In the 1980’s, a convicted drug trafficker tried to avoid an Al Capone-like issue with the I.R.S. by actually paying taxes on his drug trafficking activities. This character wisely deducted the expenses incurred in operating his illegal business. You know, typical drug trafficking expenses for things like yachts, airplanes, weapons, and bribes.
IRS Response & Unintended Consequences
In response, Congress passed section 280E of the Tax Code, which limits deductions for anyone trafficking in illegal substances. This law, which targeted cocaine smugglers, is now impacting sellers of medical (and recreational) marijuana in states were such substances are legal. Section 280E applies to legal sellers of marijuana simply because marijuana is considered a controlled substance under Federal law. The result is effective tax rates as high as 75% for businesses legally selling marijuana.
Revisit Existing Legislation
If you’re concerned about asset protection, it’s also likely that you’re worried about taxes. This fact pattern highlights an important issue. In essence, an existing statute is now impacting factual circumstances that didn’t exist and weren’t considered at the time when the statute when passed. When this happens, no matter what the circumstances, our lawmakers should revisit their previous decisions, rather than just use existing legislation to their advantage for political gain. That would be good policy.
For two good articles on this subject, check out: