Cannabis I MARCH 7, 2016

The Billion Dollar Marijuana Question

Picture link: credit to www.tokesignals.com & Steve Elliot

Laws exist as statutes, which are carried into effect by regulations, and enforced by an executive agency.  This article raises an interesting legal question whose determination is worth billions of dollars: what is the effect of defunding a law?  The law remains on the books, but no money is allocated for its enforcement.  Is there a law?  A law is only good if it can be applied and enforced.  Without that ability the law is not worth the paper that it is written on.  This exact fact pattern currently exists in the conflicting federal marijuana laws.

The Controlled Substances Act (CSA) expressly prohibits possession and commerce in marijuana. 21 U.S.C. §§ 841(a)(1), 846.  All marijuana is prohibited, no exceptions.  However, a different law that authorizes federal funds to the Department of Justice contains an exception to the prohibition of marijuana pursuant to the CSA.

Section 542 of the budget provides a carve out to the states that have passed medical marijuana laws.  Section 542 is as follows:

None of the funds made available in this Act to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and Wisconsin, Guam and Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.


Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, § 542, 129 Stat. 2242, 2332-33 (2015).

What is prohibited by one law is neutered by the law providing the funding for its enforcement.  Marijuana is still illegal, but no federal money is allocated to prevent any state from implementing its own medical marijuana law.  This means that medical marijuana businesses that comply with their state law need not fear any interference from the Department of Justice.  Congress authorized states implementing their own medical marijuana laws. The Ninth Circuit upheld this view when it handed down the case of U.S. v. McIntosh (9th. Cir. 2016).

Practically speaking, medical marijuana businesses that comply with their state laws are not prohibited by federal law because those prohibitions have no funds available for enforcement by the Department of Justice.  However, what does this conflict of law mean for the medical marijuana businesses’ relationship with the Internal Revenue Service in the Department of Treasury?  Internal Revenue Code (IRC) section 280E denies business deductions for carrying on a marijuana business.  IRC 280E provides as follows:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any 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 or the law of any State in which such trade or business is conducted.
(Added Pub. L. 97–248, title III, § 351(a), Sept. 3, 1982, 96 Stat. 640.)


IRC 280E arose after a brazen drug dealer deducted the cost of drugs he sold and the Tax Court allowed it.  See Jeffery Edmondson v. Commissioner, T.C.Memo. 1981-623. On the heels of that case, Congress introduced IRC 280E with the stated purpose of disallowing deductions and credits for the amounts paid or incurred in the illegal trafficking of drugs in the CSA.

The trap has been set to answer the question posed at the beginning of this article: if a law is on the books, but has no funds allocated to its enforcement, is it a law?  Is a state law compliant medical marijuana business prohibited by federal law?  No. The federal law explicitly halts all enforcement of the marijuana laws that “prevent any of them [states and territories] from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.”

It bears noting that no IRS memo has been issued since Congress passed Section 542 the first time in the 2015 budget.  A challenge to the construction of IRC 280E in the light of Section 542’s authorization for states to implement their own laws regarding medical marijuana is the billion dollar question in the medical cannabis industry.  The purpose of IRC 280E was to stop illegal drug traffickers from deducting the costs of drugs.  Medical marijuana did not exist in the early 1980's when Congress codified IRC 280E.

Canons of statutory construction state that the specific controls the general.  Generally, marijuana is prohibited by the CSA, but the budget specifically authorizes medical marijuana businesses that comply with state law.  As a result, these medical marijuana businesses are not prohibited by federal law.  If IRC 280E does not apply, then medical marijuana businesses may have a massive case of over payment of taxes.  Perhaps the current federal marijuana laws will provide the answer to the question of whether a law that has been defunded is still a law, but that is for the Tax Court to decided when applying the statutes this article discussed.