Dear NCIA friends:

As we embark upon 2018, Thorburn Walker continues to be at the forefront of cannabis tax defense.  It was disappointing, but not unexpected, that Jeff Sessions would rescind the Cole and Ogden Memos.  However, it was this possibility that kept us moving in aggressively defending IRS audits of cannabis clients. 

Jeff Sessions is giving the green light to cannabis prosecution. Whether or not they will occur remains uncertain.  Regardless, given the dual nature of IRS 280E audits, it is important to protect your rights.  The cold, hard, truth of Section 280E is that it applies only to persons who are operating in violation of drug laws.  In the IRS’s view of the statute, those who sell cannabis are violating federal criminal drug laws and, thus, Section 280E applies.

We believe that the IRS has been sharing audit information the Department of Justice.  The IRS denies this is occurring.  What we do know from our court cases, however, is that the IRS/DOJ is zealously defending their ability to share audit information.  Given that DOJ is one step closer to actual prosecutions, this potential for sharing becomes even more ominous. 

An important part of our defense strategy is protecting Fifth Amendment privilege against self-incrimination.  There is no question that the federal government considers state-legal sale of cannabis a federal criminal offense.  Jeff Sessions’ rattling of sabers has become even more intense.  So, it is unclear whether there will be prosecutions of state-legal cannabis in the future. 

To this end, we are hesitant to provide any incriminating information to the IRS during the tax audit.  To do so may constitute a waiver of Fifth Amendment Privilege.  The U.S. Supreme Court has made it clear that if a taxpayer voluntarily gives the IRS incriminating information, the taxpayer has waived Fifth Amendment privilege.  The government then may use the information obtained to procure a criminal conviction.  Garner v. United States, 424 U.S. 648 (1975).   This is true regardless of whether the prosecutions come now or down the road.

Given the above, it really concerns us that some practitioners recommend the taxpayer voluntarily provide the incriminating information.  The justification is that if the federal government wants to prosecute, it can obtain plenty of information outside of the tax audit.   It certainly is easier to simply turn over all the information to the government and waive privilege.  This justification ignores, however, the flip side of Fifth Amendment Privilege – absolute immunity from prosecution.   This is very important to those in the cannabis space.   Since the activity is inherently unlawful (selling cannabis) special provisions apply.

There is a line of Supreme Court Cases which include Leary v. United States, 395 U.S. 6 (1969)(Marijuana Tax Act); Grosso v. United States, 390 U.S. 62 (1968)(Wagering Excise Tax), Marchetti v. United States, 390 U.S. 39 (1968)(Wagering Excise Tax) which found that when the IRS compels information of taxpayers who fall into an area  “inherently suspect of criminal activities”, and Fifth Amendment Privilege is asserted, the government must provide absolute immunity from prosecution when compelling the information.  While there are no cases yet construing this authority with respect to Section 280E, we think that there is some probability that the courts will adopt this line of reasoning.

Thus, if the privilege is kept intact during the audit and the government charges the taxpayer for federal drug law violations, it is indeed possible that the charges will be dismissed due to absolute immunity.   However, this possibility goes away if the privilege is waived. 

We hope that this defense will never have to be tested to defend our state-legal cannabis friends.  However, we must remain vigilant.


This information is not to be interpreted as providing legal services, nor as proposing any form of legal advice. Anyone considering a lawyer should independently investigate the lawyer's credentials and ability, and not rely upon advertisements or self-proclaimed expertise.

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