IRS TELLS FAIRFAX MEDICAL MARIJUANA DISPENSARY IT OWES MILLIONS IN UNPAID TAXES

The Internal Revenue Service has notified the Marin Alliance for
Medical Marijuana in Fairfax that it owes millions of dollars in
unpaid back taxes, according to the alliance's founder and director,
Lynnette Shaw.

Shaw said the IRS audited the alliance's tax returns for 2008 and
2009 and disallowed all of its business deductions. She said that
although dispensaries throughout the state are being audited by the
IRS, the alliance is the first to be told it can't deduct business expenses.

"Every dispensary in the nation, past, present and future is dead if
this is upheld," Shaw said.

Shaw would not disclose the exact amount she is being ordered to pay
but said, "It's a staggering sum, millions and millions." She is also
negotiating with the state Board of Equalization regarding sales tax
that was not paid in 2005 and 2006.

Shaw said the IRS disallowed her deductions - for buying marijuana,
hiring employees, securing office space and more - based on section
280E of the federal tax code, which states that no deduction shall be
allowed for any business trafficking in controlled substances.

Under federal law, marijuana is classified as a schedule I controlled
substance, a category of drugs not considered legitimate for medical
use - despite voters' 1996 approval of Proposition 215, which
legalized the use of marijuana for medical purposes in California.

Jesse Weller, an IRS spokesman, said, "We can neither confirm nor
deny there is an examination or audit of any taxpayer, because of the
disclosure and privacy laws." Weller declined all other comment.

Henry Wykowski, a San Francisco lawyer who represents marijuana
dispensaries, said, "I'm personally involved in over a dozen audit
cases now, and I've been consulted on a number of others." Wykowski
said all of the audits are in California.

Steve DeAngelo, director of the Harborside Health Center in Oakland,
one of the largest dispensaries in the nation, said the IRS began
auditing Harborside's books a year ago.

DeAngelo said section 280E "is the major issue in the Haborside audit."

"If the IRS were to aggressively interpret 280E, it has the potential
to close down every medical cannabis dispensary in the United
States," DeAngelo said. "If you can't deduct your rent, your payroll,
licensing fees, et cetera ... you're going to be taxed out of existence."

Shaw said previous legal battles with the federal government have
prepared her for this challenge. She said she plans to mount a legal
defense based on the reasoning that there is no rational basis for
classifying marijuana as a schedule I drug.

Wykowski said a U.S. Tax Court judge ruled in 2007 that dispensaries
can legally deduct expenses associated with all activities except for
dispensing marijuana. Wykowski worked on the case, called
"Californians Helping to Alleviate Medical Problems Inc. v.
Commissioner of Internal Revenue."

For example, Wykowski said people who work at dispensaries often
advise people on which type of marijuana will best treat their
medical problem. He said this constitutes counseling, not
trafficking, so deducting at least a portion of that employee's
salary should be allowed.

DeAngelo said, "280E should not apply to us. It was designed for
cocaine kingpins, not nonprofit community service organizations. But
if it is applied to us, the IRS needs to take into account that the
vast bulk of what we do is education, counseling and advocacy, not
the actual handling of cannabis."