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Marijuana Dispensary Seeks Supreme Court Review in Tax Case

JUL. 25, 2019

Neil Feinberg et al. v. Commissioner

DATED JUL. 25, 2019
DOCUMENT ATTRIBUTES

Neil Feinberg et al. v. Commissioner

[Editor's Note:

The appendix can be viewed in the PDF version of the document.

]

NEIL FEINBERG, ANDREA FEINBERG, KELLIE MCDONALD,
Petitioners,
v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent.

IN THE
Supreme Court of the United States

On Petition for a Writ of Certiorari to the United States Court of Appeals
for the Tenth Circuit

PETITION FOR WRIT OF CERTIORARI

JAMES D. THORBURN
Counsel of Record
RICHARD A. WALKER
THORBURN WALKER, LLC
5460 S. Quebec St., #310
Greenwood Village, CO 80111
(303) 646-3482
jthorburn@thorburnwalker.com
rwalker@thorburnwalker.com
Counsel for Petitioner

July 25, 2019

QUESTION PRESENTED

The State of Colorado legalized marijuana. The Federal Government contends that state-legal marijuana sales constitute unlawful drug trafficking prohibited by federal law. The IRS applied 26 U.S.C Sec. 280E against the Petitioners because they sold state-legal marijuana. The reason why the IRS applied the statute was because the IRS contends the Petitioners were federally unlawful drug traffickers. The question presented for review is:

1. Did the Tenth Circuit err in holding that the Controlled Substances Act superseded and preempted Colorado marijuana laws?

RELATED PROCEEDINGS

None.


TABLE OF CONTENTS

QUESTION PRESENTED

RELATED PROCEEDINGS

TABLE OF AUTHORITIES

OPINIONS BELOW

JURISDICTION

CONSTITUTIONAL PROVISIONS INVOLVED

STATEMENT

A. General Background

B. Background of the Federal/State Dispute

C. Adoption of Section 280E

D. State Legalization of Marijuana and the Federal Coordinated Response

E. Application of Section 280E Against State Legal Marijuana Dispensaries

F. Background of the Present Action

SUMMARY OF THE ARGUMENT

The CSA Does Not Supercede State Regulation of Marijuana

ARGUMENT

THE TENTH CIRCUIT ERRED IN HOLDING THAT, DESPITE BEING STATE LEGAL, THE PETITIONERS' MARIJUANA SALES WERE UNLAWFUL DRUG TRAFFICKING

A. Despite that the Tenth Circuit Holding on Preemption was Sua Sponte, the Question is Reviewable

B. The State Legal Sales Were Not "Prohibited” Under Federal Law

C. Since Federal Law Does Not Supersede Colorado Marijuana Laws at Issue Here, Sales of State-Legal Marijuana are Not Forbidden Federally

D. Under Our System of Government, Conduct Cannot Be Simultaneously Lawful and Unlawful

E. The Preemption Doctrine

F. The Tenth Circuit Erred in Determining Supremacy Applied. Congress Did Not Intend to Prohibit Colorado State-Legal Marijuana

G. If the Court Finds Preemption, it Must Invalidate the State Statute. The Tenth Circuit Failed in this Analysis

H. The Petitioner's Sale of State Legal Marijuana Was Not Prohibited by Federal Law

I. Raich and Oakland Do Not Compel a Different Result

J. In Addition, the Tenth Circuit Erred Because the IRS Does Not Have Jurisdiction to Determine Issues of Supremacy

REASONS FOR GRANTING THE PETITION

CONCLUSION 

APPENDIX

APPENDIX A: OPINION, U.S. Court of Appeals for the Tenth Circuit (February 26, 2019) 

APPENDIX B: JUDGMENT, U.S. Court of Appeals for the Tenth Circuit (February 26, 2019) 

APPENDIX C: ORDER, U.S. Court of Appeals for the Tenth Circuit (April 26, 2019) 

APPENDIX D: MEMORANDUM OF FINDINGS OF FACT AND OPINION, U.S. Tax Court (October 23, 2017) 

APPENDIX E: ORDER, U.S. Tax Court (April 2, 2018) 

APPENDIX F: DECISION, U.S. Tax Court (April 4, 2018) 

APPENDIX G: Statement of Judge Carlos F. Lucero, U.S. Court of Appeals for the Tenth Circuit (January 22, 2019) 

TABLE OF AUTHORITIES

CASES

Alpenglow Botanicals, Ltd. Liab. Co. v. United States, 894 F.3d 1187 (10th Cir. 2018)

Altria Group, Inc. v. Good, 555 U.S. 70 (2008)

Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979)

Bank of Am. V. City & County of S.F., 309 F.3d 551 (9th Cir. 2002)

Bates v. Dow Agrosciences LLC, 544 U.S. 431 (2005)

Bond v. United States, 572 U.S. 844 (2014)

Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner, 128 T.C. 173 (2007)

City of Dearborn v. Bacila, 353 Mich. 99, 90 N.W.2d 863 (1958)

Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363 (2000)

Dalton v. Little Rock Family Planning Servs., 516 U.S. 474 (1996)

Edmondson v. Commissioner, T.C. Memo 1981-623, 42 T.C.M. (CCH) 1533 (1981)

Elkins v. Comfort, 392 F.3d 1159 (10th Cir. 2004)

English v. Gen. Elec. Co., 496 U.S. 72 (1990)

Feinberg v. Commissioner, 808 F.3d 813 (10th Cir. 2015)

Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019)

Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992)

Gibbons v. Ogden, 22 U.S. 1, 6 L. Ed. 23 (1824)

Gonzales v. Raich, 545 U.S. 1 (2005)

Grayned v. City of Rockford, 408 U.S. 104 (1972)

Green Sol. Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017)

Hancock v. Train, 426 U.S. 167, 96 S. Ct. 2006, 48 L. Ed. 2d 555 (1976)

Helvering v. Gowran, 302 U.S. 238 (1937)

High Desert Relief, Inc. v. United States, 917 F.3d 1170 (10th Cir. 2019)

Hillsborough Cty. v. Automated Med. Labs., Inc., 471 U.S. 707 (1985)

Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803)

McCulloch v. Maryland, 17 U.S. 316, 4 Wheat. 316, 4 L. Ed. 579 (1819)

Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996)

Murphy v. NCAA, 138 S. Ct. 1461 (2018)

Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015)

Patients Mut. Assistance Collective Corp. v. Commissioner, Nos. 29212-11, 30851-12, 14776-14, 2018 Tax Ct. Memo LEXIS 211 (T.C. Dec. 20, 2018)

Patients Mut. Assistance Collective Corp. v. Commissioner, Nos. 29212-11, 30851-12, 14776-14, 2018 U.S. Tax Ct. LEXIS 54 (T.C. Nov. 29, 2018)

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)

Savage v. Jones, 225 U.S. 501 (1912)

Sherman v. United States, 356 U.S. 369 (1958)

Speiser v. Randall, 357 U.S. 513 (1958)

United States v. Bass, 404 U.S. 336 (1971)

United States v. California, 921 F.3d 865 (9th Cir. 2019)

United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483 (2001)

Villas at Parkside Partners v. City of Farmers Branch, 701 F. Supp. 2d 835 (N.D. Tex. 2010)

Wyeth v. Levine, 555 U.S. 555 (2009)

CONSTITUTION

U.S. Const. art. I, § 8, cl. 3

U.S. Const. art. VI, cl. 2

U.S. Const. amend. X

Colo. Const. Article XVIII, § 144

Colo. Const. Article XVIII, § 164

STATUTES AND REGULATIONS

26 U.S.C. § 280E

28 U.S.C. § 1254(l)

Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, § 538, 128 Stat. 2130, 2217 (2014)

Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, § 542, 129 Stat. 2242, 2332–33 (2015)

Consolidated Appropriations Act, 2017, Pub. L. No. 115-31, § 537, 131 Stat. 135, 228 (2017)

Consolidated Appropriations Act, 2018, Pub. L. No. 115-141, § 538, 132 Stat. 349, 444-45 (2018) 

Controlled Substances Act of 1970, 21 U.S.C. Sec. 801, et. seq.

21 U.S.C. § 812(c) 

21 U.S.C. § 841 

21 U.S.C. § 903 

Colo. Rev. Stat. §§ 12-43.3-101 et seq. 

Colo. Rev. Stat. § 18-18-406 

RULES

Fed. R. App. P. 35 

Fed. R. App. P. 40 

U.S. Tax Ct. R. 161 

U.S. Tax Ct. R. 162

OTHER AUTHORITIES

Memorandum from Barry R. McCaffrey, Dir. Office of National Drug Control Policy (Dec. 20, 1996), available at https://www.scribd.com/document/361937054/NLWJC-Kagan-DPC-Box015-Folder011-Drugs-Legalization-Efforts

“Prohibited,” Black's Law Dictionary (7th ed. 1999)

S. Rept. 97-494, Vol. 1 (July 12, 1982)

T.R. Reid, Deduction of the Week, The Washington Post (Nov. 3, 1981), available at https://www.washingtonpost.com/archive/politics/1981/11/03/deduction-of-the-week/f67f9410-9d29-423d-8277-40fe410fae81/?utm_term=.870555bb6f024

 


PETITION FOR WRIT OF CERTIORARI

The Petitioners, above named, respectfully petition for a writ of certiorari to review the judgment of the United States Court of Appeals for the Tenth Circuit.

OPINIONS BELOW

The opinion of the court of appeals is a published decision, Feinberg v. Commissioner, 916 F.3d 1330 (10th Cir. 2019). Pet. App. 1a. The order denying reconsideration is unreported. Pet. App. 19a. The opinion of the Tax Court is unreported. Pet. App. 20a. The orders of the Tax Court denying the Rule 161 and 162 Motions are also unreported. Pet. App. 31a and 37a.

JURISDICTION

The judgment of the court of appeals was entered on February 26, 2019. Pet. App. 18a. A timely petition for a FRAP Rule 35 Request for En Banc Consideration and FRAP Rule 40 Request for Rehearing was denied on April 26, 2019. Pet. App. 19a. This Petition has been timely filed on or before July 25, 2019. The Court's jurisdiction is invoked under 28 U.S.C. § 1254(1).

CONSTITUTIONAL PROVISIONS INVOLVED

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

U.S. Const., Article VI, Paragraph 2.

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

Bill of Rights, Amendment X.

STATEMENT

A. General Background.

This case brings to the forefront what Judge Lucero calls the “huge federalism dispute”. Thirty-Seven states and the District of Columbia have legalized and regulate marijuana on various levels. On the other hand, federal agencies have ignored the States rights to regulate marijuana under the Tenth Amendment. They claim the state-legal use and distribution of marijuana is nonetheless a federal crime. Judge Lucero summarized the federal agency action as “Colorado, up yours”!

“We are going to ignore anything that you, as a State, under the United States Constitution, have the power to do and has done.”

Judge Carlos F. Lucero, Feinberg oral argument. See Pet. App. 43a.

Here, the IRS, under interagency agreement, declared that the Petitioner's Colorado state-legal distribution of marijuana constitutes unlawful drug trafficking under the CSA. Using this declaration, the IRS denied all Petitioners' costs and expenses for their business Total Health Concepts (“THC”). This resulted in a total income tax of nearly $300,000, despite the fact that the Petitioners received no compensation at all.

“[W]e (the IRS) are going to punish this business, to the point of destruction.”

Judge Lucero, Id.

The basis of Judge McHugh's decision upholding the Tax Court decision was the Supremacy Clause. The Supremacy Clause ruling was sua sponte by the Court.

“[S]tate legalization of marijuana cannot overcome federal law.”

Feinberg v. Commissioner, 916 F.3d 1330, 1338 n.3 (10th Cir. 2019).

As will be discussed further, below, the CSA has not superceded Colorado state regulation of marijuana. The Tenth Circuit erred and this Court should reverse.

B. Background of the Federal/State Dispute.

Congress, in 1970, enacted the Controlled Substances Act, 21 U.S.C. Sec. 801, et. seq. (“CSA”). Under the CSA, Congress placed various plants, substances, and drugs into five schedules (Schedules I through V). Through the CSA, Congress regulated the use and distribution of the scheduled items criminally and civilly. Marijuana and its components were placed on Schedule I, the most restrictive schedule. However, Congress did not “occupy the field”. Rather, Congress clarified in Section 903 of the CSA that the states were free to regulate the area as they saw fit “unless there is a positive conflict between that provision of this subchapter and that State law so that the two cannot consistently stand together.” 21 U.S.C. Sec. 903.

To this end, thirty-seven states and the District of Columbia have legalized marijuana on various levels. In Colorado, the People of the State of Colorado adopted constitutional amendments through the initiative process legalizing marijuana — first medically, later for “adult use”. The Colorado state legislature then adopted statutes regulating the distribution and use of state-legal marijuana. This case involves sales of medical marijuana. The applicable Colorado laws are Colo. Const. Article XVIII, Sections 14 and 16, and C.R.S. §§ 12-43.3-101 et seq.; see also C.R.S. § 18-18-406 (criminalizing unlicensed sales and possession of marijuana).

C. Adoption of Section 280E.

Section 280E was adopted in response to a Tax Court case for which Congress took exception. This occurred during the height of the drug war days — and also prior to state legalization of marijuana.

The case which prompted Section 280E was Edmondson v. Commissioner, T.C. Memo 1981-623, 42 T.C.M. (CCH) 1533 (1981). Jeffrey Edmondson was a convicted drug dealer who was sentenced to four years in prison for possessing cocaine with an intent to distribute. T.R. Reid, Deduction of the Week, The Washington Post (November 3, 1981), available at https://www.washingtonpost.com/archive/politics/1981/ 11/03/deduction-of-the-week/f67f9410-9d29-423d-8277-40fe410fae81/?utm_term=.870555bb6f02. The Tax Court allowed Edmondson to take deductions for telephone, automobile, and rental expenses that were incurred in his illicit drug business. See Edmondson v. Commissioner.

Congress took exception to the Tax Court's failure to invoke the public policy exception to Edmondson's illicit drug business. In response, Congress adopted IRC § 280E. In the Senate Report on Section 280E, the Senate explained the reasons for the statute:

“A recent U.S. Tax Court case allowed deductions for telephone, auto, and rental expenses incurred in the illegal drug trade . . . There is a sharply defined public policy against drug dealing. To allow drug dealers the benefit of business expense deductions at the same time that the U.S. and its citizens are losing billions of dollars per year to such persons is not compelled by the fact that such deductions are allowed to other, legal, enterprises. Such deductions must be disallowed on public policy grounds.”

Senate Rept. 97-494, Vol. 1, at 309 (July 12, 1982).

D. State Legalization of Marijuana and the Federal Coordinated Response.

California and Arizona legalized medical marijuana in 1996. Federal agencies and the Clinton Administration were not pleased.

In response, Barry R. McCaffrey, then Director of the National Office of Drug Control Policy (“ONDCP”) led an effort to direct the “National Drug Control Strategy” against the state marijuana legalization effort.

The Clinton Administration “strongly opposed the California and Arizona legalization efforts”. See Memorandum from Barry R. McCaffrey, Dir. Office of National Drug Control Policy (Dec. 20, 1996), available at https://www.scribd.com/document/361937054/ NLWJC-Kagan-DPC-Box015-Folder011-Drugs-Legalization-Efforts, p. 1 (the “Memo”). In order to counter the legalization, the ONDCP, in conjunction with the “Departments of Treasury, Defense, Justice, Labor, Health and Human Services, Housing and Urban Development, Transportation, and Education, the Postal Service, and the Neuclear Regulatory Agency” met and created a “coordinated federal response” to the legalization efforts. Id.

With respect to the IRS contribution to “blunt” the legalization efforts, Id. at 1, the IRS agreed:

“To the extent that state laws result in efforts to conduct sales of controlled substances prohibited by Federal law, the IRS will disallow expenditures in connection with such sales to the fullest extent permissible under existing Federal tax law.”

Id. at 3.

So, it is no wonder why

“prosecutors will almost always overlook federal marijuana distribution crimes in Colorado but the tax man never will.”

Feinberg v. Commissioner, 916 F.3d 1330 at 814 (10th Cir. 2015).

The Department of Justice initiated numerous civil forfeiture proceedings against state legal marijuana dispensaries, as well as criminal proceedings. However, Congress stepped in. Beginning 2014, Congress defunded the Department of Justice from prosecuting CSA crimes that involve otherwise lawful sales from medical marijuana states from 2014 until today.1

E. Application of Section 280E Against State Legal Marijuana Dispensaries.

Section 280E is very concise:

“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.”

26 U.S.C. § 280E.

The elements of Section 280E are (1) person; (2) in the person's trade or business; (3) “traffics”; (4) in a Schedule I or II controlled substance; (5) prohibited by federal or state law. 26 U.S.C. § 280E.

Thus, in order for Section 280E to apply, the taxpayer must have engaged in unlawful conduct outside the Tax Code. There is nothing in Section 280E which specifically states that state-legal marijuana sales are subject to the statute. However, beginning in 1996, the IRS followed the interagency agreement and began applying Section 280E to state-legal marijuana.

Here, as in many cases where marijuana distribution is state legal, the IRS applied Section 280E against the Petitioners. The IRS auditor found in this case:

“Internal Revenue Code section 280(E) disallows expenses incurred in illegal drug trafficking. Even though medical marijuana is legal under Colorado law, it is still illegal under federal law and its sale is considered illegal drug trafficking.”

Administrative Notice of Dermination, Feinberg Tax Court Proceedings, 10083-13.

Thus, the IRS auditor determined that, despite the sales being lawful under state law, the federal law superseded the state law, making the state-legal sale of marijuana unlawful. This has been a common theme of the IRS in the recent administration of Section 280E.2

F. Background of the Present Action.

The Petitioners filed the Tax Court petition to challenge the notice of determination that Section 280E was applicable to them. This proceeding has had a very long course, including a midproceeding visit to the Tenth Circuit on a petition for mandamus. See, Feinberg v. Commissioner, 808 F.3d 813 (10th Cir. 2015) (Feinberg I). Justice Gorsuch penned the opinion in that case while he was still a Tenth Circuit judge.

The matter went to trial on various objections to Section 280E which were fully briefed to the Tax Court. However, Judge Kerrigan did not resolve any of the 280E issues. Rather, she claimed that the Petitioners failed to first substantiate the expenses. This was despite the fact that the expenses were not denied on substantiation grounds.

On appeal, the Tenth Circuit correctly found that the Tax Court erred in affirming based upon substantiation.

“Here, the IRS deficiency notice determined THC was engaged in unlawful trafficking and disallowed its business deductions under §280E. But the tax court upheld the deficiency based on THC's failure to substantiate its business expenses. Because proving THC was not engaged in unlawful trafficking requires presentation of different evidence than substantiating the business expenses, the substantiation theory constitutes a new matter. The burden of proof on that new matter, and thus any failure of proof, falls on the Commissioner, as the respondent, not on the Taxpayers. As a result, the tax court erred by affirming the denial of the deductions based on the Taxpayers' failure to adduce evidence to substantiate the expenses.”

Feinberg, 916 F.3d at 1334 (10th Cir. 2019)

At that point, the Appeals court could have remanded for further proceedings consistent with the opinion, but it chose not to do so.

This court has “discretion to affirm on any ground adequately supported by the record.” Elkins v. Comfort, 392 F.3d 1159, 1162 (10th Cir. 2004).

Feinberg, 916 F.3d at 1334 (10th Cir. 2019).

The Tenth Circuit then disposed of various constitutional challenges the Petitioners had to the burden of proof used in the Tax Court proceedings in favor of the Commissioner. However, disposing of the burden of proof would not be a substantive basis to affirm. Thus, the Court went on to Supremacy.

“Despite its legality in many states, marijuana is still a schedule I “controlled substance” under federal law. 21 U.S.C. §812(c) (Schedule I)(c)(10); Green Sol. Retail, Inc. v. United States, 855 F.3d 1111, 1113 [*1334] (10th Cir. 2017). And although the Justice Department did not criminally pursue dispensaries acting in accordance with state law during the relevant time period, “the IRS . . . show[ed] no similar inclination to overlook federal marijuana distribution crimes.” Alpenglow, 894 F.3d at 1193 (internal quotation marks omitted).

* * *

“The Taxpayers are understandably frustrated with the loss of their business expense deductions under § 280E. Despite operating in accordance with state law controlling the distribution of medical marijuana, the Taxpayers are subject to greater federal tax liability than other legitimate state businesses. But state legalization of marijuana cannot overcome federal law. See Hancock v. Train, 426 U.S. 167, 178, 96 S. Ct. 2006, 48 L. Ed. 2d 555 (1976) (HN14 “It is a seminal principle of our law 'that the [United States C]onstitution and the laws made in pursuance thereof are supreme; that they control the constitution and laws of the respective States, and cannot be controlled by them.'” (quoting McCulloch v. Maryland, 17 U.S. 316, 4 Wheat. 316, 426, 4 L. Ed. 579 (1819))). Thus, the Taxpayers' remedy must come from Congressional change to § 280E or 21 U.S.C. §812(c) (Schedule I) rather than from the courts.

Feinberg v. Commissioner, 916 F.3d 1330, 1333-34, and 338 n.3 (10th Cir. 2019).

Thus, the basis for affirmance was the Supremacy Clause.

SUMMARY OF THE ARGUMENT

The CSA Does Not Supercede State Regulation of Marijuana.

The sales of Colorado state-legal marijuana, by the Petitioners, was not “prohibited” by federal law.

The Tenth Circuit erred in determining that federal law controls whether state-legal sales of marijuana is prohibited. To determine whether federal law supersedes Colorado marijuana laws, the Court must go through the preemption analysis. Preemption is the doctrine that determines whether federal or state law controls. The Tenth Circuit failed to conduct the analysis. Contrary to Supreme Court precedent, the Tenth Circuit oversimplified the supremacy analysis and came to a per se conclusion that all federal law controls any state action, conflicting or not. This was error.

The federal government is not a single sovereign. The states and federal government compose a “dual-sovereignty” relationship. To this end, as discussed more fully, below, marijuana laws of the states, including the State of Colorado, have not been superseded by the CSA. Thus, the Petitioners' sales of marijuana pursuant to Colorado law was not “prohibited” under federal law, and Section 280E does not apply.

ARGUMENT

THE TENTH CIRCUIT ERRED IN HOLDING THAT, DESPITE BEING STATE LEGAL, THE PETITIONERS' MARIJUANA SALES WERE UNLAWFUL DRUG TRAFFICKING.

A. Despite that the Tenth Circuit Holding on Preemption was Sua Sponte, the Question is Reviewable.

The supremacy issue was brought forth by the Tenth Circuit, sua sponte. However, that fact that supremacy was not argued by counsel does not preclude review by this Court. This Court has approved the lower appellate courts use of reasons not advocated by the litigants to affirm a lower court decision. “[T]he rule is settled that if the decision below is correct, it must be affirmed, although the lower court relied upon a wrong ground or gave a wrong reason.”

Helvering v. Gowran, 302 U.S. 238, 245 (1937).

“There is no hard and fast rule that appellate courts, sitting either in law or equity, cannot and hence do not raise and decide important questions sua sponte. Indeed, a mere glance at available precedent will disclose the contrary. True, the power is exercised sparingly and with full realization of the restrictions and limitations inherent in the employment thereof.”

City of Dearborn v. Bacila, 353 Mich. 99, 90 N.W.2d 863, 873 (1958).

“It is of course not a rigid rule of this Court to restrict consideration of a case merely to arguments advanced by counsel.”

Sherman v. United States, 356 U.S. 369, 379 n. 2 (1958)(Frankfurter, J., concurring)

B. The State Legal Sales Were Not “Prohibited” Under Federal Law.

Section 280E states:

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. (Emphasis in title as original. Emphasis in body added).

28 U.S.C. § 280E.

Thus, in order for the Tenth Circuit ruling to stand, the Court had to determine that state-legal marijuana sales were unlawful federally. The court's ruling was error.

The flush language of 280E makes clear that only the “illegal sale of drugs” “prohibited” by federal or state law come under 280E. It is clear that the IRS follows this interpretation since it does not “overlook federal marijuana distribution crimes.” Feinberg v. Comm'r, 808 F.3d 813, 814 (10th Cir. 2015), accord, Alpenglow Botanicals, Ltd. Liab. Co. v. United States, 894 F.3d 1187, 1193 (10th Cir. 2018).

Black's Law Dictionary defines “prohibited” as “to forbid by law”. Black's Law Dictionary, 1228 (7th ed. 1999). Thus, the question is whether Colorado state legal sales of marijuana are forbidden by federal law. If the conduct is not “prohibited”, 280E does not apply.

C. Since Federal Law Does Not Supersede Colorado Marijuana Laws at Issue Here, Sales of State-Legal Marijuana are Not Forbidden Federally.

The IRS auditor made the determination that, despite the legal nature of the Petitioner's sales under Colorado state law, the conduct of the Petitioner was prohibited by federal law. As discussed further, below, this is a core supremacy analysis.

There has been general discussion in cases making the assumption that federal law supersedes Colorado law when it comes to state legal marijuana sales. However, there has been no analysis and no holding that Colorado law and its constitution have been preempted by the CSA. As will be discussed, below, in order for the court to determine that federal drug laws “prohibit” the Petitioners' conduct, the court must determine whether or not the federal law supersedes, and thus preempts, Colorado law. Otherwise, the conduct of the Petitioners is not “prohibited”. The Tenth Circuit failed in this analysis.

D. Under Our System of Government, Conduct Cannot Be Simultaneously Lawful and Unlawful.

Some lower courts, up to now, have incorrectly presumed in the marijuana context, that conduct expressly lawful on the state level, can be simultaneously unlawful on the federal level. As discussed below, the principles of federalism and supremacy do not allow such a result. Also, it would violate the core essentials of due process to have conduct simultaneously lawful and unlawful.

An essential element of due process is notice of the proscribed conduct. Since the court assumes “that man is free to steer between lawful and unlawful conduct, we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, so that he may act accordingly.” Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). Thus, due process will not allow an act to be simultaneously lawful and unlawful. Under those circumstances, constitutionally sufficient notice would be impossible. Also, it would be fundamentally unfair to allow government to make conduct simultaneously lawful and unlawful.

This core element of due process permeates the entire supremacy analysis. As discussed below, there is one law that controls given activity, and all other laws must flow without conflict with the controlling law. The supremacy/preemption analysis determines the controlling law.

E. The Preemption Doctrine.

Preemption is the doctrine arising from the Supremacy Clause which determines whether federal law supersedes state law. Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996). Congress's ability to preempt state law emanates from the Supremacy Clause of the United States Constitution. English v. Gen. Elec. Co., 496 U.S. 72, 78 (1990).

However, the Supremacy Clause, “is not an independent grant of legislative power to Congress”. Instead, it simply provides “a rule of decision.” Murphy v. NCAA, 138 S. Ct. 1461, 1479 (2018). It specifies that federal law is supreme “in case of a conflict with state law”. Murphy, at 1479 (Emphasis added). However, “[i]f it does not [conflict], state law governs”. Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979)

Absent a conflict, federal law does not supersede state law and state law controls. id. Aronson, supra. [B]oth the Federal Government and the States wield sovereign powers, and that is why our system of government is said to be one of 'dual sovereignty'”. Murphy, at 1475.

“[T]he Constitution divides authority between federal and state governments for the protection of individuals.” (citation omitted) “'[A] healthy balance of power between the States and the Federal Government [reduces] the risk of tyranny and abuse from either front.'”

Murphy, at 1477.

All forms of preemption operate in the same manner. “Congress enacts a law that imposes restrictions or confers rights on private actors; a state law confers rights or imposes restrictions that conflict with the federal law; and therefore, the federal law takes precedence and the state law is preempted”. Murphy, at 1480.

Questions of preemption are purely legal. Bank of Am. V. City & County of S.F., 309 F.3d 551, 556 (9th Cir. 2002). The party that asserts preemption, in this case the IRS, bears a heavy burden to show that preemption was the “clear and manifest purpose of Congress.” See Wyeth v. Levine, 555 U.S. 555, 565-569 (2009).

There is a presumption against preemption. Courts must “start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Medtronic, 518 U.S. at 485.

[W]hen the question is whether a Federal act overrides a state law, the entire scheme of the statute must of course be considered and that which needs must be implied is of no less force than that which is expressed. If the purpose of the act cannot otherwise be accomplished — if its operation within its chosen field else must be frustrated and its provisions be refused their natural effect — the state law must yield to the regulation of Congress within the sphere of its delegated power.

Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363 (2000), (quoting, Savage v. Jones, 225 U.S. 501, 533 (1912).

Second, federal law will supersede state law only if Congress intended such an outcome. Medtronic, at 485-86 (congressional purpose is “the ultimate touchstone”). Courts must determine Congress's intent “from the language of the preemption statute and the 'statutory framework' surrounding it.” Id. at 486 (citation omitted).

Furthermore, courts are cautioned to “not be guided by a single sentence or member of a sentence, but [to] look to the provisions of the whole law, and to its object and policy.” Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 51 (1987) (internal quotation marks and citations omitted).

Importantly, “[w]hen the text of a preemption clause is susceptible of more than one plausible reading, courts ordinarily 'accept the reading that disfavors preemption.'” Altria Group, Inc. v. Good, 555 U.S. 70, 77 (2008) (quoting Bates v. Dow Agrosciences LLC, 544 U.S. 431, 449 (2005)).

Courts are even more cautious when the question is whether a federal criminal law displaces state law on a subject. As discussed below, under principles of federalism, a federal criminal statute will not prohibit a state-legal act unless “explicitly” directed by Congress. Bond v. United States, 572 U.S. 844, 858 (2014).

Local criminal activity has “traditionally been the responsibility of the States.” Bond v. United States, 572 U.S. 844, 865 (2014). It is assumed that “Congress normally preserves 'the constitutional balance between the National Government and the States.'” Id. at 862. Thus, “unless Congress conveys its purpose clearly, it will not be deemed to have significantly changed the federal-state balance”. United States v. Bass, 404 U.S. 336, 349 (1971).

This leads to the well-established principle that “'it is incumbent upon the federal courts to be certain of Congress' intent before finding that federal law over-rides'” the “usual constitutional balance of federal and state powers.” Bond, at 845. The Tenth Circuit certainly failed in this regard.

“[W]e will not be quick to assume that Congress has meant to effect a significant change in the sensitive relation between federal and state criminal jurisdiction. In traditionally sensitive areas, such as legislation affecting the federal balance, the requirement of clear statement assures that the legislature has in fact faced, and intended to bring into issue, the critical matters involved in the judicial decision.”

Bass, at 349.

F. The Tenth Circuit Erred in Determining Supremacy Applied. Congress Did Not Intend to Prohibit Colorado State-Legal Marijuana.

The federal statute which purportedly makes the acts of the Appellants unlawful is as follows:

(a) Unlawful Acts “Except as authorized by this subchapter, it shall be unlawful for any person knowingly or intentionally — 

(1) to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance . . .”

21 U.S.C. § 841 (emphasis added).

The preemption statute of the CSA is as follows:

Application of State Law.

“No provision of this subchapter shall be construed as indicating an intent on the part of the Congress to occupy the field in which that provision operates, including criminal penalties, to the exclusion of any State law on the same subject matter which would otherwise be within the authority of the State, unless there is a positive conflict between that provision of this subchapter and that State law so that the two cannot consistently stand together.”

21 U.S.C. § 903.

Clearly, reading the statute as a whole, Congress intended to make Section 903 an exception to the CSA. Congress did not intend to occupy the entire field. There is nothing in the statute that explicitly prohibits conduct which has been made expressly legal under state law.

Again, there is a presumption against preemption. The statute must be construed with that presumption in mind. Absent the explicit direction by Congress prohibiting that which is expressly legal under Colorado law, the Court should not determine that Colorado marijuana laws have been preempted by the CSA. Thus, Congress did not override Colorado state legal marijuana distribution laws in favor of the CSA. As a result, Colorado law controls. Aronson. Colorado state-legal marijuana sales are not “prohibited” under federal law.

G. If the Court Finds Preemption, it Must Invalidate the State Statute. The Tenth Circuit Failed in this Analysis.

“Where express or implied federal preemption occurs, the Supremacy Clause invalidates local regulations that “interfere with or are contrary to” federal law. Gibbons v. Ogden, 22 U.S. 1, 82, 6 L. Ed. 23 (1824); see also Gade v. Nat'l Solid Wastes Mgmt. Ass'n, 505 U.S. 88, 108, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992) (“any state law, however clearly within a State's acknowledged power, which interferes with or is contrary to a federal law, must yield.”).”

Villas at Parkside Partners v. City of Farmers Branch, 701 F. Supp. 2d 835, 851 (N.D. Tex. 2010).

Thus, the court must “invalidate the state enactment” if the conflict is found. United States v. California, 921 F.3d 865, 889 (9th Cir. 2019).

However, when the court determines that preemption has occurred, state law is displaced only “to the extent that it actually conflicts with federal law.”

Dalton v. Little Rock Family Planning Servs., 516 U.S. 474, 476 (1996).

“The rule [is] that a federal court should not extend its invalidation of a statute further than necessary to dispose of the case before it.”

Id.

The Tenth Circuit failed in this regard. The decision leaves uncertainty whether Colorado law is invalid.

Additionally, if the federal and Colorado state laws are not in conflict, expressly state-legal marijuana sales could not be considered “prohibited” under federal law.

H. The Petitioner's Sale of State Legal Marijuana Was Not Prohibited by Federal Law.

Section 280E only applies if the “trafficking” of a controlled substance is “prohibited” under federal or state law. The Commissioner pleaded no facts to demonstrate that the Petitioner's conduct was “prohibited”. The Petitioner's sales were lawful under Colorado law. The CSA did not make unlawful sales of drugs which are specifically lawful under state law. Thus, Colorado law controls.

The Supreme Court has made clear that there is a “presumption that state and local regulation related to matters of health and safety can normally coexist with federal regulations . . .” Hillsborough Cty. v. Automated Med. Labs., Inc., 471 U.S. 707, 718 (1985). There is nothing in the CSA which explicitly prohibits that which is expressly lawful in the State. Given the above, the Appellants did not engage in sales of a controlled substance “prohibited” by federal law. Section 280E was improperly applied.

If the federal and state laws are not in conflict, there would be no basis to conclude that that an explicitly state-legal act would be prohibited under federal laws. The core principles of federalism and preemption do not allow such a result.

I. Raich and Oakland Do Not Compel a Different Result.

The Commissioner may rely upon Gonzales v. Raich, 545 U.S. 1 (2005) for the proposition that Colorado law has been preempted. However, such reliance would be misplaced. The Raich Court was construing a California law allowing the personal possession and cultivation of marijuana. The primary question was whether such cultivation could be regulated by Congress under the commerce clause. A majority of the Court determined that Congress could regulate it. However, the Supreme Court did not address whether the California law was actually preempted.

Nor did the Supreme Court address the CSA's preemption provision, 21 U.S.C. § 903, and its effect on preemption of state law. Most importantly, the Court did not address Colorado law. California and Colorado are separate sovereigns. Raich only addressed California law and the Commerce Clause. Regardless of the merits of the California law, the court will need to analyze Colorado law and determine whether Congress displaced the sovereignty of the State of Colorado. Until the Colorado law has been preempted by the court, the presumption against preemption applies. Without preemption, there is no conflict between federal law and the Colorado marijuana laws. Without conflict, there can be no prohibition of the expressly state-legal act.

Thus, any argument that Raich supports preemption of state marijuana legalization laws misconstrues the opinion, which is couched exclusively in terms of the Commerce Clause and Congress's intent to obviate the need for the medical necessity defense.

Furthermore, even if the Court would determine that Raich is applicable due to regulation of interstate commerce, the Supreme Court nevertheless requires “proof of a connection to interstate commerce in every case, thereby 'preserv[ing] as an element of all the offenses a requirement suited to federal criminal jurisdiction alone.'” Bond, 572 U.S. at 859, quoting Bass, 404 U.S. at 350. This requirement respects both the dual-sovereignty, sensitive federal/state relations, and the limitation of Congress' power to regulate purely local conduct under the Commerce Clause. Id.

Since the IRS made no findings that the Petitioners' conduct occurred in interstate commerce, the state-legal sale of marijuana cannot be considered “prohibited” under federal law. The IRS erred in this regard.

Nor will United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483 (2001) be helpful to the IRS. In Oakland, the Supreme Court decided whether “medical necessity” was a viable defense to a criminal prosecution under the CSA. The Court determined it was not. However, Justice Stevens' concurring opinion discusses the limited nature of the ruling:

“Lest the Court's narrow holding be lost in its broad dicta, let me restate it here: “We hold that medical necessity is not a defense to manufacturing and distributing marijuana.”

* * *

“The overbroad language of the Court's opinion is especially unfortunate given the importance of showing respect for the sovereign States that comprise our Federal Union. That respect imposes a duty on federal courts, whenever possible, to avoid or minimize conflict between federal and state law, particularly in situations in which the citizens of a State have chosen to “serve as a laboratory” in the trial of “novel social and economic experiments without risk to the rest of the country.

* * *

“I join the Court's judgment of reversal because I agree that a distributor of marijuana does not have a medical necessity defense under the Controlled Substances Act. I do not, however, join the dicta in the Court's opinion.”

United States v. Oakland Cannabis Buyers' Coop., 532 U.S. 483, 502 (2001).

Thus, the discussion the IRS may rely upon is simply dicta.

Like Raich, the Supreme Court did not preempt California law. Nor was Colorado law even discussed. Thus, there can be no reliance on Oakland.

J. In Addition, the Tenth Circuit Erred Because the IRS Does Not Have Jurisdiction to Determine Issues of Supremacy.

The IRS is without jurisdiction to determine the issues of supremacy or preemption absent express delegation by Congress. Wyeth v. Levine, 555 U.S. 555, 577 (2009). “[A]gencies have no special authority to pronounce on preemption absent delegation by Congress . . .” Id. Even if the court concludes that under Alpenglow, the IRS's administrative authority includes jurisdiction to determine supremacy of drug laws, the Court has never “deferred to an agency's conclusion that state law is preempted.” Id. (Emphasis in original). The IRS's conclusion that federal law displaces Colorado marijuana laws is not subject to a presumption of correctness. Nor does it withstand Supreme Court supremacy analysis.

REASONS FOR GRANTING THE PETITION

The Petitioners respectfully urge the Supreme Court to grant the Petition to determine whether or not Congress has displaced state marijuana laws.

As the Tenth Circuit stated in Alpenglow Botanicals, these cases are a result of the “clash between these state and federal policies.” Alpenglow Botanicals, Ltd. Liab. Co. v. United States, 894 F.3d 1187, 1193 (10th Cir. 2018). At the time Alpenglow was decided (2018), there were twenty-eight states that had legalized marijuana, despite the federal law to the contrary. Id. There are now thirty-seven states. This is not an issue that is going away. It is getting worse.

Congress does not appear to be ready to address the issue. It is hiding its head in the sand.

In the meantime, those employed by marijuana industry businesses and their families are being denied the ability to get mortgage loans, health insurance, even checking accounts because the money earned is tainted by this current clash. Many businesses, including insurance companies and banks, will not accept money that can be deemed to be from “criminal enterprise.” It is argued that health care is a “right” — except to those employed by state-legal “drug traffickers”. Those families can perish. These allegations of unlawful conduct reduce these families to “second-class citizenship”. See Speiser v. Randall, 357 U.S. 513, 536 (1958)

The time has come to decide once and for all whether the marijuana legalization by Colorado — and by extension the other thirty-six states — has been superseded and invalidated by federal law. The citizens of these states have a right to know whether their actions taken in accordance with state law are actually federal crimes. As this Court stated in Grayned, we have a right to know what the law is, so we can steer between the lawful and the unlawful. This not knowing is fundamentally unfair. It has to be resolved.

Since Marbury v. Madison, this Court is the branch that determines what the law is. We need to know whether these expressly state-legal actions are federal crimes. Only this honorable Court can resolve the issue. Please grant certiorari.

CONCLUSION

The Court should grant certiorari and determine that Congress did not supersede Colorado marijuana laws with the CSA.

Respectfully submitted,

JAMES D. THORBURN
Counsel of Record
RICHARD A. WALKER
THORBURN WALKER, LLC
5460 S. Quebec St., #310
Greenwood Village, CO 80111
(303) 646-3482
jthorburn@thorburnwalker.com
rwalker@thorburnwalker.com

Counsel for Petitioner

July 25, 2019

FOOTNOTES

1See Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, § 538, 128 Stat. 2130, 2217 (2014); Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, § 542, 129 Stat. 2242, 2332–33 (2015); Consolidated Appropriations Act, 2017, Pub. L. No. 115-31, § 537, 131 Stat. 135, 228 (2017); and Consolidated Appropriations Act, 2018, Pub. L. No. 115-141, §538, 132 Stat. 349, 444-45 (2018). 

2See Alpenglow Botanicals, Ltd. Liab. Co. v. United States, 894 F.3d 1187 (10th Cir. 2018); Patients Mut. Assistance Collective Corp. v. Commissioner, Nos. 29212-11, 30851-12, 14776-14, 2018 Tax Ct. Memo LEXIS 211 (T.C. Dec. 20, 2018); Patients Mut. Assistance Collective Corp. v. Commissioner, Nos. 29212-11, 30851-12, 14776-14, 2018 U.S. Tax Ct. LEXIS 54 (T.C. Nov. 29, 2018); High Desert Relief, Inc. v. United States, 917 F.3d 1170 (10th Cir. 2019); Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner, 128 T.C. 173 (2007); Olive v. Commissioner, 792 F.3d 1146 (9th Cir. 2015.

END FOOTNOTES

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