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IRS-Tax

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IRC Sec 280E – Escrows

IRC Sec 280E – Escrows

IRC Sec 280E – Escrows – recent Tax Court decision in Northern California Small Business Assistants Inc. v. Commissioner [“NorCal”][1] made what is perhaps the most damning statement [2] yet regarding the application of IRC Sec. 280E to cannabis dispensaries.  The Court stated:

“Our precedent is unambiguous. Congress, rather than this Court, is the proper body to redress the petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in IRC Sec.280E for businesses that operate lawfully under State law. Until then, the petitioner is not entitled to deduct expenses IRC Sec 280E - Escrowsincurred in the operation of its drug-related business.”

In reaching our holding, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.”

The Court in NorCal followed the Tax Court precedential analysis by Judge Mark V. Holmes in his opinion in the first Harborside case[3].  The first Harborside case rejected the manner in which the two dispensaries determined the Cost of Goods Sold (“COGS”).  Judge Holmes agreed with the Chief Counsel Memorandum[4] that IRC Sec. 471 should be used by a cannabis dispensary to determine COGS.  The opinion in Harborside rejected the use of IRC Sec. 263A and approved the use of IRC Sec. 471 in the determination of COGS[5].

IRC Sec 280E – Escrows

The situation becomes particularly grim for California dispensaries beginning after 2017.  California’s Bureau of Cannabis Control adopted regulations beginning in 2018 that require Retailers to purchase cannabis that has been tested, packaged, and labeled by a Distributor[6].  The adoption of these regulations renders virtually all adjustments to COGS by a dispensary improper[7].

A California cannabis dispensary can mitigate a significant portion of the adverse impact of Harborside and NorCal opinions.  These opinions create an opportunity for a cannabis dispensary to exclude from gross revenue a substantial portion of the money collected from cannabis consumers.  Through the adoption of proper record-keeping systems and procedures, a dispensary can treat all of the money it collects for taxes that are not included in COGS as taxes imposed on consumers, or as reimbursements for taxes paid or payable by the dispensary, that must be remitted to various governmental agencies.

A dispensary will collect state-level Cannabis Excise Tax [“CET”], California Sales Tax, and it may collect any of a variety of municipal and county sales taxes, excise taxes, and gross receipts taxes[8].  These funds are money that a dispensary is obligated to remit to various governmental agencies.  As a consequence of the Harborside and NorCal opinions, it is critical for a dispensary to not allow these funds [“Reimbursable Taxes”] to be included in gross revenue.  If Reimbursable Taxes are properly identified and consistently segregated using an escrow account[9] [“Reimbursable Tax Escrow”], all taxing agencies should recognize these taxes are properly excluded from gross revenue.

IRC Sec 280E – Escrows

The taxes included in the money a dispensary will collect from retail customers can be classified into five categories as follows:

(1) income taxes which will be paid by the dispensary out of income;

(2) CCT which will be paid to a distributor by the dispensary as part of COGS;

(3) local taxes on cannabis that may be comparable to the preceding classification (2) or comparable to either of the two classifications (4) and (5) that follow;

(4) CET which is an excise tax that a dispensary is required to collect from a cannabis consumer that has some aspects of being money held in trust by virtue of the requirement that collections of CET in excess of the amounts actually paid by a dispensary to distributors are owed to California under the language of the statute; and

(5) Sales Tax collections which are more specifically money that constitute a trust fund in the hands of the retail seller that is collected as an agent for California and for which there is personal liability for a failure to remit.

We believe that the taxes identified in (1) and (2) above cannot be excluded from gross revenue.  However, the taxes identified in (3), (4), and (5) may be excluded from gross revenue by a dispensary if:

Each of the taxes is separately stated and identified on sales receipts that the dispensary provides to its retail customers; and

IRC Sec 280E – Escrows

The dispensary creates and maintains separate Reimbursable Tax Escrow trust account as well as complete and accurate records of each type of tax collected, deposited into the account, and remitted from the account, and performs a reconciliation for the trust account and the various Reimbursable Taxes each time the dispensary prepares a tax return and remits tax to a governmental agency.

While this issue is not entirely free from doubt, a dispensary that carefully maintains and utilizes a separate trust account, and minimizes transfers into and out of such an account, has a high probability the segregation of these funds as well as the exclusion of these funds from gross revenue will be respected.

IRC Sec. 280E – Escrows

[1] 153 TC 4 (2019)

[2] The taxpayer also argued in this case that IRC Sec. 280E solely applies to IRC. Sec. 162 deductions.  The taxpayer argued that the text of IRC Sec. 280E “tracks” the language of IRC Sec. 162 which allows a deduction for all ordinary and necessary business expenses.  The taxpayer argued the use of the same language indicated the prohibition of IRC Sec.  280E should solely apply to IRC Sec. 162 deductions.  Judge Goeke points out the taxpayer’s argument ignored the first line of IRC Sec.  280E which states, “No deduction or credit shall be allowed . . . .” (Emphasis added.)  The Court states the language of this section is clear and unequivocal.

Judge Goeke also points to a broader statutory scheme as support for the conclusion IRC Sec. 280E means what it says – no deductions under any section shall be allowed for businesses that traffic in a controlled substance.  As the Court points out, IRC Sec. 261 which is found in part IX of subchapter B of Chapter 1 of the Code, provides that “no deduction shall, in any case, be allowed in respect of the items specified in this part.”  IRC Sec. 280E is found in part IX[9]

[3] 151 TC 11(2018)

[4] CCM 201504011

[5] The tax year 2015 is significant for two reasons.  The Tax Court’s decision in Olive v. Commissioner, 139 TC 19, 36-42 (2012) aff’d 792 f.3d 1146 [CA-9, 2015] was the first reviewed decision that discussed the phrase “consists of” in IRC Sec. 280E.  Olive was not affirmed by the 9th Circuit until 2015.  Chief Counsel Memorandum 201504011 was issued in 2015. This Memorandum provided the first guidance from the IRS relating to IRC Sec. 280E.  The IRS has never promulgated regulations relating to IRC Sec. 280E.  A taxpayer that fails to utilize IRC Sec. 471 post-2015 is almost certainly subject to the “substantial understatement” penalty contained in IRC Secs. 6662, and potentially the civil fraud penalty in IRC Sec. 6663.

IRC Sec 280E – Escrows

[6] See § 5412. Prohibition on Packaging and Labeling by a Retailer.

A licensed retailer shall not accept, possess, or sell cannabis goods that are not packaged as they will be sold at final sale, in compliance with this division.

A licensed retailer shall not package or label cannabis goods.

Notwithstanding subsection (b) of this section, a licensed retailer may place a barcode or similar sticker on the packaging of cannabis goods to be used in inventory tracking. A barcode or similar sticker placed on the packaging of a cannabis goods shall not obscure any labels required by the Act or this division.

Authority: Section 26013, Business and Professions Code. Reference: Section 26120, Business and Professions Code. and

5303. Packaging, Labeling, and Rolling.

A licensed distributor may package, re-package, label, and re-label cannabis, including pre- rolls, for retail sale. All packages of cannabis, including pre-rolls, shall comply with the following:

Until January 1, 2020, all packages shall meet the following requirements:

The package shall protect the cannabis, including pre-rolls, from contamination and shall not expose the cannabis or pre-rolls to any harmful substance.

The package shall be tamper-evident.

If the package of cannabis or pre-rolls contains more than one serving, then the packaging shall be resealable.

The package shall not imitate any package used for goods that are typically marketed to children.

Beginning January 1, 2020, all packages shall meet the requirements of subsection (a)(1) of this section and shall also meet the following requirements:

The package shall be child-resistant until the package is first opened. For purposes of this division, the following packages are considered child-resistant:

Any package that has been certified as child-resistant under the requirements of the Poison Prevention Packaging Act of 1970 Regulations (16 C.F.R. §1700.15(b)(1)) (Rev. July 1995), which is hereby incorporated by reference.

Plastic packaging that is at least 4 mils thick and heat-sealed without an easy-open tab, dimple, corner, or flap.

The package shall be labeled with the statement “This package is not child-resistant after opening.”

Notwithstanding subsections (a)(1)-(a)(2) of this section, immature plants and seeds shall not be required to be packaged in child-resistant, tamper-evident, and resealable packaging.

A licensed distributor shall not process cannabis but may roll pre-rolls that consist exclusively of any combination of flower, shake leaf, or kief. Pre-rolls shall be rolled prior to regulatory compliance testing.

Licensed distributors may label and re-label a package containing manufactured cannabis goods with the number of cannabinoids and terpenoids based on regulatory compliance testing results.

Authority: Section 26013, Business and Professions Code. Reference: Sections 26013 and 26120, Business and Professions Code.

[7] The common practice for California dispensaries prior to the Harborside decision was to purchase flower in bulk, and then process and package, label, and possibly test the flower in-house.  With proper substantiation, the opinion in Harborside permits a dispensary to utilize IRC Sec. 471 to increase COGS for both the direct and indirect costs properly allocable to the handling, processing, packaging, and security for the conversion of bulk purchases of cannabis inventory into a retail product.

The Harborside opinion approves the use of IRC Sec. 471.  California’s regulation of its cannabis industry, however, now prohibits a dispensary from processing products for retail sale.  A California dispensary must acquire cannabis products from a distributor in a consumer-ready form.  Commercial cannabis products must be acquired by a California dispensary fully packaged and labeled.  As a consequence of regulatory requirements, effective January 1, 2019, a California dispensary is effectively subject to income tax on Gross Income (Gross Revenue less Cost of Goods Sold [“COGS”] )  for federal income tax purposes.

[8] A similar set of principles applies to the portion of employment taxes which are withheld from employee paychecks and treated as “trust funds”. A discussion of employment taxes is beyond the scope of this article.

[9] An escrow account is an account where funds are held in trust for a particular purpose, for example, segregation of funds that were collected for a taxing agency.  In formalized escrow arrangements third-party acting as a fiduciary will hold funds in a segregated trust account.  Funds are subject to disbursement in accordance with the contractual arrangements for the escrow.

IRC Sec 280E – Escrows

 

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An Elegant Solution

AN ELEGANT SOLUTION

An Elegant Solution – We are writing this article for the cannabis growers of the Emerald Triangle as well as all of the cannabis growers in smaller and less recognized enclaves of cannabis cultivation throughout California.  This Article Is For You!

As our readers are aware, we have written a number of articles regarding the financial advantages of the use of a Cannabis Cooperative Association (“CCA”) for California’s cannabis industry[1].   This article describes the use of a CCA that appears to have been wholly overlooked by many of the experts on California’s cannabis industry.

Everyone who follows the cannabis industry is aware the United States Tax Court hammered California’s cannabis industry in its opinion in Northern California Small Business Assistants Inc. v. Commissioner[2].  This case affirmed the An Elegant Solutionearlier decision of Judge Mark V. Holmes in the first Harborside case[3] that IRC §280E disallows any deduction to a cannabis dispensary for ordinary and necessary business expenses for federal income tax purposes.

An Elegant Solution

A CCA provides an elegant solution to this problem for well-advised California cannabis cultivators.   A CCA is a special form of corporation created by the California Legislature to allow small California cannabis cultivators to organize the equivalent of an agricultural cooperative.  The Long Valley Cannabis Cooperative Association is the legal equivalent to the Sacramento Valley Pear Growers Association under California law.  Both of these organizations are marketing and processing agricultural cooperatives.

The critical aspect under California law for the Long Valley Cannabis Cooperative Association and the Sacramento Valley Pear Growers Association is that both of these organizations are legally recognized cooperatives.  Both of these organizations can own and operate an incorporated distributorship.   A wholly-owned corporation that operates a distributorship for a cooperative will be deemed to be conducting a portion of the business activities of the organization within the legal framework of the cooperative for federal and California income tax purposes.

At this point, a reader should ask, “What does this have to do with IRC §280E?”  Cooperatives can have buyer members as well as grower members.  Pear connoisseurs can join the Sacramento Valley Pear Growers Association as members in order to be confident they will receive the best pears at the lowest possible price.  Cannabis connoisseurs can join the Long Valley Cannabis Cooperative Association as members in order to be certain they will receive the highest quality Emerald Triangle cannabis at the lowest possible price.

An Elegant Solution

The financial relationship between the purchaser members of a cooperative and the cooperative is determined by the membership agreement as a matter of contract law.  As long as the contractual relationship does not improperly circumvent tax laws, the contractual relationship will be respected for federal and California income tax purposes.  If a consumer member of Long Valley Cannabis Cooperative Association contractually agrees to reimburse the cooperative for the taxes and non-deductible business expenses the organization incurs in connection with the member’s purchase of cannabis from the cooperative as a contribution to the capital of the cooperative, the agreement will be respected for federal and California income tax purposes.  The cooperative will receive the money it needs in order for the cooperative to pay the taxes imposed on the sale of the cannabis as well as to pay the non-deductible business expenses without being required to include this money in the gross revenue of the cooperative.

Of course, great care must be taken in the organization and operation of a cannabis cooperative as a CCA in order to secure these tax benefits.  Is it worth the effort?  Of course, it is.  The income tax deficiency asserted by the IRS in the Northern California Small Business Assistants Inc. case for the one year before the Tax Court exceeds $1.0M.  A modest investment in planning to save over $1.0M per year in taxes is obviously a good investment.

[1] See  Licensing a Cannabis Cooperative Association, CCA’s Create Profits and Towards A Better Mousetrap

[2] 153 T.C. No. 4 (2019).

[3] 151 TC 3 [2018]

An Elegant Solution

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IRC Sec. 280E Insanity

IRC Sec. 280E Insanity

IRC Sec. 280E Insanity  – We just completed writing what is perhaps our tenth article about IRC Sec. 280E and Harborside[1]. Harborside is a sophisticated taxpayer with well-designed financial and operational systems and expensive professional advisors.  The two Harborside cases created an opportunity for analysis and a solid foundation for tax planning going forward for the cannabis industry.  Such planning is what tax professionals should be engaged with on a daily basis.

Northern California Small Business Assistants Inc. v. Commissioner[2], is an example of positions that should not be pursued in the Tax Court.  The Tax Court is a prepayment forum in which taxpayers are permitted to contest tax liabilities without first paying the tax and claiming a refund.  The Tax Court enforces federal tax laws.  The Tax Court enforces federal tax laws.  The Tax Court will only reluctantly consider policy.  It will do so solely when it finds the statutory language IRC Sec. 280E Insanityambiguous. Judge Mark V. Holmes had already addressed the language of IRC Sec. 280E.  For the cannabis industry, the pursuit of the motion for partial summary judgment gave a number of Tax Court judges an opportunity to express in dicta opinions which were largely unfavorable to the cannabis industry.  This case created an opportunity for the judge to express opinions we anticipated that in several instances we would prefer not to have seen expressed.  The dicta generated by this case will haunt taxpayers involved in the t cannabis industry for the next ten years.

IRC Sec. 280E Insanity

The summary of the case by the Tax Court is,

“P is a California corporation that operates a medical marijuana dispensary legally under California law. R argues that P is subject to the limitations of I.R.C. sec. 280E, which disallows all deductions for a business that consists of trafficking in a controlled substance within the meaning of Schedule I or II of the Controlled Substances Act. P argues that I.R.C. sec. 280E imposes a gross receipts tax as a penalty in violation of U.S. Const. amend. VIII. Further, P argues, even if I.R.C. sec. 280E is constitutional, it only bars ordinary and necessary business deductions under I.R.C. sec. 162 and does not apply to other distinct sections of the I.R.C. Finally, P argues that it is not subject to I.R.C. sec. 280E because its business, legally operated under California law, does not consist of “trafficking” in a controlled substance.

Held: I.R.C. sec. 280E is not a penalty provision and therefore does not violate the prohibition on excessive fines in U.S. Const. amend. VIII.

Held, further, I.R.C. sec. 280E is not limited to deductions claimed under I.R.C. sec. 162 but applies to bar all deductions claimed by P.

Held, further, P has provided no compelling argument to overrule our precedent holding that I.R.C. sec. 280E applies to businesses operating legally under state law, notwithstanding its use of the word “trafficking”.

The Tax Court was NOT pleased with the position taken by the taxpayer stating,

“On July 12, 2018, petitioner filed its motion for partial summary judgment pending before the Court in which it alleges that section 280E:

(1) imposes a gross receipts tax as a penalty in violation of the Eighth Amendment to the Constitution;

(2) eliminates only ordinary and necessary business deductions under section 162 and does not apply to other distinct sections of the Code; and  

(3) does not apply to marijuana businesses legally operated under State law.  

We reject each of the petitioner’s arguments and will deny its motion for partial summary judgment.”

It is our opinion the questions of whether IRC Sec. 280E is a penalty, whether the VIII Amendment applies, and whether IRC Sec. 280E is unconstitutional are well-settled law.  Judge Joseph Goeke affirmed these opinions.  If taxpayers want to change or repeal IRC Sec. 280E[3], they should follow the lead of “the adults in the room” such as the Cannabis Trade Federation [“CTF”] and Marijuana Policy Project[4].

IRC Sec. 280E Insanity

The Supreme Court has held that any deductions from gross income are a matter of legislative grace.  Deductions can be reduced or expanded in accordance with Congress’ policy objectives[5]. Under the Sixteenth Amendment, “[t]he power of Congress to tax gross income is unquestionable[6].

Section 280E is directly tied to Congress’ policy objective to limit and deter trafficking in illegal controlled substances[7].  Section 280E is not an effort by Congress to punish violators of State law that has no legitimate Federal objective[8].

The argument that IRC Sec. 280E is a penalty cannot be reconciled with the authority of Congress to tax gross income.  For that reason, the Tax Court concluded IRC Sec. 280E is not a penalty provision.  Consequently, the Eighth Amendment’s Excessive Fines Clause does not apply.

The taxpayer also argued that IRC Sec. 280E solely applies to IRC. Sec. 162 deductions.  The taxpayer argued that the text of IRC Sec. 280E “tracks” the language of IRC Sec. 162 which allows a deduction for all ordinary and necessary business expenses.  The taxpayer argued this indicated IRC Sec.  280E should apply solely to prohibit IRC Sec. 162 deductions.  Judge Goeke pointed out the taxpayer’s argument ignored the first line of IRC Sec.  280E which states, “No deduction or credit shall be allowed . . . .” (Emphasis added.)  The language of this section of the Code is clear and unequivocal.

IRC Sec. 280E Insanity

Judge Goeke also points to a broader statutory scheme as supports for the conclusion IRC Sec. 280E means what it says – that no deductions under any section shall be allowed for businesses that traffic in a controlled substance.  As the Court points out, IRC Sec. 261 which is found in part IX of subchapter B of Chapter 1 of the Code, provides that “no deduction shall, in any case, be allowed in respect of the items specified in this part.”  IRC Sec. 280E is found in part IX[9].

The taxpayer argued as its final argument that section 280E applies only to businesses that engage in illegal or disreputable sales of controlled substances.  As support for the position, the taxpayer pointed to the word “trafficking” in section 280E.  The taxpayer argued the word suggested some unsavory or illicit purpose was required for IRC Sec. 280E to apply.  The Court made short shrift of this argument[10] stating “[T]he sale of medical marijuana pursuant to California law constitutes trafficking within the meaning of section 280E.”

“Medical Marijuana” is a Schedule I controlled substance, and dispensing it pursuant to * * * [California law] is ‘trafficking’ within the meaning of IRC Sec. 280E.”). Thus, we hold that the use of the word “trafficking” in IRC Sec.280E encompasses the petitioner’s medical marijuana dispensary legally operated under California State law.

IRC Sec. 280E Insanity

The nasty bonus gift in the Tax Court’s opinion, in this case, includes an express denial of the taxpayer’s and an express statement by a majority of the Tax Court judges that IRC Sec. 280E denies as “trafficking expenses” all of the expenses associated with the operation of a dispensary.  Solely items that are excluded from gross revenue such as reimbursed expenses before the deduction of Cost of Goods Sold [“COGS”] would be subject to IRC Sec. 280E[11].  Of course, the opinion, in this case, is a disaster for California dispensaries.  The only saving grace is that the case is a denial of a motion for partial summary judgment.  Most of the statements of the judges are dicta.

Upon reflection, this case might be viewed as a close cousin to “play stupid games, win stupid prizes”.

We must mention a couple of additional items.  It is our impression many representatives of cannabis dispensaries failed to consider the opportunity to reconsider and amend returns based on CCM 201504011.  We noted some time ago an argument could be made the failure to do so constituted malpractice.  In light of Judge Mark V. Holmes opinion in Harborside[1] taxpayers and representatives of dispensaries should carefully evaluate the risks associated with IRC Secs. 6662-6664 as well as consider the inclusion of a Form 8275 – Disclosure Statement with returns.  Practitioners should also consider the possible application of penalties on preparers pursuant to IRC Sec. 6694, including the consequences of an enhanced penalty for intentional disregard pursuant to IRC Sec. 6694(b)(2).  An enhanced penalty constitutes grounds for a referral to the Office of Professional Responsibility.

[1] 151 TC No. 3 (2018).

[2] 153 TC No. 4 (2019).

[3] Consistent with this designation, we have held that the limitations imposed by section 280E are applicable to the ever-increasing number of marijuana businesses operating legally under State law. Olive v. Commissioner, 139 T.C. 19, 38 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); CHAMP, 128 T.C. at 182-183.

[4] See Killing Three Birds with One Bill: The STATES Act Simultaneously Harmonizes Federal Law with State Cannabis Laws and Addresses the Cannabis Industry’s Banking and Tax Issues and Marijuana Legalization

[5] INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see Keeler v. Commissioner, 70 T.C. 279, 284-285 (1978)

[6] .” Bagnall v. Commissioner, 96 F.2d 956, 957 (9th Cir. 1938), aff’g 35 B.T.A. 1 (1936).

[7] See CHAMP, 128 T.C. at 182 (“Section 280E and its legislative history express a congressional intent to disallow deductions attributable to a trade or business of trafficking in controlled substances.”); see also S. Rept. No. 97-494 (Vol. 1), at 309 (1982), 1982 U.S.C.C.A.N. 781, 1050 (“To allow drug dealers the benefit of business expense deductions * * * is not compelled by the fact that such deductions are allowed to other, legal, enterprises.”).

[8] Cf. Constantine, 296 U.S. at 295-296.

[9] See CHAMP, 128 T.C. at 180-181 (disallowing section 162 deductions under IRC Sec. 280E); Beck v. Commissioner, T.C. Memo. 2015-149, at *18 (disallowing an IRC Sec. 165 loss deduction under IRC Sec. 280E).

[10] See, e.g., Olive v. Commissioner, 139 T.C. at 38; CHAMP, 128 T.C. at 182-183;

Canna Care, Inc. v. Commissioner, T.C. Memo. 2015-206, at *9

[11] The Tax Court concludes,

“Our precedent is unambiguous. Congress, rather than this Court, is the proper body to redress petitioner’s grievances. We are constrained by the law, and Congress has not carved out an exception in IRC Sec.280E for businesses that operate lawfully under State law. Until then, petitioner is not entitled to deduct expenses incurred in the operation of its drug-related business.”

In reaching our holding, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.

IRC Sec. 280E Insanity

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SAFE Banking Passes House

SAFE Banking Passes

SAFE Banking Passes The Secure and Fair Enforcement (SAFE) Banking Act, sponsored by Rep. Ed Perlmutter (D-CO), currently has 206 cosponsors, including 26 Republicans. It would shield banks that take on marijuana business clients from being penalized by federal regulators. Perlmutter moved to add amendments to the legislation last week—clarifying that the protections extend to hemp and CBD businesses and prohibiting regulators from targeting certain industries such as firearms SAFE Banking Passes dealers as a higher risk for fraud—in order to bolster its GOP appeal. The SAFE Banking Act is the first piece of standalone cannabis reform legislation to get a House floor vote. Advocates and lawmakers have emphasized that this bill represents the first in a series of reform moves Congress will take, with the ultimate goal being to end federal marijuana prohibition.

“I support legislation that de-schedules marijuana federally, requires courts to expunge convictions for marijuana-related offenses, and provides assistance such as job training and reentry services for those who have been disproportionately affected by the war on drugs,” she said.

The comments come after several advocacy groups including the ACLU, Drug Policy Alliance, and Human Rights Watch sent a letter to House leadership urging a delay on the banking vote until broader reform passed.

The second-highest-ranking Democratic in the House said on Wednesday that the House should take up comprehensive marijuana legalization legislation after the passage of a bipartisan cannabis banking bill. Hours before the House voted in favor of the Secure and Fair Enforcement (SAFE) Banking Act by a significant margin, Majority Leader Steny Hoyer (D-MD) released a statement saying that while he is “proud” to have put the bill on the floor, “I believe it does not go far enough.”

“This must be a first step toward the decriminalization and de-scheduling of marijuana, which has led to the prosecution and incarceration of far too many of our fellow Americans for possession,” he said, adding that a number of legalization bills have been introduced that could be advanced.

Waters said “I have long fought for criminal justice reform and deeply understand the need to fully address the historical racial and social inequities related to the criminalization of marijuana.

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Blather – Prattle – Outsourcing

Blather – Prattle – Outsourcing
Blather – Prattle – Outsourcing – The AICPA and state CPA Societies have developed and provide a substantial number of tools to support CPA firms in professional practice. A CPA is responsible for compliance with the same professional standards mandated by State Boards of Accountancy, the Internal Revenue Service under Circular 230 [for attorneys, CPAs, and Enrolled Agents] or the Return Preparer Office for non-professional tax return preparers. CPAs that are AICPA and State Society members are subject to additional sets of professional standards for attest, tax, and consulting services.
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​​We are going to use this Dropbox Showcase as support to our mark up of the “Brand X Freelance” Blather - Prattle - Outsourcingdocument so readers are able to better understand the difference between a structured CPA firm, and an individual that in operating as a “one-man-band”.
Blather – Prattle – Outsourcing
​​My own experience is that after completing a BS in Accountancy at the University of Illinois – Urbana in five semesters, I passed the Uniform CPA exam in May 1982 and won the Elijah Watt Sells Silver Medal for the second-highest scores on the exam out of 70,000 candidates. I attended the University of Texas – Austin and completed an MS – Taxation in a year. As an aside,  the programs at those two schools have been consistently ranked as the best or second-best programs of Accountancy and Tax in the United States every year since 1982 [See https://www.usnews.com/best-colleges/university-of-texas-3658, https://www.usnews.com/best-colleges/university-of-illinois-urbanachampaign-1775, https://www.accounting-degree.org/best-graduate-schools-for-accounting/, and
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​​After graduation from UT – Austin, I joined a Big 8 [precursor to Big 4] accounting firm – Arthur Andersen LLP’s New York Office as a Tax Associate in October 1983, promoted to Tax Senior in May 1984, promoted to Tax Manager in May 1986, and admitted as a full equity Tax Partner in July 1991, three months after my 30th birthday [turns out I was possibly the youngest person to become what is called an SC Partner. The total time from joining the firm to becoming a partner was eight years…go ahead and ask anyone that works for a Big 4 firm how long it would take them to become a partner…my bet is that their answer is twelve to fifteen years, if ever.  Eventually, I became the Managing Partner for the Metro New York Real Estate Practice with approximately 300 professionals and $450MM in net collected annual fees. One would hope, that would dispatch any questions of my education and experience to comment on the requirements and challenges of both controlling practice risks and managing a firm’s tax practice with appropriate risk and quality control procedures and systems in place.
Blather – Prattle – Outsourcing
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​​The reason for my explanation and the long discussion is that the experience with Arthur Andersen was critically important in providing an opportunity to acquire the skills required for success in professional tax practice. A generic accountant or a CPA that goes to work for a small firm that doesn’t have the quality controls and provide the training is ill-equipped to provide professional services to an individual or a business with complex requirements.
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​​The second lesson I learned is having twenty Tax Partners in the same office with me meant that there was always a peer with comparable skills available to discuss a problem, evaluate risk, or reach a conclusion. The adage “no one partner has the right or responsibility to make a difficult decision on their own, there is always someone to share thoughts and concerns in reaching a difficult conclusion available. It has been a tremendous challenge to replicate that shared responsibility and knowledge in a smaller firm. However, through much hard work, we have been successful at it, and you can see that if you review the recommendation [roughly 40 of them] contained in my Linkedin profile at https://www.linkedin.com/in/jordanzoot/.
Blather – Prattle – Outsourcing
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​​You can review the website for our Oakland based Cannabis Practice Group [“CPG”] at http://dopecpa.cool. A repository of our published articles can be found either through our article search tool at https://abizinaboxcannabis.com/abizinabox-cannabis/post-index/, or an index of our published articles on CannabisLaw.report at https://cannabislaw.report/category/jordan-zoot/.
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​​Finally, Tax Notes, which along with Bloomberg’s Daily Tax Reporter are regarded as the “gold standards” in current articles about tax practice, legislation and policy in the United States published an article about how I as a Wall Street-based high complexity tax practitioner wound up working with a bunch of cannabis farmers in Humboldt County, California. You can read the article at https://cannabislaw.report/tax-notes-features-our-columnist-jordan-zoot-in-recent-article-on-tax-cannabis-advice/.
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​​Finally, before you begin reviewing the materials, you might enjoy our highly rated discussion on how to select a tax advisor for a cannabis business at https://abizinaboxcannabis.com/choosing-cannabis-tax-advisors/, and another article on the Regulation of Circular 230 Practitioners You can also immediately verify if an individual is a certified public accountant in good standing anywhere in the United States at https://cpaverify.com. After reflecting, we decide to reference our piece on Addressing Professional Incompetence.
Blather – Prattle – Outsourcing
Our mark-up of the document appears below. A substantial amount of tools and resources from the AICPA for small and mid-sized CPA firms can be found here.
If you are in the cannabis industry and would prefer to deal with a CPA firm that provides high complexity professional skills for accounting, attest, tax and regulatory compliance, we should talk and you can start with the form below. If you are seeking bullshit, “feel-good speak”, prattle, blather or gibberish, we suggest you look elsewhere. Some should be grateful that stupidity isn’t a crime, as that would make this a capital case.

Blather – Prattle – Outsourcing

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IRS Updates CTR Exams

IRS Updates CTR Exams

IRS Updates CTR Exams – While we do a very significant amount of writing for our clients, partners, friends and the cannabis industry in California as a whole, we also do a very substantial amount of reading, and perhaps our three “go-to reads” are

Tax Talk – Virginia La Torre Jecker, Esq  or  Let’s Talk About US Tax“ – Virginia is the expert to turn to when it comes to US tax matters affecting international individuals  Many US persons face US tax issues simply because they live abroad, purchase foreign assets or have a non-US spouse.

Tax Litigator Blog written by the attorneys at Hochman Salkin Toscher Perez P.C. whom we have known for quite some time, and we regard as among the best of breed tax litigators and criminal tax attorneys on the West Coast.

John Schroyer’s Columns at MJBizDaily – John is one of the few cannabis industry reporters in that covers the legal industry in California that understands what investigative journalism is all about.

Each of the three sources listed above has unique features and content that complement IRS Updates CTR Examsour ability to keep our followers informed and up to date. We thought that preface was long overdue, and now to today’s article.

IIRS Updates CTR Exams

Steve Toscher, Esq. has written an article that seeks to summarize an update to Internal Revenue Manual [“IRM”] Sec. 4.10.4 entitled “The IRS Is Using Its Big Data and Reminds Us and Its Agents That They Have Access to Records of Large Cash Transactions at Financial Institutions“.

The IRS has recently provided interim guidance to clarify actions IRS Examiners musttake to analyze and document Currency Transaction Report (CTR) data during an audit.  The Guidance, which is effective immediately, will be incorporated into IRM 4.10.4, Examination of Returns, Examinations of Income.

Prior to incorporation, IRM 4.10.4 provided very little guidance on when and how to use the Financial Crimes Enforcement Network’s (FinCEN) Currency Transaction Reports [See Structuring Rules ]. However, this new guidance assists examiners during an audit of a taxpayer’s returns and income.

The Guidance

Financial institutions are required to report all transactions of currency that exceed $10,000 by filing a FinCEN CTR. Information from this filing may be used by an examiner to decide whether to use additional auditing techniques, question sources of income for which tax has not been withheld, and generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.

IRS Updates CTR Exams

A CTR provides information that an individual was involved in a transaction that exceeded $10,000. It does not provide information as to who the money belonged to. To remedy this situation, the Guidance has provided the following actions an examiner should take to determine whether the individual names on a CTR is the taxpayer in question:

  1. The examiner must confirm the information on the CTR is for the taxpayer in question.
  2. The examiner must confirm the bank account on the CTR is the taxpayer’s, or whether the bank account belongs to an entity related to the taxpayer.
  3. The examiner must trace the transaction on the CTR to the taxpayer’s bank account.
  4. The examiner must determine the origin of the transaction.
  5. If the examiner is unable to establish a relationship between the CTR and taxpayer through an analysis of the financial accounts, the examiner should ask the taxpayer if they were involved in cash transactions over $10,000.
  6. If the examiner cannot trace the transaction and the taxpayer denies involvement in transactions over $10,000, the examiner may consider issuing a summons for the bank account listed on the CTR.

Examiners must document the steps taken to trace a CTR and their conclusions.

IRS Updates CTR Exams

Our view is that Mr. Toscher’s analysis is an excellent start, but it fails to highlight a number of concerns that perhaps are more apparent to us as CPA’s. They include

A rather unexpected and inept focus by the document’s authors on withdrawals from accounts and financial institutions for expenditures, as the funds in those accounts, have already been traced.

Financial institutions, including casinos, must report each receipt and each withdrawal of currency exceeding $10,000 by filing a FinCEN Currency Transaction Report (CTR). See IRM 4.26.5.4.1, Currency Transaction Reports, for information on the FinCEN forms used for reporting CTRs.

The concept of FinCen Query Request [‘FCQ”] needs to be elaborated upon [1]

IRS Updates CTR Exams

The Title 31 implications for structuring transactions to avoid the rules require further development, particularly for non-plant touching businesses that serve the cannabis industry, particularly Circular 230 Practitioners.

IRS Updates CTR Exams

[1] FinCEN Query (FCQ) is an on-line database query application that replaced the Web-based Currency and Banking Retrieval System (WebCBRS) on February 1, 2014, for all Bank Secrecy Act (BSA) users and on March 31, 2014, for all other IRS users. The FCQ application was developed by the Financial Crimes Enforcement Network (FinCEN) as part of the BSA Information Technology Modernization Program and is accessed via the secure FinCEN Portal at https://bsa.fincen.gov. The FCQ application supports a wide range of law enforcement and regulatory users for access to perform report and data information queries on the millions of BSA reports housed within the FCQ database. The system is designed to provide users with expanded query capabilities, including the ability to query multiple fields, use of four available search options, and use of various search methods to narrow or expand query results.

BSA report filings, as required under 31 USC Chapter 53 and 31 CFR Chapter X, are input and processed through the FinCEN BSA E-Filing System located at http://bsaefiling.fincen.treas.gov. E-filing of these reports became mandatory on April 1, 2013, with the exception of the Report of Foreign Bank and Financial Accounts (FBAR) and Form 8300, Report of Cash Payments Over $10,000 Received in Trade or Business. E-filing of FBAR became mandatory on July 1, 2013. Form 8300 filers currently have the option to file these reports electronically or in paper format. FinCEN Form 105, Report of International Transportation of Currency and Monetary Instruments (CMIR), is submitted and processed through the U.S. Customs and Border Protection in the Homeland Security Department.

IIRS Updates CTR Exams

 

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