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IRS Urges 10th Circ. To Toss Pot Cos.' Tax Summons Fight

Updated: Jun 16, 2022

Law360 (August 17, 2020, 5:13 PM EDT) -- The IRS has urged the Tenth Circuit to follow precedent it set this year and toss a series of appeals by Colorado pot businesses and their owners that challenge tax summonses for information on several entities. The appeals court should uphold the Internal Revenue Service's summonses for information on Green Solution LLC and other companies owned by Eric Speidell and on Medical Wellness Center LLC and other businesses owned by Judy Aragon and Steven Hickox, the government said in a brief filed Friday. The owners have said the IRS lacks the authority to issue the summonses, but the Tenth Circuit rejected a similar argument in April in the Standing Akimbo case, the government said. In Standing Akimbo v. U.S. , the Tenth Circuit found in April that the IRS was justified in seeking the financial information of Standing Akimbo LLC, another Denver-based marijuana dispensary, from the Colorado Department of Revenue. The three-judge panel found that the IRS satisfied proper requirements to seek relevant business information in its audit of Standing Akimbo to determine whether the company had improperly claimed business expense deductions. Speidell and several Green Solutions entities he owned were issued summonses by the IRS in 2016 seeking information from state agencies about the businesses' 2013 and 2014 tax returns to determine whether the companies improperly claimed federal business expense deductions, according to court documents. Those deductions are disallowed for state-regulated marijuana businesses under Internal Revenue Code Section 280E . A Colorado federal court denied Speidell's attempts to quash the summonses in the series of cases during 2018 and 2019, according to court documents. On appeal, Speidell and others told the Tenth Circuit that the ruling in Standing Akimbo should not apply in his case. Speidell argued that the lower court incorrectly applied the four-part test established in U.S. v. Powell , a 1964 U.S. Supreme Court decision that stipulated an agency must state a legitimate purpose for seeking information outside its possession that is relevant to an investigation and proper administrative procedures must be followed. That test, which was also used in Standing Akimbo to deny business expense deductions under Section 280E, shouldn't have applied because the IRS must make a "predicate finding" that a company committed a federal crime to disallow those tax benefits under the Internal Revenue Code. The IRS' summonses should be treated as warrants, and the agency should be required to show probable cause for the information requested, Speidell said. "The IRS cannot have it both ways," Speidell said. "They cannot be allowed the power to act as the [Department of Justice] but also enjoy the relaxations of the Powell standard." The government said that the factors that led to the Tenth Circuit's decision in Standing Akimbo, such as the submission of affidavits by IRS revenue agents explaining the need for the records requested, are similar to the proceedings in Speidell's series of appeals. The parallels in proceedings should make clear that the summonses should be enforceable, the government said. Legal representatives of the government and Speidell didn't immediately respond to requests for comment. Speidell is represented by James D. Thorburn of Thorburn Law Group LLC. The government is represented by Michael J. Haungs and Nathaniel S. Pollock of the U.S. Department of Justice, Tax Division. The case is Eric D. Speidell v. U.S., case nos. 19-1214 through 19-1218, in the U.S. Court of Appeals for the Tenth Circuit. --Editing by Vincent Sherry. 

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