Will Justice Thomas Bring Consistency To Cannabis Regulation? - Forbes

In recent years, the majority of states have enacted laws legalizing some form of marijuana use, with eighteen states and the District of Columbia allowing the recreational use of marijuana, and another eighteen states authorizing the use of marijuana for medicinal purposes. The federal Controlled Substances Act (the “CSA”), however, continues to classify marijuana as a Schedule I controlled substance, criminalizing virtually all production, sale, and possession of marijuana. 

Nevertheless, different federal agencies have taken varying approaches to the enforcement of marijuana-related laws and regulations. While the Department of Justice has resumed its policy of generally declining to prosecute marijuana crimes in jurisdictions that authorize such activity, the Internal Revenue Service has consistently applied Section 280E of the Internal Revenue Code—which precludes the deductibility of expenses incurred “in carrying on any trade or business if such trade or business consists of trafficking in controlled substances … prohibited by Federal law or the law of any State in which such trade or business is conducted”—to the cannabis industry. 

Congress enacted Section 280E in 1982 in direct response to the Tax Court’s decision in Edmondson v. Commissioner, 42 T.C.M. (CCH) 1553 (1981), which allowed a taxpayer to deduct business expenses associated with his illegal sale of amphetamines, cocaine, and marijuana. The Senate Finance Committee’s report accompanying the bill cited to Edmondson and explained that business expense deductions for “drug dealers . . . trafficking in drugs listed in the Controlled Substances Act” should be disallowed given the “sharply defined public policy against drug dealing.” Section 280E thus reflected an attempt by Congress to harmonize tax and criminal law at a time when marijuana was uniformly prohibited by the states and prosecuted at both the state and federal levels.

Today, however, the IRS’s approach to Section 280E stands in direct conflict to the law in many states as well as the DOJ’s enforcement policies. As I previously wrote, this conflict disadvantages cannabis businesses from a federal tax perspective and has given rise to a series of cases exploring the constitutional implications of the disallowance of business deductions for state-sanctioned businesses. But the cannabis industry’s challenges to Section 280E’s constitutionality—including, among other arguments, that Section 280E violates the Eighth and Sixteenth Amendments and that the IRS’s attempts to collect and audit information about marijuana-related businesses runs afoul of the Fourth and Fifth Amendments—have been uniformly rejected. 

Late last month, the United States Supreme Court refused to hear Standing Akimbo, LLC et al. v. United States, in which the Tenth Circuit Court of Appeals rejected a medical marijuana dispensary’s attempts to quash IRS summonses issued in connection with a civil audit to determine whether the dispensary and its owners and business manager had taken deductions in violation of Section 280E. While the facts of Standing Akimbo are unremarkable and the Supreme Court’s decision not to hear it is unsurprising, the case created a stir when Justice Thomas issued a “Statement respecting the denial of certiorari” in which he questioned the federal government’s authority to ban the intrastate use or cultivation of marijuana in light of its “half-in, half-out regime that simultaneously tolerates and forbids” such activity.

Although his stance on marijuana may be surprising to the casual outside observer, Justice Thomas has long been skeptical of the federal government’s power to criminalize local marijuana use. In Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court first confronted the conflict between state and federal marijuana laws and held that Congress had the power under the Commerce Clause to “prohibit the local cultivation and use of marijuana in compliance with [state] law” as part of the comprehensive statutory scheme of the CSA. According to the Raich court, Congress’s decision “to prohibit entirely the possession or use of [marijuana]” was “necessary and proper” to avoid creating a “gaping hole” in Congress’s “closed regulatory system.” In his dissent, however, Justice Thomas argued that the CSA exceeded Congress’s power as applied to the “intrastate and noncommercial” conduct of cultivating and consuming medical marijuana in accordance with California law.

Justice Thomas may have lost the battle in 2005, but as he noted in his Statement in Standing Akimbo, times have changed and “the Federal Government’s current approach to marijuana bears little resemblance to the watertight nationwide prohibition that a closely divided Court found necessary to justify the Government’s blanket prohibition in Raich.” To the contrary, given the “disjuncture between the Government’s recent laissez-faire policies on marijuana and the actual operation of specific laws”—including, but not limited to, Section 280E—“[o]ne can . . . understand why business owners . . . may think that their intrastate marijuana operations will be treated like any other enterprise that is legal under state law.” Justice Thomas therefore concluded that a “prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach.” 

Justice Thomas’s Statement opens the door for the cannabis industry to bring a whole new wave of litigation directly challenging the CSA’s classification of marijuana. Indeed, in light of Justice Thomas’s Statement, the petitioners in Standing Akimbo have filed a petition for rehearing, asking the Supreme Court to decide whether the “current federal prohibition of intrastate use, cultivation, production, and sale of marijuana under the [CSA is] a necessary and proper exercise of Congress’ Commerce Clause power.” Once considered firmly settled law, the central holding of Raich is now on shakier ground.

In Raich, the Court noted that medical marijuana users could have potential recourse through “the democratic process, in which the voices of voters allied with these respondents may one day be heard in the halls of Congress.” And, in fact, a handful of legislative proposals that could grant relief to the cannabis industry have been introduced in Congress, including one bill that would “decriminalize and deschedule” marijuana under the CSA and another that would carve out an exception to Section 280E for marijuana businesses operating in compliance with state law. But if you ask Justice Thomas, Congress has no business legislating about local marijuana use in the first place. As he noted in Raich, “[o]ur federalist system, properly, allows . . . [the] States to decide for themselves how to safeguard the health and welfare of their citizens.” Perhaps, sixteen years later, his view will finally prevail.

To read more from Jeremy Temkin please visit maglaw.com

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