IRS Denies Marijuana Tourism Group’s Request For Nonprofit Tax-Exempt Status, Citing Ongoing Federal Prohibition

The Internal Revenue Service (IRS) has denied a marijuana-focused tourism
organization’s request for nonprofit tax-exempt status, citing the ongoing
federal criminalization of cannabis and saying that the group’s activities
create a “private benefit to the cannabis industry” and its members.

Therefore, the agency said, the organization cannot claim tax exemptions
for charitable purposes.

In a notice to the group that IRS made publicly available, the agency said
the articles of incorporation (AOI) that were submitted to qualify as a
tax-exempt nonprofit corporation stated that the organization’s purpose was
to “promote the development of a responsible cannabis-related tourism
industry, and advocate for sustainable innovations and social equity.”

“Your application stated you aim to accomplish your purpose by engaging in
education, training-workforce development, and outreach partnerships,” the
notice, which was posted in a redacted form that does not show the group’s
name, said. “One of your goals, per your website, is to cultivate local
partnerships that can grow cannabis-related economic development
opportunities…through education and training.”

IRS said a review of the organization’s website shows that it planned to
“utilize a portion of local abandoned buildings to create a vertically
integrated farming entity through seed-to sale operations to cultivate an
economy around cannabis development (cannabis, food, and industrial hemp
seed-to-sale).” That includes “teaching vertical farming techniques and
providing real estate to grow cannabis.”

“The cannabis business will be sustained year-round through the hydroponic
techniques taught to your members,” the agency said. “As a result, you
would create a hub for cannabis-related networking and business
development.”

While the state the group is based in has “legalized cannabis activities
you aim to promote,” the letter says, “federal law classifies cannabis as a
Schedule I controlled substance… Furthermore, federal law prohibits the
manufacture, distribution, possession, or dispensing of a controlled
substance.”

“Further, you operate for a substantial non-exempt purpose of providing
private benefit to the cannabis industry and your members. You advocate for
the local cannabis industry in the city of [information withheld] to engage
in business to grow and sell cannabis. The creation of networking hubs,
combined with access to vertical farming facilities, would provide direct
benefits to your members seeking to enter the cannabis industry (i.e.,
aiding in getting a license and providing real estate within the city
[information withheld] to develop cannabis through vertical farming
methods.) These opportunities would disproportionately benefit those
individuals rather than the public at large.”

“You fail the organizational test because your purpose, as stated in your
AOI, is too broad and expressly empowers you to engage substantially in
activities which do not further exempt purposes,” IRS concluded. “Moreover,
although you do have charitable and educational purposes, you fail the
operational test because you have substantial non-exempt purposes of
promoting federally illegal activities (cannabis production) and serving
the private interests of your members. Therefore, you fail to qualify for
exemption under IRC Section 501(c)(3).”

To that end, the organization is required to pay any federal taxes it
avoided by claiming nonprofit exempt status within 30 days of receiving the
notice.

The final rejection letter was sent to the organization in September and
publicly posted by IRS last month, one day after President Donald Trump
issued an executive order directing the attorney general to complete the
process of moving marijuana from Schedule I to Schedule III of the
Controlled Substances Act (CSA).

Whether that pending reform would impact the organization’s request for
nonprofit tax-exempt status is unclear, but one of the key policy changes
that would be enacted is directly related to IRS—specifically an agency
code known as 280E. If marijuana moved to Schedule III, that code barring
businesses from taking federal tax deductions if they work with Schedule I
or Schedule II substances would be rendered moot for the cannabis sector.


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Last year, IRS advised marijuana companies that they still could not take
federal tax deductions for business expenses afforded to other traditional
industries unless the administration finalized the rule to reschedule
cannabis.

In anticipation of the rescheduling move, certain multi-state marijuana
operators sough refunds for what they said were excess taxes paid in past
years due to 280E.

Multiple states have taken steps to provide state-level tax relief to
marijuana businesses that are subject to 280E, but the federal rule has not
yet changed. The Congressional Research Service (CRS) noted in a 2021
report that IRS “has offered little tax guidance about the application of
Section 280E.”

IRS did provide some guidance in an update in 2020, explaining that while
cannabis businesses can’t take standard deductions, 280E does not “prohibit
a participant in the marijuana industry from reducing its gross receipts by
its properly calculated cost of goods sold to determine its gross income.”

The update seemed to be responsive to a Treasury Department internal
watchdog report that was released in 2020. The department’s inspector
general for tax administration had criticized IRS for failing to adequately
advise taxpayers in the marijuana industry about compliance with federal
tax laws. And it directed the agency to “develop and publicize guidance
specific to the marijuana industry.”

The post IRS Denies Marijuana Tourism Group’s Request For Nonprofit
Tax-Exempt Status, Citing Ongoing Federal Prohibition appeared first on Marijuana
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