Approximately half of all American adults have used cannabis at some point in their lives.1 Whether any one estate-planning professional falls into this particular demographic, it’s crucial for all advisors to understand the estate-planning uncertainties and complexities facing owners of legal cannabis businesses. Eighteen states and Washington, D.C. have legalized cannabis for adult recreational use; over 35 states have legalized the medicinal use of cannabis (often in conjunction with permitting adult recreational use).2 Indeed, many jurisdictions and localities are taking steps to decriminalize cannabis-related offenses.3 Yet for federal purposes, cannabis remains a “Schedule I” controlled substance.4 Therefore, cannabis possession, distribution and sales are all federal offenses with serious consequences.5
Critics point out that the criminalization of cannabis has disproportional impacts on the basis of race and class.6 For example, President Obama commented in 2014 that “[m]iddle-class kids don’t get locked up for smoking pot, and poor kids do . . . . African-American kids and Latino kids are more likely to be poor and less likely to have the resources and support to avoid unduly harsh penalties.”7 Perhaps, in part, because of the growing awareness of the collateral (and unequal) consequences of drug criminalization, American attitudes toward cannabis are generally permissive. A recent Pew Research Center polls reveals that the over 90% of Americans approve of legal cannabis use in some form, with 60% of respondents saying it should be permitted for medicinal and recreational use, although 31% of respondents endorse its use for medicinal purposes only.8
Despite the strength of public opinion, however, it’s difficult to know whether (or when), the federal government will legalize the sale of cannabis in any form. In December 2020, the U.S. House of Representatives voted to decriminalize cannabis in a largely symbolic vote.9 In July 2021, New York Sen. Chuck Schumer introduced legislation that would remove cannabis from the Controlled Substances Act (CSA), tax sales of cannabis products, expunge past federal convictions for certain cannabis-related crimes and allow for the possible commutation of sentences for those currently incarcerated.10 Many observers suggest that this legislation is unlikely to become law any time soon.11
As federal legislators continue to debate the matter, the market for legal cannabis grows unabated. Experts estimate that legal recreational sales in the United States will have reached $18.9 billion in 2021 and that by 2026, sales in the United States alone will reach $41.8 billion or more.12 Because of the burgeoning wealth of some entrants into the legal cannabis business, estate planners need to become familiar with the myriad state and federal rules that apply to the creation, operation and transfer of cannabis-related businesses.
State-Level Regulation
In every jurisdiction that authorizes legal cannabis sales, there are extensive regulations for all “plant-touching” activity, meaning the growth, testing, manufacture, distribution and sales of cannabis. Only an individual (or entity) holding a state-issued permit may engage in these activities, and each jurisdiction has its own eligibility rules.13 In contrast, those involved on the “non-plant-touching” side of the legal cannabis industry, such as individuals or businesses that provide packaging, security, lighting, marketing or professional services such as legal and accounting advice, generally don’t face the same permitting requirements, regulations or barriers.14
The number of cannabis licenses, and thus legal cannabis businesses, will vary from jurisdiction to jurisdiction; each jurisdiction has different limits on the number and types of licenses it issues.15 To give a thumbnail sketch, as of August 2021, there were approximately 8,550 licensed cannabis retailers in the United States; California issued 774 of those licenses.16 The relative scarcity of licenses in a particular jurisdiction and the anticipated location of a retail business may dramatically impact the cost of the license. In the Los Angeles area, for example, a license for a retail cannabis operation in a prime location can range from $2 million to $10 million.17 And while licenses are expensive, the cannabis business can be quite lucrative. According to the California State Board of Equalization, for example, its 774 licensed cannabis businesses recently reported an estimated $870 to $2 million in revenue (although it’s not clear why more accurate estimates aren’t available).18 Legal sales of cannabis in California in 2020 generated sales and excise tax revenue in the estimated range of $1 billion.19 It’s easy to see why legalized cannabis businesses could be appealing to jurisdictions from a tax perspective. Industry advocates further emphasize that a complete picture of the economic impact of legalized cannabis must also include the number of jobs created and increased labor income.20 By that measure, it’s estimated that the 2017 legalization of cannabis in Nevada will lead to the creation of 41,000 jobs in the state and over $1.7 billion in labor income before 2024.21
Federal Banking Limitations
Assuming that a cannabis business owner can successfully navigate the complex web of applicable state rules and regulations, there are two main areas of federal laws with which cannabis business owners and their advisors must be familiar: banking and taxation. Owners of legal plant-touching cannabis businesses are subject to drastic limitations on access to banking services, and they generally may not avail themselves of income tax deductions for ordinary and necessary business expenses.
Consider as an initial matter that even in jurisdictions where cannabis is legal, plant-touching cannabis businesses may not open or maintain accounts at federally insured banks. These institutions don’t want to run the risk of violating federal laws such as the Bank Secrecy Act, to just give one example; that law contains prohibitions against money laundering and extensive customer due diligence requirements.22 For the same reasons that cannabis business owners can’t open up banking accounts, cannabis-related businesses typically aren’t eligible for loans or credit the way other legal businesses are. Therefore, plant-touching cannabis businesses lack access to capital and typically operate on an exclusively cash basis, raising predictable challenges such as accurate accounting and on-premises security (that is, the risk of theft by employees or by outsiders).23 Indeed, because banks must submit a suspicious activity report for all deposits over $5,000 cash if they suspect that the funds are derived from activities that are illegal under federal law,24 many cannabis business owners avoid the banking system entirely.25 In April 2021, the U.S. House of Representatives passed legislation called the “SAFE Banking Act,” which would allow banks to provide services to legal cannabis businesses.26 Prior versions of the same legislation, although passed in the House, have failed in the Senate.27 Thus, the fate of the current proposed legislation is uncertain.
Federal Income Tax Limitations
Apart from the restrictions on cannabis businesses’ access to banks, plant-touching cannabis businesses are also disadvantaged compared to other legal businesses in terms of their eligibility for income tax deductions. Under Internal Revenue Code Section 280E, no deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on a trade or business “if such trade or business (or the activities which comprise such trade or 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.”28 Nor is a deduction permitted in future years through capitalization. Under IRC Section 263A, costs that are otherwise nondeductible under Section 280E may not be capitalized.29 Section 263A doesn’t, however, prevent taxpayers from reducing sales by the cost of goods sold in determining gross income.30 Thus, plant-touching cannabis businesses—even those that are legal under the laws of the state where they operate—effectively pay federal income tax on their gross income (although, as indicated, the cost of goods sold is permitted as a reduction in determining gross income). Two recent cannabis-related cases are representative of taxpayers’ resounding failure when they’ve attempted to challenge Sections 280E and 263A.31
In Alpenglow Botanicals, LLC v. United States, a dispensary of medical cannabis operating legally in Colorado challenged the IRS’ disallowance of its claimed business deductions under Section 280E for items such as rent, officer compensation, advertising, taxes, depreciation, wages and salaries.32 The plaintiff had subsequently moved to amend its complaint to challenge the IRS’ characterization of some of the denied expenses as deductions, rather than cost of goods sold, in calculating the company’s tax liability.33
The U.S. Court of Appeals for the Tenth Circuit affirmed the U.S. District Court’s denial of the taxpayer’s request for a refund, reasoning that no criminal conviction for “trafficking in controlled substances” is required for the IRS to disallow business deductions under Section 280E. Rather, it “is within the IRS’s statutory authority to determine, as a matter of civil tax law, whether taxpayers have trafficked in controlled substances.”34 The Tenth Circuit similarly rejected the taxpayer’s argument that Section 280E violates the Sixteenth Amendment.35 It also affirmed the U.S. District Court’s denial of the taxpayer’s motion to amend its complaint alleging improper disallowance of a reduction for the cost of goods sold in the taxpayer’s income on the grounds that the claim was untimely.36 The court reasoned that the taxpayer had all the necessary facts available at the time it filed the original refund claim and that the taxpayer had failed to allege facts sufficient to support the claim that the IRS erroneously characterized the denied expenses as deductions.
The Alpenglow court embraced the principle that Section 280E doesn’t bar a reduction for the cost of goods sold. Indeed, the government itself maintains that the section doesn’t bar such a reduction.37 Furthermore, a 2014 legal advisory by the Chief Counsel’s National Office makes clear that a taxpayer trafficking in a Schedule I or Schedule II controlled substance “is entitled to determine inventoriable costs using the applicable inventory-costing regulations under § 471 as they existed when § 280E was enacted.”38 In affirming the U.S. District Court’s denial of the taxpayer’s motion to amend its complaint, the Alpenglow court even acknowledged that in some cases, there’s a similarity between expenses that are ordinary and necessary business expenses and the cost of goods sold, but the expenses identified by the taxpayer in this case were disallowed as deductions under Section 280E.39
Approximately one month after the Tenth Circuit’s decision in Alpenglow, the Tax Court addressed another challenge by a legal cannabis business to the disallowance of business deductions under Section 280E. In Patients Mutual Assistance Collective Corp. v. Commissioner (Harborside), the Tax Court affirmed the IRS’ denial of the taxpayer’s claimed deductions under Section 280E and the IRS’ determination that these deductions couldn’t then be capitalized under Section 263A.40 In Harborside, the non-profit corporation operated a cannabis dispensary that sold medical cannabis to its members. It also sold non-cannabis products, such as rolling papers, pipes, books and apparel. The taxpayer argued that it should be entitled to take some deductions related to the non-cannabis products. The Tax Court disagreed, noting that the non-cannabis products constituted less than 1% of the taxpayer’s revenue, required only 5% to 10% of employee time and occupied 25% of available retail space.41 Those details, combined with the fact that the sales floor was only accessible to those who passed through security and were eligible to purchase cannabis, led the Tax Court to disallow any business deductions to the taxpayer under Section 280E.42 The Tax Court further disallowed any deduction for what the taxpayer claimed was cost of goods, except for those listed in the Treasury regulations under IRC Section 471 (dealing with the cost of inventory) —with the court prohibiting the taxpayer from capitalizing under Section 263A those expenses that were denied under Section 280E.43 As in Alpenglow, the Tax Court’s approach to the cost of goods sold is consistent with prior case law and IRS guidance.44
How the Business is Organized
Given the cost of entry into the cannabis business—in the form of licenses, for example—the extensive state regulations and the federal income tax limitations on cannabis businesses, it’s hardly surprising that very few cannabis businesses appear to be operated as sole proprietorships. Anecdotal evidence suggests that most cannabis licenses are held by limited liability companies (LLCs).45 From a business-planning perspective, this is a sensible choice given the flexibility that LLCs afford in terms of corporate governance, distributions and tax treatment; the LLC offers the beneficial owners protection against creditors of the business.46 With careful planning, in most states, an LLC can be organized so as to qualify as a potential licensee for plant-touching activity, and so there’s no reason for a natural person to own the license and to risk personal exposure to claims of business creditors, for example.47
The relative ease with which an LLC can be formed and operated belies the underlying organizational structures of the most lucrative participants in the legal cannabis industry. To be sure, there are a few mom-and-pop-type cannabis businesses, but the dominant players in the industry are “multi-state operators” organized as holding companies. These holding companies have separate subsidiaries to engage in plant-touching activities in each state where they operate.48 It’s not uncommon for a multi-state operator to own separate businesses in each state where licensed, with each business responsible for a different step in the “seed to sale” chain: cultivation, manufacturing and retail.49 While multi-state operators’ cannabis products can’t travel across state lines, the holding companies nevertheless enjoy multiple non-plant-touching synergies: executive leadership, marketing, payroll management, standardized operating policies, shareholder relations and even shared intellectual property.50
Examples of large multi-state operators in the cannabis industry include, by one recent measure, Curaleaf (with an estimated valuation of $4 billion), Acreage Holdings (holding retail licenses in
12 states) and Harvest Health & Recreation (with 70 dispensaries).51 In fact, LLCs can become publicly traded in the United States in some circumstances,52 but because cannabis sales aren’t legal at the federal level, U.S.-based multi-state operators may not list on the New York Stock Exchange or Nasdaq. Instead, these multi-state operators, whether C corporations, LLCs or other business entities, typically trade on Canadian stock exchanges and the secondary over-the-counter (OTC) market in the United States.53
Transfers of Business Interests
One of the most important estate-planning considerations for a cannabis business owner is the transferability of that ownership interest. Any transfers typically require approval of the state; the transferee must independently qualify as the owner of a cannabis business license in that state.54 Depending on where the business is located, where a client’s intended beneficiaries live, how old the beneficiaries are and whether the client’s estate plan includes the use of long-term trusts, the rules governing the transfer of interests in cannabis businesses may not be readily discernible or easy to satisfy.55
For these reasons, it’s worthwhile to note how the interpolation of multiple layers of business entities between the cannabis business itself and the ultimate beneficial owners may be advantageous. In the case of multi-state operators, in particular, transferability is rendered a minor concern. After all, there’s a developed market for interest in those businesses, and not everyone purchasing interests in a U.S.-based multi-state operator must independently qualify as a license holder in the jurisdiction where the cannabis is grown, manufactured or sold. Thus, it would appear that the rigorous state licensing requirements don’t apply to the beneficial owners of the “parent” multi-state operators because of the “distance,” through business entities, between the legal owner of the plant-touching business and the ultimate beneficial owners.
Valuation of Interests
Bracketing, then, any obstacles to the transferability of interests in cannabis businesses (that appear to be able to be addressed through careful structure and design), the savvy estate planner must be able to advise on the next question: How will these interests be valued for wealth transfer tax purposes? One’s immediate reaction is that familiar gift and estate tax valuation rules should apply, but the analysis doesn’t end there.
For gift tax purposes, a gift is the transfer of property “for less than an adequate and full consideration in money or money’s worth,” in which case “the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift.”56 Treasury Regulations Section 25.2512-1 amplifies the gift tax valuation rule:
The value of the property is the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts. The value of a particular item of property is not the price that a forced sale of the property would produce. Nor is the fair market value of an item of property the sale price in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.57
Just as the gift tax valuation snapshot is taken at the time of the transfer, the estate tax valuation snapshot is taken at the time of the decedent’s death.58 The decedent’s gross estate includes the fair market value (FMV) at the time of the decedent’s death all of the decedent’s property, real or personal, tangible or intangible, wherever situated.59 For estate tax purposes, FMV is defined in a way that’s consistent with the gift tax rule. Under Treas. Regs. Section 20.2031-1(b), FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”60
Given the inclusion of cannabis as a Schedule I drug for the purposes of the CSA,61 there are several open questions about how these familiar valuation rules apply to gratuitous transfers of interests in cannabis businesses. Even though cannabis may be legal in the jurisdiction where the transferor/decedent was domiciled and where the cannabis business operated, it’s not obvious that the local market for legal cannabis is the appropriate reference for federal wealth transfer tax purposes. Note, however, that the gift tax Treasury regulations specifically provide that with respect to lifetime gifts, valuation should be none other than “the fair market value of an item of property the sale price in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate.”62 On its face, this Treasury regulation would seem to suggest that the local market for legal cannabis would be the appropriate referent, but nowhere do the Treasury regulations provide guidance for situations in which there’s a legal market under state law but no legal market under federal law. Indeed, there are some wealth transfer-tax cases involving illegal assets that suggest that the IRS may not respect the prices set by the local market.
Consider, for example, the case of a three-dimensional collage by artist Robert Rauschenberg known as Canyon, which contained a stuffed bald eagle. The collage had been owned by New York art dealer Ileana Sonnabend.63 On Sonnabend’s death, her heirs valued the collage at zero, because they were prohibited from selling the piece of art due to federal law that makes it illegal to possess, sell or purchase a bald eagle, whether living or dead.64 The IRS disagreed, arguing that the value of the collage was $65 million.65 The heirs ended up settling the valuation dispute by donating the painting to the Museum of Modern Art in New York City but only after agreeing to refrain from taking an estate tax deduction for the value of the transfer to charity.66
To be sure, interests in legal cannabis businesses are different from a famous artist’s collage with a dead bald eagle. As a policy matter, bald eagles are protected as a symbol of the United States; presumably, the purpose of the law against their ownership or use is to allow bald eagles to flourish in their natural habitat. Cannabis, on the other hand, is the subject of substantial political (and moral) disagreement. It’s not universally acclaimed throughout the country as a valuable national symbol. Some jurisdictions have legalized cannabis, but others haven’t. Cannabis remains illegal for federal purposes. Even so, it’s difficult to imagine the IRS agreeing with the heirs of a cannabis business owner, as it did with the Sonnabend heirs, that there should be zero estate tax inclusion in return for a donation of the business interest to a charity. Indeed, allowing the business to continue would be contrary to the federal policy of discouraging the trafficking in illegal substances. It’s more likely, then, that the IRS would argue for inclusion of the cannabis business assets at the highest possible values.
Consider next an estate tax case involving a decedent who died in 1987, before sales of cannabis became legal in any jurisdiction. In that case, the decedent had been under suspicion of drug smuggling for several years. He was piloting an airplane laden with cannabis to a location where he intended to meet two accomplices, but bad weather caused a fatal crash. The police found over 450 pounds of cannabis in the crashed plane and apprehended the two accomplices driving a truck containing over 200 additional pounds of cannabis taken from the crashed plane.67
In a Technical Advice Memorandum (which under IRC Section 6110(k)(3) can’t be cited or used as precedent except in some cases to avoid penalties, but may be indicative of the views of the IRS), the Office of Chief Counsel (OCC) advised that the value of all cash and drugs found in the decedent’s plane and being transported by the accomplices were fully includible in the decedent-pilot’s gross estate under IRC Section 2033, with no corresponding deduction permitted under any other section on account of the cash and drugs having been seized by the government.68 Citing analogous income tax cases, the OCC opined that Congress had an “obvious intent” to tax income, regardless of whether it was derived legally or illegally, “to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune.”69 Furthermore, the OCC stated that the IRS had broad discretion “to determine the FMV of drugs that have been confiscated… [and] to use any reasonable means to establish the grade of the drugs held by the decedent at his death and the market in which the drugs would have been sold.”70
This TAM raises two significant concerns. First, if cannabis is a Schedule I drug under the CSA, there’s nothing to stop the federal government from seizing a decedent’s interests in a plant-touching cannabis business (even though that appears unlikely under the Department of Justice guidance).71 Second, if the IRS has such broad discretion in valuing interests in substances that are illegal for federal purposes, then even if cannabis businesses are legal for state law purposes, it’s difficult to predict with certainty how the IRS would seek to value the assets.
In a similar TAM issued a few months later, the OCC again addressed the estate tax inclusion of the value of illicit assets.72 In this case, the decedent had stolen several works of art while he was serving in the U.S. Army in Europe during World War II. He mailed the stolen works home to his mother; for several years afterwards, it was well known by members of the decedent’s family that the decedent possessed these artworks. On the decedent’s death, the artworks weren’t included in the inventory filed in connection with the probate of the decedent’s will, nor did the decedent’s executor file a federal estate tax return, because the stated value of the declared estate was below the filing threshold. Nevertheless, after the decedent’s death, members of his family made several attempts to sell the artworks on the open market. This activity alerted the relevant authorities to the existence of the stolen art, which was then traced back to the decedent.
The OCC opined that the value of the stolen art was fully includible in the decedent’s gross estate because the decedent had possessed and enjoyed the beneficial use of the art during his lifetime. He had also passed that benefit along to his intended beneficiaries. The OCC reasoned that “no distinction should be drawn between a decedent’s property that has been obtained by theft and decedents’ property that has been lawfully obtained.”73 This TAM permits an inference relevant for legal cannabis business owners: It’s almost certain the value of the business interests will be includible in the owner’s estate at death (because the fact that the ownership was “unlawful” for federal purposes shouldn’t allow it to escape taxation). What the TAM doesn’t answer, however, is how the IRS will determine the value of the “illicit” asset for wealth transfer tax purposes.
Commenting on these two TAMs—the one involving the downed plane with bales of cannabis and the one involving the art stolen during World War II—Professor William Turnier of North Carolina School of Law has reasoned that, by analogy to income tax cases that include the “fruits of criminal activities in the incomes of criminals,” illegal assets should similarly be included in a decedent’s gross estate for federal estate tax purposes.74 In the case of cannabis businesses that are legal under applicable state law, it’s unfathomable that the IRS would take any position other than estate tax inclusion. Indeed, estate tax inclusion often turns on whether a decedent had the ability to control the post-death disposition of the assets under state law.75 Because interests in cannabis businesses are transferable under state law (although there may be restrictions on how and to whom cannabis licenses may be transferred, for example),76 they should be includible in a decedent’s estate.
The trickier issue, highlighted in this discussion, is that conventional valuation principles are fundamentally at odds with any system for valuing illicit assets. As described above, the federal gift and estate tax valuation Treasury regulations consider what a hypothetical buyer and seller would agree is an appropriate sales price.77 But when, as a matter of federal law, the asset can’t be legally sold, these rules apply uneasily. In the case of a legal cannabis business, one might base valuation on the price being paid by market participants, that is, buyers and sellers in the jurisdiction where the business is located, or, in the case of interests in multi-state operators, the prices paid for those interests on Canadian stock exchanges or in the secondary OTC market in the United States.78 Given that cannabis is a Schedule I drug for federal purposes, a taxpayer might argue for a significant valuation discount to reflect the difficulties in operating such a business (such as the restriction on business deductions under Section 280E). Whether the IRS or a court would be receptive to that argument is difficult to forecast.
Federal Budget Proposal
It’s difficult to predict whether the Biden administration will propose changes to the wealth transfer tax laws. As of this writing, there don’t appear to be any major changes in the short-term future. That being said, the House Ways and Means Committee Budget Proposal, released on Sept. 13, 2021, did contain several provisions that would be relevant for owners of cannabis business owners.79 If these changes were to become law, the federal estate and gift tax exclusion would be reduced to 2010 levels of $5 million per taxpayer (indexed for inflation), compared to
$12.06 million per taxpayer in 2022 under current law.80 Furthermore, valuation discounts may be eliminated for business entities, such as multi-state operators, that hold passive assets held for the production or collection of income but not used in the active trade or business.81 On the positive side, however, the House Ways and Means Committee did propose extending the special valuation rules under Section 2032A to allow a maximum decrease in the estate value of “qualified real property” used in a family farm or family business from $750,000 to the $11.7 million exemption amount at the time of the proposal.82 For cannabis cultivators who are otherwise able to meet the detailed requirements of Section 2032A, such a new provision could offset any decrease in the unified credit. In the future, the Biden administration may introduce legislation that incorporates some or all of these proposals.
The Road Ahead
As difficult as it is to forecast the future, estate planners can be certain of two things: The tax law will change, and more clients are likely to own interests in legal cannabis businesses. To the extent that increasing access to banking services for cannabis businesses—and even legalization of cannabis—remains on the federal agenda, it may be that the House Ways and Means Committee takes up these issues at the intersection of wealth transfer taxation and legal cannabis businesses. We’ve raised concerns elsewhere about the availability of various deductions for transfers of interests in cannabis businesses.83 We’ve asked important questions about how these interests will be valued for gift and estate tax purposes. The simplest solution would be for the IRS to issue a revenue ruling that provides that all interests in legal cannabis businesses will be subject to the same rules of inclusion, exclusion, deduction, accounting and valuation as any other legal asset. Taking such a position needn’t be interpreted as a federal endorsement of cannabis. Rather, to treat interest in legal cannabis businesses is to embrace the very federalist principles on which the nation is founded. As John Adams wrote in 1776, “Each individual of the society has a right to be protected by it in the enjoyment of his life, liberty, and property, according to standing laws. He is obliged, consequently, to contribute his share to the expense of this protection.”84 Cannabis business owners shouldn’t be required to contribute more than others who own property with equivalent economic value, in service of punitive tax laws designed to accomplish social goals about which people may reasonably disagree. A simple revenue ruling can accomplish the type of horizontal equity that the tax laws should embrace in these cases.
Endnotes
1. See Robert Hart, “Record High Getting High—Nearly Half of Americans Have Tried Marijuana, Poll Finds,” Forbes (Aug. 17, 2021), www.forbes.com/sites/roberthart/2021/08/17/record-high-getting-high---nearly-half-of-americans-have-tried-marijuana-poll-finds/?sh=4d5988155210 (reporting results of Gallup poll showing that 49% of American adults “said they’ve tried marijuana”).
2. See Jeremy Berke, Shayanne Gal and Yeji Jesse Lee, “Marijuana Legalization is Sweeping the US,” Business Insider (July 9, 2021), www.businessinsider.com/legal-marijuana-states-2018-1?r=US&IR=T (listing states and providing graphic of where cannabis is legal for adult recreational purposes, medicinal purposes or both).
3. See, e.g., Wayne A. Logan, “After the Cheering Stopped: Decriminalization and Legalism’s Limits,” 24 Cornell J.L. & Pub. Pol’y 319, 323-27 (2014) (providing overview of decriminalization efforts).
4. See 21 U.S.C. Sections 812(c)(10) (including “marihuana” on the list of Schedule I controlled substances), 812(b)(1) (defining as Schedule I substances those drugs having “high potential for abuse” and “no currently accepted medical use treatment in the United States”), 841 (prohibiting certain actions and activities with respect to controlled substances).
5. See 21 U.S.C. Section 841.
6. See, e.g., Ekow N. Yankah, “A Paradox in Overcriminalization,” 14 New Crim. Law Rev. 1, 3 (2011) (“The intersection of wealth, class, and law means that whereas many middle class can buy marijuana out of police view, many poor who engage in the same activity do so in public view, on street corners and the like, and are thus subject to stop, frisk, and arrest.”)
7. David Remnick, “Going the Distance,” New Yorker (Jan. 27, 2014), at p. 52 (quoting President Obama).
8. See Ted Van Green, “Americans Overwhelmingly Say Marijuana Should be Legal For Recreational or Medical Use,” Pew Research Center (April 16, 2021), www.pewresearch.org/fact-tank/2021/04/16/americans-overwhelmingly-say-marijuana-should-be-legal-for-recreational-or-medical-use/.
9. See, e.g., Alex Gangitano, “House Passes Sweeping Reform Bill to Decriminalize Marijuana,” The Hill (Dec. 4, 2020), https://thehill.com/homenews/house/528787-house-passes-sweeping-reform-bill-to-decriminalize-marijuana.
10. See, e.g., Lauren Claon and Emily Kopp, “Senate Democratic Leaders Unveil Draft Bill to Legalize Marijuana,” Roll Call (July 14, 2021), www.rollcall.com/2021/07/14/senate-democratic-leaders-unveil-draft-bill-to-legalize-marijuana.
11. See, e.g., Nicholas Fandos, “Schumer Proposes Federal Decriminalization of Marijuana,” The New York Times (July 14, 2021), www.nytimes.com/2021/07/14/us/politics/marijuana-legalization-schumer.html. (“Mr. Schumer conceded that he did not yet have even the support of his full caucus and would have to persuade moderates who are uncomfortable with the implications of decriminalization.”)
12. See“Sales of Legal Recreational Cannabis in the United States from 2019 to 2026,” Statistica (June 17, 2021), www.statista.com/statistics/933384/legal-cannabis-sales-forecast-us (providing projections from 2019 to 2026); “Cannabis Market Size to Worth $97.35 Billion by 2026,” Fortune Business Insights (June 8, 2021), www.globenewswire.com/en/news-release/2021/06/08/2243761/0/en/Cannabis-Market-Size-to-Worth-97-35-Billion-by-2026-Increased-Use-for-Medical-Theraputic-Purposes-to-Aid-Marijuana-Industry-Growth-Says-Fortune-Business-Insights.html (estimating a $97.35 billion legal cannabis market in the United States by 2026).
13. Compare, e.g., Wash. Rev. Code Section 69.50.331(1)(b)(i), (ii) (listing multiple types of licenses for “plant-touching” cannabis business activities and limited licenses to those who are 21 years of age or older and who’ve resided in the state for at least six months) with N.Y. Can. Law Section 3(1) (permitting any “person,” including business entities, to apply for a license to grow, process, distribute, deliver or dispense cannabis for sale, as long as the applicant has a “significant presence” in the state).
14. See, e.g., “Cannabis Business Models 101,” Leafly (April 22, 2021) (distinguishing between “plant-touching” and “non-plant-touching” businesses and calling the latter “ancillary cannabis businesses”).
15. See Trevor Reeves, “How Many Dispensary Licenses Are in the US?” Canix (Aug. 23, 2021), www.canix.com/blog-posts/how-many-dispensary-licenses-are-in-the-us (listing number of cannabis dispensary licenses by state, as of August 2021).
16. See ibid.
17. See Mio Asami, “How Do I Get a Cannabis License in California,” JDSupra (Feb. 1, 2021), www.jdsupra.com/legalnews/how-do-i-get-a-cannabis-license-in-4121765/ (quoting price for retail cannabis license in Los Angeles area).
18. Ibid. (citing statistics from the California State Board of Equalization of legal marijuana clubs and dispensaries in 2019).
19. See Carl Davis, “State and Local Cannabis Tax Revenue Jumps 58%, Surpassing $3 Billion in 2020,” Inst. on Tax’n & Eco. Polc’y (March 15, 2021), https://itep.org/state-and-local-cannabis-tax-revenue-jumps-58-surpassing-3-billion-in-2020/ (providing data about state excise and general sales tax revenue from cannabis sales).
20. Mrinalini Krisha, “The Economic Benefits of Legalizing Weed,” Investopedia (April 29, 2021), www.investopedia.com/articles/insights/110916/economic-benefits-legalizing-weed.asp.
21. Ibid.
22. See, e.g., 18 U.S.C. 1956 (laundering of monetary instruments); Customer Due Diligence Requirements for Financial Institutions, 81 FR 29397. See also Memorandum from James M. Cole, Deputy Attorney General, to All U.S. Attorneys, “Guidance Regarding Marijuana Enforcement” (Aug. 29, 2013), www.justice.gov/iso/opa/resources/3052013829132756857467.pdf (setting forth Department of Justice’s priorities in enforcing the Controlled Substances Act, specifically with regard to cannabis); Memorandum from James M. Cole, Deputy Attorney General, to All U.S. Attorneys, “Guidance Regarding Marijuana Related Financial Crimes” (Feb. 14, 2014), www.dfi.wa.gov/documents/banks/dept-of-justice-memo.pdf (providing guidance on cannabis-related activity that may form the basis for prosecution under federal banking laws).
23. See, e.g., Colleen M. Banker, “Entrepreneurial Regulatory Legal Strategy: The Case of Cannabis,” 57 Am. Bus. L.J. 913, 919-20 (2020); Julie Andersen Hill, “Banks, Marijuana, and Federalism,” 65 Case W. Res. L. Rev. 598, 599 (2015) (discussing banking-related challenges faced by certain cannabis businesses).
24. See 31 C.F.R. Section 1020.320 (requiring banks to report any conducted or attempted transaction if it “involves or aggregates at least $5,000 in funds or other assets, and the bank knows, suspects, or has reason to suspect that … the transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities”).
25. The banking limitations on cannabis-related businesses may also impact landlords and vendors transacting with those businesses. See, e.g., “Five Tips for Landlords of Cannabis Businesses,” Nat’l. Rev. (Jan. 28, 2020), www.natlawreview.com/article/five-tips-landlords-cannabis-related-businesses (describing possible complications for landlords, given that federal law “makes it a felony to lease or rent any place for the purpose of manufacturing, distributing, or using any controlled substance, including cannabis”).
26. HR 1996, 117th Cong. (2021).
27. HR 1595, 116th Cong. (2019).
28. Ibid. See also 21 U.S.C. Section 812(c)(10) (including “marihuana” on the list of Schedule I controlled substances).
29. See Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. No. 100-647, Section 1008(b)(1), 102 Stat. at 3437 (codified at Internal Revenue Code Section 263A(2)).
30. See, e.g., New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Treas. Regs. Sections 1.61-3(a), 1.1.62-1(a).
31. See alsoN. Cal. Small Bus. Assistants Inc. v. Commissioner, 153 T.C. 65, 72 (rejecting the taxpayer’s argument that IRC Section 280E violates the Eighth Amendment as an “excessive fine”).
32. Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187, 1193-94 (10th Cir. 2018).
33. Ibid., at p. 1204.
34. Ibid., at p. 1197.
35. Ibid., at p. 1201.
36. Ibid., at pp. 1197, 1202.
37. SeeCalifornians Helping to Alleviate Medical Problems, Inc. v. Comm’r, 128 T.C. 173, 178 n.4 (2007).
38. Internal Revenue Service Chief Counsel Advisory 201504011 (Jan. 23, 2015).
39. Alpenglow, supra note 32 at pp. 1200-01.
40. Patients Mutual Assistance Collective Corp. v. Comm’r (Harborside), 151 T.C. 176 (2018). On the same day that it issued the decision in Harborside, the Tax Court also ruled against the taxpayers in a similar case that the taxpayer’s sale of non-cannabis-related products were “incident” to the business of selling cannabis and denied the taxpayer deductions under IRC Sections 280E, 263A. Alternative Health Care Advocates v. Comm’r, 151 T.C. 13 (2018).
41. Harborside, ibid., at p. 203.
42. Ibid.
43. Harborside, ibid., at pp. 209-210. See also Feinberg v. Comm’r, 916 F.3d 1330 (10th Cir. 2019) (denying the taxpayer’s claimed deduction under IRC Section 280E and holding that the taxpayers had no Fifth Amendment privilege against self-incrimination when asked to provide evidence that they weren’t engaged in the trafficking in controlled substances, because the taxpayers weren’t facing criminal prosecution). Later, the U.S. Court of Appeals affirmed the Tax Court’s determination that the taxpayer was required to use the inventory accounting method in calculating exclusions under IRC Section 471. Patients Mutual Assistance Collective Corp. v. Comm’r, 995 F.3d 671 (2021).
44. Seesupra notes 37-38.
45. See, e.g., Marijuana Business Licenses Approved as of July 13, 2021, Or. Liquor Control Comm’n, www.oregon.gov/olcc/marijuana/Documents/MarijuanaLicenses_Approved.pdf.
46. See, e.g., Brett Freudenberg and Bradley T. Borden, “Contribution and Distribution Flexibility and Tax Pass-Through Entities,” 23 Fla. Tax Rev. 349 (2020) (describing multiple benefits associated with limited liability companies (LLCs) and analyzing impact on tax basis rules for LLC members).
47. See supra note 13 and accompanying text.
48. See, e.g., Debra Borchardt, “Multi-State Operators Enjoy Significant Cannabis Market Advantages,” Green Market Report (March 20, 2019), www.greenmarketreport.com/the-cannabis-industrys-top-12-u-s-multi-state-operators (describing existence and organization of multi-state operators in “seed to sale” cannabis business activity).
49. See ibid.
50. Ibid.
51. Ibid.; see also Jeff Smith, “Marijuana MSOs Post Strong Quarterly Results, But Investors Tepid,” MJBoxDaily (Sept. 13, 2021), https://mjbizdaily.com/marijuana-multistate-operators-post-strong-quarterly-results-but-investors-tepid (reporting revenue growth for the 10 largest publicly held cannabis multi-state operators).
52. See, e.g., Fortress Investment Group LLC, Form S-1, Securities & Exchange Comm’n (Nov. 8, 2006), www.sec.gov/Archives/edgar/data/1380393/000095013606009310/file1.
53. See, e.g., Phillip van Doorn, “If You Want to Get Rich with Marijuana Stocks, You Need to Know the Critical Difference Between U.S. and Canadian Companies,” Market Watch (Feb. 23, 2021), www.marketwatch.com/story/if-you-want-to-get-rich-with-marijuana-stocks-you-need-to-know-the-crucial-difference-between-u-s-and-canadian-companies-11613658205 (explaining the anomaly in U.S. law that permits Canadian licensed producers that don’t sell cannabis in the United States to list on the New York Stock Exchange or Nasdaq, while limiting U.S. companies to the over-the-counter market).
54. This topic is explored in greater detail in a separate article. See Bridget J. Crawford and Jonathan G. Blattmachr, “Estate Planning for Cannabis Business Owners: An Introduction,” 5-7, 41 ACTEC L.J. (forthcoming 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3898182.
55. Ibid.
56. IRC Section 2512(b). There are safe harbors for bona fide transfers made in the ordinary course of business, at arm’s length, in the absence of donative intent. See Treas. Regs. Section 25.2512-8.
57. Treas. Regs. Section 25.2512-1 (valuation of property).
58. IRC Section 2031 (definition of gross estate). Note that under IRC Section 2032, an estate, if it qualifies, may elect to have its assets valued on the alternate valuation date, normally six months after date of death. Note also that under IRC Section 2032A, real property used in a farm or other business may be valued at its value in that business rather than at its fair market value as defined above.
59. Ibid.
60. Treas. Regs. Section 20.2031-1(b) (valuation of property generally).
61. See supra note 4 and accompanying text.
62. See supra note 57 and accompanying text.
63. See Eric Gibson, “The Illegal Eagle and a Baldly Grasping IRS,” Wall St. J. (Dec. 2, 2012), www.wsj.com/articles/SB10001424127887324705104578151561581708972.
64. See 1940 Bald and Golden Eagle Protection Act, 16 U.S.C. Section 668.
65. See David Yanofsky, “A Worthless, $65 Million Piece of Art Ends Up in MoMA,” Quartz (Nov. 28, 2012), https://qz.com/31910/a-worthless-65-million-piece-of-art-ends-up-in-moma.
66. See Patricia Cohen, “MoMA Gains Treasure That Met Also Coveted,” The New York Times (Nov. 28, 2012), www.nytimes.com/2012/11/28/arts/design/moma-gains-treasure-that-metropolitan-museum-of-art-also-coveted.html.
67. Technical Advice Memorandum (TAM) 92-07-004 (Oct. 21, 1991).
68. Ibid.
69. Ibid.
70. See supra note 22 (referring to Memoranda).
71. TAM 91-52-005 (Aug. 30, 1991).
72. Ibid.
73. Ibid.
74. See William J. Turnier, “The Pink Panther Meets the Grim Reaper: Estate Taxation of the Fruits of Crime,” 72 N.C. Law Rev. 163, 172-73 (1993).
75. See, e.g., Estate of Wadewitz v. Comm’r, 39 T.C. 925, 933 (1963), aff’d, 339 F.2d 980 (7th Cir. 1964).
76. See Crawford and Blattmachr, supra note 54, manuscript at pp. 5-7.
77. See supra notes 57-60 and accompanying text.
78. See supra note 53 and accompanying text (describing buying and selling of interests in multi-state operators in the legal cannabis industry).
79. House Ways and Means Committee, Amendment in the Nature of a Substitute to the Committee Print, https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/NEAL_032_xml.pdf.
80. Ibid., at Section 138207 (Termination of Temporary Increase in Unified Credit).
81. Ibid., at Section 138210 (Valuation Rules for Certain Transfers of Nonbusiness Assets).
82. Ibid., at Section 1328208 (Increase in Limitation of Estate Tax Valuation Reduction for Certain Real Property Used in Farming or Other Trades or Businesses).
83. See Crawford and Blattmachr, supra note 54, at p. 8.
84. Mass. Declaration of Rights, art. X (1776), reprinted in The Works of John Adams, Vol. IV, at p. 225 (1851).