Could IRS policy change strip marijuana trade associations of tax exemption?

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, Could IRS policy change strip marijuana trade associations of tax exemption?

The Internal Revenue Service issued a 280-page policy update in January, and buried deep inside is what appears to be a ban on future nonprofit organizations that lobby on behalf of the marijuana industry.

That could make life a lot harder for advocacy groups trying to change cannabis laws across the nation – depending on how the IRS chooses to implement it.

The little-heralded provision declares that the agency will not acknowledge tax-exempt applications for any organization “whose purpose is directed to the improvement of business conditions … relating to an activity involving controlled substances … which is prohibited by federal law regardless of its legality in the state in which such activity is conducted.”

The change was announced Jan. 2, just two days before U.S. Attorney General Jeff Sessions revoked the Cole Memo and other Obama-era Department of Justice policies that essentially protected marijuana businesses.

Colorado-based cannabis attorney Rachel Gillette said the agency’s new policy “doesn’t shock me. It’s another example of the IRS’ punitive policies towards the cannabis industry.”

California accountant Jerry Chin said the policy change is “an interpretation of what the IRS sees in its own rules and regulations.”

“What the IRS is saying is, if your trade association’s main purpose is the advocacy of a Schedule 1 substance, then we’re going to deny your application for that fact alone,” Chin said.

Already one target

The new policy has already affected at least one nascent marijuana trade group – the New Jersey Cannabis Industry Association (NJCIA).

In January, the year-old NJCIA was denied a so-called IRS determination letter regarding its application for tax-exempt status, according to the organization’s president, Hugh O’Beirne.

NJCIA’s bad news came after months of back-and-forth between the trade association and the IRS.

“We had been moving along, and there were a number of points at which (the IRS was) asking us for further details on our application,” O’Beirne said.

“At the 11th hour, we were informed, ‘Sorry, there’s been a procedural rule change, we’re not giving these types of letters to your type of company.’

“And that happened within a week of when this procedural rule change was announced.”

It’s unclear whether other newly formed trade associations have been denied determination letters or tax-exempt status.

The IRS did not respond to requests from Marijuana Business Daily seeking comment.

The policy change is only a few months old, yet there’s already a good bit of confusion about what it could mean for the cannabis industry and which organizations it may affect.

What’s it mean?

Perhaps the biggest unanswered question is whether the new policy could be used to revoke the tax-exempt status of longstanding MJ advocacy groups or if it applies only to newly formed organizations.

There’s no consensus among experts on that point.

One obvious target for the IRS in such a situation would be the National Cannabis Industry Association (NCIA), which has been a registered 501(c)6 nonprofit since 2010.

If the NCIA didn’t have its nonprofit status, the organization would have had to pony up $210,000 in taxes to the IRS for its 2017 revenue, said Chin, who’s been working with cannabis businesses since 2012.

That’s the type of cost that all MJ nonprofits could face under the new policy, he added.

Chin based his estimate on NCIA having $2 million in deductible business expenses for the $3 million in revenue the group showed in its 2017 financial statement.

He floated the “distinct possibility” the IRS could use its new policy to revoke previously granted tax-exempt statuses to organizations like NCIA.

“The IRS does have the ability to say, ‘Hey, we’re going to review your status and perhaps revoke it based on this (new policy),'” Chin said.

San Francisco-based cannabis attorney Henry Wykowski, who serves as NCIA’s general counsel, disagreed with Chin.

Wykowski believes there are limited circumstances in which the IRS would have the power to yank an organization’s tax-exempt status.

He believes the new policy is basically another kick to the industry’s shins by the IRS.

“You would have to run afoul of your obligations as a tax-exempt organization before they could just take it away,” he said. “It’s not like it’s completely discretionary.

“On its face, (the new policy) doesn’t apply to any entity that has already received a determination.”

Even if the IRS were to revoke NCIA’s tax-exempt status, he added, the organization would be able to sue the agency in U.S. Tax Court.

It’s unclear whether the IRS will try to implement the policy retroactively, Boston-based tax attorney Ed Bartlett wrote in an email to MJBizDaily.

“The IRS would have to rule specifically that an organization no longer qualifies for tax-exempt status,” Bartlett wrote.

“Until that happens, existing organizations should continue to function as tax-exempt entities.”

Whether the new policy could affect cannabis nonprofits that aren’t focused specifically on business issues is also an open question, said Gillette, the Colorado attorney.

“Where do you draw the line as to who’s an organization that’s dedicated to the ‘improvement of business conditions?'” Gillette said, quoting what she said is vague language in the new policy.

“How broadly can that be interpreted?”

In other words, the IRS could potentially use the policy to target tax exemptions already granted to groups that don’t work directly on behalf of cannabis businesses, like Marijuana Policy Project (MPP) or Americans for Safe Access.

If that happens, “hundreds” of tax-exempt marijuana organizations could be targeted, according to Gillette, because the policy could extend to state chapters of national nonprofits dedicated to reforming cannabis laws.

MPP’s communications director, Morgan Fox, wrote in an email to MJBizDaily that the IRS’ new policy “does not jeopardize (MPP’s) tax exempt status.”

The group, he noted, works to end marijuana prohibition, and “any benefit to marijuana businesses is incidental.”

Aaron Smith, NCIA’s executive director, said he hasn’t heard from the IRS about the policy change.

But he’s confident it won’t cost the organization its tax-exempt status.

Even if it did, he added, “we’re prepared to fight it.”

Impact: Big or small?

Several industry insiders say that the worst potential outcome from the loss of nonprofit status is that nascent groups like the NJCIA would have to pay taxes on profits, leaving them fewer resources with which to advocate for changes to law.

“Overall, that will be the effect – that it’s less work for the dollars because there are less dollars to be had,” Gillette said.

Chin, the accountant, noted that any trade group that is without tax-exempt status would be subject to a 21% federal tax on profits.

But if the IRS decided to yank NCIA’s 501(c)6 status, that would “have a deep, immediate impact” on the association’s effectiveness, Smith said.

“It’s outrageous,” he added, “because associations are lawful entities that are exercising free speech.”

And, Smith said, even if the policy isn’t retroactive and applies only to future industry associations, it will hamstring those groups’ effectiveness and credibility.

“It will essentially make it more difficult for organizations that are truly operating as nonprofits to do the good work their members expect,” he said, “because they’ll be strapped of the 21% tax rate.”

John Schroyer can be reached at