High Desert Relief, Inc. v. United States of America
MEMORANDUM OPINION AND ORDER by District Judge William P. Johnson denying 15 First MOTION to Stay Ruling on Petition to Quash filed by High Desert Relief, Inc. (rwg)
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
DENYING PETITIONER’S MOTION TO STAY RULING ON PETITION TO QUASH
THIS MATTER comes before the Court upon Petitioner’s Motion to Stay Ruling On
Petition to Quash, filed April 11, 2017 (Doc. 15).
Having reviewed the parties’ briefs and
applicable law, the Court finds that Petitioner’s motion is not well-taken and, therefore, is
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.
The Court recently granted Respondent’s (the “Government’s”) Motion to Dismiss for
Failure to State a Claim (Doc. 4), finding that Petitioner failed to allege facts sufficient to
disprove the IRS’ legitimate purpose in issuing the summons in this case and the petition to
quash was dismissed for failure to state a claim upon which relief may be granted. Doc. 17. The
Court deferred entering a separate order enforcing the summons to Southwest Capital Bank until
it could consider the instant motion to stay. Doc. 18.
Petitioner has filed this First Motion to Stay (Doc. 15) in light of an appeal in a case that
is currently under advisement before the Tenth Circuit Court of Appeals, Green Solution Retail,
Inc., et al. v. United States, et al., No. 16-1281 (10th Cir.). Petitioner contends that the Green
Solutions case addresses issues similar to those in the instant case and that the appeal decision
would provide guidance to the Court by eliminating the potential for inconsistent rulings.
Counsel for Petitioner believes that there is a substantial likelihood the Tenth Circuit will find no
delegation of authority to the IRS to investigate whether a taxpayer has violated federal drug
laws. The Government’s position is that Petitioner cannot show either that it is likely to succeed
on the merits or that it will be irreparably injured absent a stay.
The Court considers the following four factors when considering a motion to stay
pending appeal: (1) whether the stay applicant has made a strong showing that he is likely to
succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3)
whether issuance of the stay will substantially injure the other parties interested in the
proceeding; and (4) where the public interest lies. U.S. v. Various Tracts of Land in Muskogee
and Cherokee Counties, 74 F.3d 197, 198 (10th Cir. 1996) (citing Hilton v. Braunskill, 481 U.S.
770, 776 (1987)).
No Likelihood of Success on Merits
Petitioner’s sole support for showing a likelihood of success on the merits is the
recollection by petitioner’s counsel that the appellate judges questioned extensively about the
standards set forth in Section 280E for the IRS’ delegation of authority to investigate whether a
taxpayer has violated federal drug laws. Unfortunately, counsel for petitioner has not provided
any portions of the oral argument transcript to support this contention, and ultimately it would
not be the dispositive consideration in determining whether to grant a stay, for two reasons.
First, as the Government notes, other courts have found that the IRS can apply Section
280E to disallow the ordinary and necessary business deductions of a marijuana dispensary. See
Olive v. Comm’r of Int. Rev., 792 F.3d 1146 (9th Cir. 2015) (affirming the Tax Court’s decision
that Section 280E precluded the taxpayer, a medical marijuana dispensary, from deducting any
ordinary or necessary business expenses associated with trafficking in a controlled
substance prohibited by federal law); Alpenglow Botanicals, LLC, et al. v. United States, 2016
WL 7856477 (D.Colo. 2016) (the IRS is charged with enforcing Section 280E and that it has the
authority to make the factual determinations necessary to decide whether that provision applies
to a taxpayer’s trade or business). These courts came to the same conclusion reached by this
Court in ruling on the Government’s Motion to Dismiss, finding that Section 280E is a civil
statute and that its application has nothing to do with the enforcement of federal criminal law. In
Alpenglow Botanicals, the district court for the District of Colorado reasoned this way:
. . . there is nothing in the language of § 280E that requires a criminal
investigatory entity to delve into any such secretive business practices. Section
280E is placed in the Internal Revenue Code, and instructs that deductions should
be disallowed if certain circumstances exist in a taxpayer's business. It would
certainly be strange if the Internal Revenue Service was not charged with
enforcing that provision. The fact that selling marijuana may also constitute a
violation of the CSA is simply a byproduct of § 280E using the CSA's definition
of “controlled substances.” Section 280E does not require that a criminal
investigation be pursued against a taxpayer, or even that § 280E only applies if a
criminal conviction under the CSA has been obtained. If Congress had wanted
such an investigation to be carried out or conviction to be obtained, then it could
easily have placed such language in § 280E. It did not, however. Plaintiffs assert
repeatedly that § 280E requires the IRS to find that a crime has been committed
and/or that a taxpayer has engaged in illegal activity . . . Even if these assertions
are accurate, this does not transform the IRS' determination that § 280E applies
into a criminal investigation, a criminal prosecution, or somehow the rendering of
a criminal verdict.
Alpenglow Botanicals, LLC v. United States, 2016 WL 7856477, at *4.
The second reason for the Court’s rejection of Petitioner’s argument is that as the
Government notes, the issue on appeal in Green Solution is not identical to the issue before this
Court. The Green Solution plaintiffs sought to enjoin the IRS from investigating whether they
were trafficking a Schedule I Controlled Substance in violation of the CSA, and asked the district
court to enter a declaratory judgment that the IRS does not have jurisdiction to enforce the CSA.
Instead, the district court in Green Solution dismissed that lawsuit because it concluded that it
lacked jurisdiction to enjoin IRS in the matter at all. Specifically, the court found that it had no
jurisdiction to enter an injunction under the Anti-Injunction Act, 26 U.S.C. §7421(a) based on
the statute’s language barring a court from restraining any assessment or collection of any tax,
including “activities leading up to, and culminating in, such assessment and collection.” See
Green Solution et al. v. U.S. et al., Civil Action No. 16-257 (USDC D.Colo.), Doc. 16 at 2, filed
6/7/16 (citing Lowrie v. U.S., 824 F.2d 827, 830 (10th Cir. 1987)). The district court also found
that it lacked jurisdiction to enter a declaratory judgment under the Declaratory Judgment Act,
28 U.S.C. §2201(a) because that provision excludes civil suits for claims regarding federal taxes.
Id. at 3.
The issue in the Green Solution case is whether a district court has jurisdiction to enjoin
the IRS from conducting an investigation under Section 280E, whereas the issue in the instant
case is whether the IRS has been delegated authority to conduct civil tax audits that apply
Section 280E of the Internal Revenue Code’s civil liability provisions. These are not the same
questions. Because the issue on appeal in the Green Solution differs from the issue before this
Court, Petitioners in this case would not prevail on the merits simply because the Green Solution
petitioners eventually prevail on the merits in that case. Moreover, in deciding the Green
Solution case, even if the Tenth Circuit considers the issue of whether the IRS has been
delegated authority to conduct civil tax audits that apply Section 280E of the IRS code, Petitioner
has not shown it will prevail on the merits in light of the case law which appears to support the
Irreparable Injury and Balance of Harm
The Court also agrees with the Government’s argument that Petitioner cannot show it
will suffer irreparable injury absent a stay. The IRS is currently conducting an examination to
determine Petitioner’s correct 2013 and 2014 tax liability, including whether Section 280E
should apply to disallow all of Petitioner’s ordinary and necessary business expenses. Denial of
Petitioner’s request for a stay would mean that the IRS will be able to use the information
acquired from the summonses to continue its audit. Petitioner can choose one of two forums
(either the Tax Court of U.S. District Court) to challenge an unsatisfactory result of this audit and
to seek to remedy any alleged wrong that results from the audit. See, e.g., 26 U.S.C. §§7422 &
6213. See Feinberg v. Comm’r of Intern. Rev., 808 F.3d 813 (10th Cir. 2015) (denying writ of
mandamus because an appeal in the normal course would suffice to supply any necessary remedy
for the Tax Court’s finding that the taxpayers, who operate a marijuana dispensary in Colorado,
were not entitled to invoke the Fifth Amendment privilege in response to discovery issued by the
IRS). Thus, because any errors committed by the IRS during the examination can be rectified in
a lawsuit before either the Tax Court or U.S. District Court, Petitioner cannot show that it will
suffer irreparable harm without a stay.
On the other hand, a stay would injure the United States because the only purpose of a
stay is to delay the completion of the IRS’ audit of Petitioner, and since Petitioner has not shown
a likelihood that it will win on the merits, the irreparable injury and balance of harm factors
weigh in favor of denying a stay.
The public inquiry factor is related to the balance of harm inquiry here, since delaying the
IRS’s investigation under Section 280E delays the public interest in seeing all taxpayers pay their
fair share of taxes. The efficient collection of taxes that are justly owed from taxpayers who
have underreported their liability prevents an unfair tax burden on millions of taxpayers who
voluntarily file and pay their correct tax liabilities. This factor also weighs against Petitioner’s
request for a stay.
Accordingly, Petitioner has not satisfied the four-factor test used to determine whether a
stay pending appeal is appropriate.
IT IS ORDERED that Petitioner’s Ruling On Petition to Quash (Doc. 15) is hereby
DENIED for reasons described in this Memorandum and Order. The Court will issue a separate
Order Enforcing the Summons issued to Southwest Capital Bank .
UNITED STATES DISTRICT JUDGE
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