1. September 20, 2014 - Atlanta, GA - © DJL
Business structure, Tax Preparation, and Internal Safeguards Dwight J. Lacy
September 20, Atlanta, GA - © DJL

2. September 20, 2014 - Atlanta, GA - © DJL
Outline
State Laws
Federal Concerns
Taxes and IRS Audits
Tax Bill 280E
Department of Justice
Congressional Response
Organizational Structure
Protecting yourself, and your investors
September 20, Atlanta, GA - © DJL

3. 22 Jurisdictions allow Medical Marijuana
Alaska
Massachusetts
Arizona
Michigan
California
Montana
Colorado
Nevada
Connecticut
New Hampshire
Delaware
New Jersey
District of Columbia
New Mexico
Hawaii
Oregon
Illinois
Rhode Island
Maine
Vermont
Maryland**(NOT a fully functioning public program)
Washington
September 20, Atlanta, GA - © DJL

4. September 20, 2014 - Atlanta, GA - © DJL
Tax Planning
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. Helvering v. Gregory, 69 F.2d 809, (2d Cir. 1934).
Judge Learned Hand
September 20, Atlanta, GA - © DJL

5. September 20, 2014 - Atlanta, GA - © DJL
Title 26 U.S.C.A. § 280E
§ 280E. Expenditures in connection with the illegal sale of drugs
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
September 20, Atlanta, GA - © DJL

6. Establishing a Dispensary
Corporations are state entities.
A corporation is designated by the owners as a C Corp or an S Corp by checking the box on the IRC Form 8832
Otherwise than that the majority of the paperwork articles, bylaws, and secretary is the same either entity regarding formation at the state level
S Corps Federal criteria: 100 SHs, No Corp SHs, American Citizens, 1 class of stock.
September 20, Atlanta, GA - © DJL

7. General Entity Options
C Corporation
S Corporation (100 Owners or less)
Cooperative, Collective, or Partnership
Sole Proprietorship
Trust Corporation
Limited Liability Organizations
Blend of partnership and corporation
September 20, Atlanta, GA - © DJL

8. Four Types of IRS Audits
Math Audit, Mail Audit, Office Audit, and Field Audit
Math Audit - to double check the math errors. Notice is not required. TP will either get a letter with an explanation detailing that the US Gov owes you money with a check, or a deficiency that you owe the IRS money.
September 20, Atlanta, GA - © DJL

9. September 20, 2014 - Atlanta, GA - © DJL
Mail audit – you get a letter saying we think this is wrong and you need to provide something.
Will ask TP some specific question
Office audit – pick one part of your return, and you have to substantiate one part of your return. If you win/correctly, you are free to go. If you fail, they open your entire return for a Field Audit
September 20, Atlanta, GA - © DJL

10. September 20, 2014 - Atlanta, GA - © DJL
Field Audit
Field Audit – Very serious. This is when they come to your home and evaluate everything. They think you are a liar and they are there to find out things about you. They are trying to figure out things about you to determine whether you are lying. Conducted by an agent. After audit, you get a 30-day letter (proposed notice of deficiency). No requirement that they send this to you.
September 20, Atlanta, GA - © DJL

11. IRS Transaction Planning
Request a Revenue Ruling or a Private letter ruling from the IRS
-Drawbacks???
Controlled Substances Act
Marijuana is still illegal under the Federal controlled substances act as a schedule one drug
September 20, Atlanta, GA - © DJL

12. Dept. of Justice New Position
In a new memorandum outlining the policy, the Department makes clear that marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively enforce this statute. To this end, the Department identifies eight (8) enforcement areas that federal prosecutors should prioritize.  These are the same enforcement priorities that have traditionally driven the Department’s efforts in this area. Released August 29, 2013
September 20, Atlanta, GA - © DJL

13. Eight Areas of Prevention focus
Distribution of Marijuana to minors
Revenue from the sale of marijuana going to gangs, cartels, and criminal enterprises
The diversion of marijuana from states where it is legal in some form to other states
State authorized activity from being used as cover up for trafficking other illegal substances
September 20, Atlanta, GA - © DJL

14. Next Four DOJ Prevention aims
Violence and the use of firearms in the cultivation and distribution of marijuana
Drugged Driving and the exacerbation of other public health consequences associated with marijuana use
Growth of marijuana on public lands and the associated environmental and public safety dangers
Marijuana possession on Federal Property
September 20, Atlanta, GA - © DJL

15. September 20, 2014 - Atlanta, GA - © DJL
DOJ Local Crutch
Source: DOJ guidance Regarding Marijuana Enforcement, 8/2013
Typically, DOJ relies on local law enforcement to alert them of marijuana related violations.
Contra. Printz v. United States, 521 U.S. 898 (1997)
If your dispensary is one of the 22 Jurisdictions, or Georgia in the future, then this eases your worries.
September 20, Atlanta, GA - © DJL

16. September 20, 2014 - Atlanta, GA - © DJL
Pending Legislation
May 2014 US House of Representatives voted 219 to 189 to restrict the Department of Justice and the Drug Enforcement Administration from using taxpayer funds to interfere in state-sanctioned medical marijuana programs in those 22 states
This is not law yet. The vote is still pending with the US Senate, and a certification or veto by President Obama.
September 20, Atlanta, GA - © DJL

17. September 20, 2014 - Atlanta, GA - © DJL
Preparing for an Audit
Adding to your Paper trail
Doctor referrals for new patients
Patient Confidentiality; HIPAA Laws
Patient Verification System
September 20, Atlanta, GA - © DJL

18. General Entity Options
C Corporation
S Corporation
Cooperative, Collective, or Partnership
Sole Proprietorship
Trust Corporation
Limited Liability Organizations
Blend of partnership and corporation
September 20, Atlanta, GA - © DJL

19. September 20, 2014 - Atlanta, GA - © DJL
Organizational Structure: The Composition of the Business Operation Who owns what? Who is responsible for the business organization’s actions?
September 20, Atlanta, GA - © DJL

20. Establishing a Dispensary
Corporations are state entities.
A corporation is designated by the owners as a C Corp or an S Corp by checking the box on the IRC Form 8832
Otherwise than that the majority of the paperwork articles, bylaws, and secretary is the same either entity regarding formation at the state level
S Corps Federal criteria: 100 SHs, No Corp SHs, American Citizens, 1 class of stock.
September 20, Atlanta, GA - © DJL

21. September 20, 2014 - Atlanta, GA - © DJL

22. September 20, 2014 - Atlanta, GA - © DJL
IRC 501(c)(3) Bounds
Charity, benefit of children, prevention of cruelty
The concept of promoting health has been expanded beyond the traditional acute care hospital context to include organizations that do not directly provide medical care, but otherwise promote the health of the community. Rev. Rul
September 20, Atlanta, GA - © DJL

23. September 20, 2014 - Atlanta, GA - © DJL

24. September 20, 2014 - Atlanta, GA - © DJL

25. Transaction Structure Rationale
Two separate entities
The deal exchange. A consulting arrangement between the non-profit and the Corporation. The non profit hires the corporation to manage and consult, and then the Corporation bills the Non-profit organization.
Logic for selecting for a C Corp over an S Corp and LLCs  pass through taxation.
September 20, Atlanta, GA - © DJL

26. September 20, 2014 - Atlanta, GA - © DJL
Protecting Yourself
Draw back  C Corp’s subject to double taxation. An additional layer of tax on the Corp income and then the payment of dividends, or salary to the person.
Adequate capitalization
Avoid comingling of Assets
Alternative  create the Trust Fund from money from the Consulting Corp. Purpose of a Trust is to separate the benefits and burdens from ownership. Spendthrift Trust.
September 20, Atlanta, GA - © DJL