America’s First Dispensary Owner Files for Bankruptcy Due to $1.27 Million IRS Tax Bill

Just Released! Get realistic market forecasts, state-by-state insights and benchmarks with the new 2024 MJBiz Factbook member program, now with quarterly updates. Make informed decisions.

By Anne Holland

Lynette Shaw (pictured), who opened America’s first licensed medical marijuana center in 1997, has filed for personal bankruptcy due to a $1.27 million bill she received from the IRS for back taxes and penalties. The bankruptcy filing lists $276,000 in California state sales taxes among her debts.

In part, Shaw’s troubles stem from IRS rules that disallow deductions for any and all business expenses involved in running a cannabis dispensary, including her inventory and electric bill. So, although her books showed net losses totaling $186,826 for 2008-9, The IRS’s math shows she had a taxable income of $2.83 million for that time period.

Unfortunately, even if Shaw’s center, the Marin Alliance for Medical Marijuana, was actually profitable in reality, she would not be able to use revenues to pay off her tax bill. The center was shut down late in 2011 after US Attorney Melinda Haag filed a civil forfeiture action against the center’s landlord. Haag is currently trying to shut down Harborside Health Center in Oakland using the same method.

To make matters worse, Shaw made the mistake of not incorporating her center. Instead, she ran it as a sole proprietorship. This means her other personal assets are probably not shielded from seizure for debts.
This should be a good reminder to every MMJ entrepreneur in US to file for incorporation, either as a for-profit or non-profit, right away. (Filing can cost less than $1000 and may even be accomplished quickly and easily online, without hiring a lawyer.)

BTW: If you’d like to learn how to avoid typical cannabis industry tax problems, MMJ tax expert Henry G. Wykowski will be presenting his advice at the National Marijuana Business Conference in Denver this November two days after the national elections. For tickets and info click here.