Can A Dispensary Claim Immunity to Avoid Future Criminal Prosecution?
A Colorado medical marijuana company has refused to turn over documents to the IRS, citing fears that the records could be used against the company in a criminal proceeding. Standing Akimbo’s lawyer has said the Denver firm will claim the Fifth Amendment if it does not receive “absolute immunity” from federal drug crimes prosecution. So this case begs the question, What Are Your Fifth Amendment Rights in a Marijuana Dispensary Audit?
The IRS wants to view seed-to-sale records for tax years 2014 and 2015. But according to the company’s lawyer, the requested documents “would be the same evidence that would ‘convict overwhelmingly‘ under federal criminal drug laws should this information be shared with the Department of Justice (DOJ) and prosecution ensue.” That’s a very big “if,” as the IRS has denied that it works with the DOJ to prosecute marijuana dispensaries. In response, government lawyer Charles Butler said the company’s actions are “part of an ongoing campaign” to hamstring IRS auditors.
A similar case, Green Solution Retail v. United States, is currently pending before the Supreme Court. The Justices should rule on the link between marijuana audits and criminal prosecutions sometime in 2018.
Why Do Marijuana Businesses Get Audited?
Other than the sentence length, there’s basically no difference between selling marijuana in a medical dispensary and selling crack cocaine to schoolchildren under federal law. As a result, highly-regulated banks do not work with marijuana businesses, so almost all their sales are cash-only. This arrangement invites the unwelcome attention of the IRS.
Moreover, at the end of 2014, the Service limited the cost of goods sold deduction for marijuana dispensaries. It eliminated things like employee time in preparing product for display, which it had allowed for years. The short-staffed and Bitcoin-obsessed IRS is just now scrutinizing many 2014 and 2015 returns, which is why many marijuana businesses are now being audited.
If the IRS Comes Knocking, Can I Plead the Fifth?
The Fifth Amendment privilege against self-incrimination is one of the bedrock principles of American criminal law. Ever since Congress re-adopted the income tax in 1916 (the Supreme Court found the first one unconstitutional in 1895), the interplay between the Fifth Amendment and tax law has been hotly debated. After all, it’s not just marijuana businesses who face jail time for income tax indiscretions. Does the name Al Capone ring a bell?
Long ago, the Supreme Court declared that the Fifth applies to criminal cases, pseudo-criminal cases (e.g. lying to Congress), and documentary production. That third privilege is the one that applies to the link between marijuana audits and criminal prosecutions.
In Fisher v. United States (1976), taxpayers refused to give the IRS documents, claiming their “legitimate privacy interest” allowed them to invoke the Fifth Amendment. The Supreme Court disregarded that argument, but did hold that if the requested documents are critical to the government’s prosecution, the privilege may attach.
The test case came fourteen years later, in United States v. Hubbell. Whitewater lawyer “Webb” Hubbell refused to comply with a subpoena duces tecum. In a majority opinion from John Paul Stevens, the Supremes backed up Mr. Hubbell’s Fifth Amendment claim. Justice Stevens compared turning over documents to a prisoner trying on a bloody shirt. Both are testimonial. Furthermore, special prosecutor Kenneth Starr’s entire case rested on the disputed documents. Therefore, the Fifth Amendment applied.
Note that, in the above case, Standing Akimbo’s lawyer pointed out that the requested documents would almost certainly convict his client in a federal criminal prosecution. But it remains to be seen how a court would rule on the link between marijuana audits and criminal prosecutions, especially since the IRS has pinky-swore that it only uses this information for civil audits. Most likely, the Supreme Court will require the company to turn over the documents but bar their use in a future criminal proceeding.