Wagner Kirkman Blaine Klomparens & Youmans LLP THE HIGHS (& LOWS) OF A CANNABIS TAX PRACTICE ETHICAL AND TAX CONSIDERATIONS FOR PROFESSIONALS ADVISING CANNABIS BUSINESSES November 3, 2017   Douglas L. Youmans Wagner Kirkman Blaine Klomparens & Youmans LLP Email: dyoumans@wkblaw.com

ABA Model Rules of Professional Conduct ABA Model Rule of Professional Conduct (“RPC”) - Rule 1.2d “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”

California Rules of Professional Conduct California RPC Rule 3-210 (current) “A member shall not advise the violation of any law, rule, or ruling of a tribunal unless the member believes in good faith that such law, rule, or ruling is invalid. A member may take appropriate steps in good faith to test the validity of any law, rule, or ruling of a tribunal.” Observation: CA Rule 3-210 seems more flexible than ABA Rule 1.2d.

California Rules of Professional Conduct (cont.) California RPC Rule 1.2.1 Advising or Assisting the Violation of Law1 (a) A lawyer shall not counsel client to engage, or assist a client in conduct that the lawyer knows is criminal, fraudulent, or a violation of any law, rule, or ruling of a tribunal. (b) Notwithstanding paragraph (a), a lawyer may: (1) Discuss the legal consequences of any proposed course of conduct with a client; and (2) Counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of a law, rule or ruling of a tribunal. Proposed California Rule for Professional Conduct 1.2.1, has been adopted by the Board of Trustees on November 17, 2016, and March 9, 2017. The proposed rule with become operative if the Supreme Court of California approves it. The proposed rule was submitted to the CA Supreme Court on March 30, 2017, under docket number S240991.

California Rules of Professional Conduct (cont.) Comment (6) Paragraph (b) permits a lawyer to advise a client regarding the validity, scope and meaning of California laws that might conflict with federal or tribal law, and, despite such a conflict, to assist a client in conduct that the lawyer reasonably believes is permitted by California statutes, regulations, orders, and other state or local provisions implementing those laws. If California law conflicts with federal or tribal law, the lawyer should also advise the client regarding related federal or tribal law and policy. (Emphasis added.)

Arguments for Lawyer Involvement New Industry Lawyers should be involved in the process to assure compliance with new state laws and regulatory schemes Scale of the “High Growth” Industry More states are expected to legalize medicinal and recreational MJ Need for lawyers in a variety of fields: Draft regulations Deal with the formation and operation of new businesses Advise banks and other lenders on their involvement Tax compliance and planning Consider IRC § 280E

APPROACHES TAKEN BY STATES No Assistance: Maine (7/7/10). Maine draws a distinction between assisting in complying with state law and assisting in violating federal law: An attorney may counsel a client regarding marijuana-related businesses if the attorney has performed “the analysis required by the Maine Rule of Prof. Conduct 1.2” and determined “whether the particular legal service being requested rises to the level of assistance in violating federal law.” The onus is on the attorney to make a good faith determination of the scope of the representation.

APPROACHES TAKEN BY STATES (Cont.) No Opinion Regarding Assistance: Connecticut (2013). Connecticut Bar Association Professional Ethics Committee, Informal Opin. 2013-02: “At some point… some clients may expect their lawyers to assist them by providing advice and services in aid of functioning marijuana enterprise... It is at this point that a lawyer must consider Rule of Professional Conduct 1.2(d). … We decline to categorize particular factual circumstances that may raise issues of culpability because the circumstances may be so various as to make the effort valueless. … At a minimum, a lawyer …must inform the client of the conflict between the state and federal statutes, and that the conflict exists regardless of whether federal authorities in Connecticut are or are not actively enforcing the federal statutes”.

APPROACHES TAKEN BY STATES (Cont.) Assistance Permitted: 1. Arizona (2011). A lawyer may counsel or assist a client in legal matters expressly permitted under Arizona’s Medical Marijuana Act (“Arizona’s Act”) Caveats: Arizona’s Act must remain valid, and cannot have been preempted by federal law Lawyer must reasonably conclude that the client’s activities fully comply with state law Lawyer must advise client on possible federal law implications of the proposed conduct or recommend that the client seek other counsel

APPROACHES TAKEN BY STATES (Cont.) 2. Colorado (prior to March 2014). “A lawyer does not violate Colo. RPC 1.2(d) by representing a client in proceedings relating to the client’s past activities; by advising governmental clients regarding the creation of rules and regulations implementing…the Medical Marijuana Code; by arguing or lobbying for certain regulations, rules, or standards; or by advising clients regarding the consequences of marijuana use or commerce under Colorado or federal law… for good or ill, under the plain language of Colo. RPC 1.2(d), it is unethical for a lawyer to counsel a client to engage, or assist a client, in conduct that violates federal law. Between these two points lies a range of conduct in which the application of Colo. RPC 1.2(d) is unclear.”

APPROACHES TAKEN BY STATES (Cont.) On March 24, 2014, the Colorado Supreme Court adopted a new comment to Colo. RPC 1.2, making clear that attorneys are allowed to provide legal services to clients in the state-authorized medical marijuana industry: “A lawyer may counsel a client regarding the validity, scope, and meaning of Colorado constitution article XVIII, secs. 14 & 16, and may assist a client in conduct that the lawyer reasonably believes is permitted by these constitutional provisions and statutes, regulations, orders and other state or local provisions implementing them. In these circumstances, the lawyer shall also advice the client regarding related federal law and policy.” (Emphasis added.) (See, further, California, Illinois, New York, Oregon and Washington)

APPROACHES TAKEN BY STATES (Cont.) Caveats: In order for the attorney to be protected by this guidance, the following must also apply Federal non-enforcement policies must continue to be in be in place Lawyer must advise about risks resulting from participating in a state law-regulated marijuana business, including federal consequences

California No statewide guidance (yet, but see RPC Rule 1.2.1, supra) “Local” guidance (issued in 2015) The San Francisco Bar Association (“SFBA”); and Los Angeles County Bar Association (“LACBA”)

SFBA: Ethics Opinion2 Addresses need for legal counsel in the MJ industry States that Rule 3-210 did not anticipate a scenario where an action is permitted under state law but not federal law Argument that assisting a client in complying with state and local laws is not the same as advising the client to violate federal laws Encourages the SFBA to urge the State Bar Rules Revision Commission, Board of Trustees of the State Bar, and California Supreme Court to: (i) adopt rules and propose legislation protecting lawyers from discipline in this regard and (ii) propose an amendment to the Evidence Code to preserve the attorney-client privilege 2 LA’s is similar.

SFBA: Ethics Opinion (Cont.) “Conclusion”: Attorneys are permitted to advise on and assist clients with lawfully forming and operating a medical MJ dispensary and other matters permissible under state law, even though the attorney may thereby aid and abet violations of federal law

SFBA: Ethics Opinion (Cont.) Caveat: If a lawyer decides to represent the client, the lawyer should: Counsel the client not to violate state laws Only assist the client in conduct that conforms with state law Advise the client of potential liability under federal law and warn the client about possible prosecution under federal law Advise the client how to minimize the risk of prosecution Inform the client of the limitations on confidentiality Be aware of the attorney’s own risks

ADVICE In General Congressional Non-Enforcement Mandate – Advice to a client should be sufficient to allow the client to make informed decisions. Accordingly, a lawyer should explain the (then) current enforcement status of the Federal law prohibiting trafficking in marijuana and warn that, if not extended, the DOJ can be expected to initiate enforcement measures again. DOJ Priorities - The lawyer must also explain that the DOJ enforcement policy is focused on the “eight deadly sins.” If a lawyer knows or should know that a client’s intended actions are likely to make the client a target of federal enforcement in one or more of the priority areas, the lawyer should not take on the representation or, if possible, terminate the representation.  

ADVICE (Cont.) The lawyer may also consider persuading the client to revise the client’s plan of action to avoid triggering any of the federal enforcement priorities, noting that this may be regarded as advising the client to engage in criminal activity. The lawyer should explain the penalties to which the client may be subject, including criminal liability and potential seizure of property.

ADVICE (Cont.) Advice about Federal Tax Law Income from an illegal business is subject to tax. Providing advice on complying with the income tax law is seemingly permitted.

The Eight Deadly Sins3 (According to the US Department of Justice) 1. Distribution of marijuana to minors; 2. Revenue from the sale of marijuana going to criminal enterprises, gangs, and cartels; 3. Diversion of marijuana from states where it is legal under state law in some from to the other states; 4. State-authorized marijuana activity is used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; 5. Violence and the use of firearms in the cultivation and distribution of marijuana; 6. Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use; 7. Growing marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and 8. Marijuana possession or use on federal property.  From James Cole, Guidance Regarding Marijuana Enforcement, Memorandum for all United States Attorneys (August 29, 2013) ____________________ 3Reprinted with permission from Philip Buri of Buri Funston Mumford, PLLC, 1601 F St., Bellingham, WA 98225.