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A federal jury in Detroit has found Ryan Richmond of Bloomfield, Michigan, guilty on charges including evading federal income taxes and obstructing the IRS.
According to the original indictment, Richmond owned and operated Relief Choices LLC, a medical marijuana dispensary in Warren, Michigan. Warren is a short drive north from Detroit.
Legality Of Cannabis
Under federal law, marijuana (also called cannabis) is classed as a Schedule I drug—on par with heroin and LSD—which means that it is not legal in any form. It is against federal law to grow, sell, or use cannabis for any purpose, including medical reasons.
Although cannabis remains illegal for federal purposes, many states have legalized it—including Michigan. Beginning in 2008, the use of cannabis for medical purposes was legalized through the Michigan Medical Marihuana Act. Today, cannabis is legal for medical and recreational use in the Wolverine State. There is no age limit for medical use, but you must be at least 21 to use cannabis recreationally. And for individuals, the possession limit in Michigan is 2.5 ounces for recreational and medical use.
Despite the disparate treatment under federal and state law, cannabis sellers must still report their income—even from illegal means—for tax purposes.
Tax Treatment
The IRS’ involvement with the cannabis industry has slowly evolved. For years, the agency said little beyond confirming that sales were taxable—most of the transactions were under the radar, so the issue didn’t get much attention. But with decriminalization efforts beginning in many states at the turn of the century, the IRS stepped in with a policy clarification, reaffirming that sales of cannabis were subject to federal tax, but also noting that it would disallow expenses for medical dispensaries.
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The agency relied on section 280E of the Tax Code for its position. That section says: 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.”
In 2015, the IRS indicated its position might be shifting. As the popularity of cannabis increased, IRS Memorandum 201504011 took another look at the tax deduction question. The memo didn’t reverse course on the issue of the deductions but it did suggest that, by looking at section 263, careful consideration as to the characterization of certain activities might result in legitimate reductions in tax.
Today, the consensus tends to be that only the cost of goods sold is deductible for cannabis businesses for federal tax purposes. In most cases, traditional business costs, like employee payroll and marketing, remain non-deductible. This position is echoed on the IRS’ cannabis-focused web page (yes, they really have one). The result can be an effective tax rate of between 40% and 70% for cannabis-based businesses, which means that it can look like profit on paper even if there’s no real profit.
It is not clear if Richmond attempted to deduct any expenses that would be disallowed under section 280E—there is not a significant discussion about expenses in court documents. However, the indictment and related documents do make clear that IRS believed that Richmond did not report income and that he took additional steps to conceal his assets to avoid paying taxes.
Allegations
The government alleged that while conducting business from 2011 through 2014, Richmond made a profit from operating Relief Choices and owed income taxes. To avoid paying taxes, the government charged that he used other entities, including Richmond Media, Realty Plus, and Schell Group, to hide his business activity and income during those years.
Specifically, Richmond was accused of using cash to pay business operating expenses and then routing customer credit card payments through an unrelated third-party bank account at a company he owned to conceal his actual business gross receipts from the IRS.
It’s not illegal to use cash in your business, and many cannabis-based companies rely on cash because of restrictions in the banking system. Since cannabis remains illegal under federal law, banks are reluctant to take on cannabis clients since money associated with cannabis operations could be considered money laundering. That could put the bank at risk, so many banks simply say no to cannabis customers.
Still, if you use cash in your business, you must keep good records and report properly. According to the indictment, Richmond maintained two sets of books for Relief Choices—one which reported gross sales, including cash receipts, that the government called “fraudulent”—and another accurate set of books that documented all the transactions.
In addition, the government accused Richmond of making false statements about his work with Relief Choices to an IRS auditor while he was under examination in 2015 and 2016. Some of the information he reportedly said to investigators that proved to be false included that he did not use cash in his business and was not involved with Relief Choices.
According to the Department of Justice, Richmond’s activities caused a tax loss of more than $1.15 million to the IRS.
Explanations
Interestingly, before he turned himself in, Richmond offered something of a confession. In an email directed to the IRS, he attempted to explain his actions and expressed some semblance of relief that the saga was ending. In an email offered into evidence by the government, Richmond wrote, “A UPS letter was not how I expected this to play out, I had imagined a much harsher scenario every day since 2010 when local law enforcement first told me that my file was sent over to the IRS. Thank you for your civility.”
He then outlined a series of raids he claims were conducted against him by the “Oakland County Sheriff in a highly political move” and other law enforcement. Richmond alleged that in 2011, “while working with a medical cannabis collective in Warren, MI we were raided (no warrant) on average every 3 months while operating.” He was careful to note that those raids were not related to the IRS Criminal Investigations activities—the IRS CI worked on the case.
Sentencing
Richmond is scheduled to be sentenced on Dec. 13 before Judge Linda Parker. He faces a statutory maximum penalty of five years in prison for each count of tax evasion, three years in prison for obstructing the IRS, and one year for the willful failure to file a tax return count. He also faces a period of supervised release, restitution, and monetary penalties.
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