IRS OPENS AUDIT OF DENVER MEDICAL-MARIJUANA DISPENSARY

The Internal Revenue Service has opened an audit of a Denver
medical-marijuana dispensary, the latest action in what one observer
calls a "guerrilla campaign" by the federal government to push back
against the cannabis industry.

The audit is believed to be the first of its kind in Colorado and
follows audits of numerous medical-marijuana dispensaries in
California and other states.

Investigators are examining whether it was unlawful for the
dispensaries - which are illegal enterprises under federal law - to
deduct business expenses from their federal taxes, said Jim Marty, a
Denver accountant who represents the Colorado dispensary.

Marty declined to name the dispensary or say where it is located.
Marty said the dispensary was notified of the audit earlier this month.

"So far," he said, "the IRS has been pretty cooperative. . . . The
client had good records."

Marty said he expects the IRS to look broadly at dispensaries in
Colorado. If so, that would mirror what the agency has done in
California, where tax attorney Henry Wykowski said the IRS has
undertaken at least 30 audits of dispensaries.

The audits are also part of a bigger series of events in which the
federal government appears to be more actively asserting itself in
state-legal marijuana businesses.

In recent months, U.S. attorneys in Washington state and California
have sent letters to state officials there warning them that efforts
to regulate medical-marijuana businesses will not change the federal
government's disapproval of those businesses.

In one letter, U.S. attorneys in Washington warn Gov. Christine
Gregoire that state employees who regulate the businesses "would not
be immune from liability."

In addition to the IRS audits, the federal government has asserted
its authority by raiding medical-marijuana dispensaries. Last month,
federal agents served 26 criminal search warrants in Montana during a
drug-trafficking investigation that focused on dispensaries. The
agents allege the dispensaries were also engaged in other illegal activities.

Because federal law enforcement resources are so limited, Robert
Mikos, a Vanderbilt University law professor who has studied
medical-marijuana laws, said the government has had to be selective
in how it targets medical marijuana, conducting more of a "guerrilla
campaign" than a frontal assault.

Colorado Attorney General John Suthers believes the recent crackdown
should be a warning to Colorado medical-marijuana providers and state
lawmakers alike.

But so far - the recent IRS audit aside - Colorado has seen
relatively little federal enforcement against cannabis businesses,
despite having the most well-codified medical-marijuana regulatory
system in the nation. Dan Hartman, who oversees medical-marijuana
industry regulation in Colorado, said state officials have met
repeatedly with federal authorities to keep them apprised of the
state's evolving regulations. That has included providing limited,
public information about dispensaries if the federal agents request it.

Hartman said federal officials, during the meetings, have remained
firm that they see medical-marijuana businesses as illegal.

But Hartman thinks the dialogue has helped prevent public blowups.
"We started out in the beginning to make sure we have a transparent business."

Still, Allen St. Pierre, the executive director of the National
Organization for the Reform of Marijuana Laws, told an audience at
his group's annual convention in Denver last week that recent events
are a reminder the medical marijuana industry remains a perilous business.

"One cannot whistle by the graveyard when it comes to medical
cannabis," he said.