuana, it is required to pay taxes on any profits
made from that business. The IRS would therefore be entitled to conduct an investigation in
order to determine whether the information submitted by High Desert Relief substantiates the
gross receipts and income information it reported on its tax returns.
In the interest of judicial economy, there would be no point in considering consolidation
after a ruling has been made on the merits in HDR I. This Court has reviewed the detailed
analysis of the issues which has been set forth in Chief Judge Armijo’s opinion and finds that, for
the same reason of judicial economy, there is also no point in proceeding with a separate analysis
on the same issues presented in this case. In her opinion, Chief Judge Armijo addressed all of
the arguments Petitioner makes in the petition to quash in this case. Specifically, in HDR I, the
court found that Section 26 U.S.C. §280E is a civil statute and that the IRS may investigate
whether a party is violating the controlled Substances Act for purposes of applying Section 280E
without conducting a criminal investigation.1 The court also concluded that the Government met
the requirements in U.S. v. Powell, 379 U.S. 48 (1964), which set forth the standard for
government enforcement of an IRS summons and as a result enforced the two remaining
summonses issued in that case.
The Court finds the decision in HDR I to be very persuasive authority. Accordingly, the
Court for the same reasons articulated in HDR I reaches the same result in this case. More
specifically, the Court hereby adopts the findings in HDR I, No. 16-cv-469, Doc. 28, and
concludes that even under the most generous reading of the allegations in the petition, Petitioner
has failed to allege facts sufficient to disprove the IRS’ legitimate purpose in issuing the
summons in this case. The petition to quash shall therefore be DISMISSED for failure to state a
claim upon which relief may be granted pursuant to the Government’s Motion to Dismiss.
UNITED STATES DISTRICT JUDGE
26 U.S.C. § 280E disallows deductions for business expenses if the business “consists of trafficking in controlled
substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by
Federal law or the law of any State in which such trade or business is conducted.”
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