POT SHOPS IN HAZE OVER TAX FILING

Federal Ban on Marijuana Clouds Business Deductions.

BOULDER -- Tax time places the owners of medical marijuana businesses
in a bit of a bind.

The product they sell remains illegal at the federal level, and a
section in the tax code prohibits any deductions or credits for
business expenses if the business "consists of trafficking in
controlled substances."

But if they file without deducting any of their business expenses,
they are faced with enormous tax liabilities as their business looks
like pure profit.

Not filing at all isn't an option. Remember, the feds nailed Al Capone
for tax evasion, not for his many illegal enterprises.

"What does the IRS do with a business that is illegal under federal
law?" said Boulder attorney Eric Moutz, who represents some medical
marijuana businesses. "I don't think this has been worked out."

When the IRS went after a California dispensary called CHAMP for
deducting business expenses, U.S. Tax Court Judge David Laro declared
that the organization was both a marijuana provider and a caregiving
service. He ruled that CHAMP could deduct the majority of employee
costs as caregiving expenses.

In court documents, Laro said the IRS conceded that tax code 280E
didn't apply to "the costs of goods sold." CHAMP's attorney, Matthew
Kumin, told the Sacramento Bee newspaper that meant its biggest
expense -- $575,000 for marijuana -- was deductible.

However, the newspaper also reports that the IRS continues to audit
California dispensaries, and some of them are lobbying for a change to
the rule that would explicitly exempt medical marijuana businesses in
states where they are legal.

Changes to Colorado law last year mean that most dispensaries here
operate on a straight retail model, without the caregiving component.

IRS spokeswoman Karen Connelly said IRS rules prevent her from
commenting on the correctness of tax returns or on hypothetical examples.

"I am kind of nervous, but so far, it seems like they've only been
busting people who don't follow the rules, and part of following the
rules is paying taxes," said Ryan Hartman, owner of Boulder Wellness
Center.

Hartman didn't have an issue with his taxes last year, and he's hoping
for the same this year.

Veronica Carpio, owner of 420 Highways in Lafayette, didn't have a
problem last year, either, but she's been putting off filing this year
as she tries to decide what to do.

"It's a big, huge mess," she said. "My goal has been to do the
right thing, but if I do them the way they want me to and don't deduct
anything, that raises red flags, too. I really want to avoid an audit,
but audits will come up."

Carpio said she worries that IRS audits will be used to shut down
dispensaries that are in full compliance with state law.

The IRS often works in concert with the Drug Enforcement Agency, said
Boulder attorney Jeff Gard, who specializes in medical marijuana
issues, but he saw no indication of that in the recent IRS audit of
one of his clients, a Boulder dispensary. He believes the only issues
that were flagged related to travel expenses, and he thinks marijuana
businesses will continue to be able to deduct most, if not all, of
their expenses.

Gard said he believes the audit was one of two done this year of
Colorado marijuana businesses as the IRS figures out how to handle the
industry.

Colorado's strict regulations might be a blessing in disguise for
marijuana businesses because they'll have no trouble providing
detailed receipts, Gard said.

Moutz agreed, noting that many dispensaries didn't start out with the
best record-keeping but have had to become a lot more transparent. He
said he'd advise clients to be scrupulous about the numbers on their
tax returns but not go out of their way to indicate what business
they're involved in.

"The numbers involved are legit, but you don't say the product is
marijuana," he said.

Gard referred detailed questions about the tax code's implications for
marijuana businesses to the accountant who worked with his client, but
he couldn't be reached Thursday.

Gard said marijuana businesses probably will have a higher tax
liability than other businesses with equivalent revenues, but it's a
price dispensary owners will have to pay.

"Very few people are going to give up their hopes and dreams to
pocket an extra $2,000," he said.