Speidell v. United States

978 F.3d 731

Eric D. SPEIDELL, Petitioner - Appellant,

v.UNITED STATES of America, THROUGH its agency the INTERNAL REVENUE SERVICE, Respondent - Appellee.

The Green Solution Retail, Inc., a Colorado corporation; Green Solution, LLC, a Colorado limited liability company; Infuzionz, LLC, a Colorado limited liability company; Green Earth Wellness, Inc., a dissolved Colorado corporation, Plaintiffs - Appellants,

v.United States of America, through its agency the Internal Revenue Service, Defendant - Appellee.

Green Solution, LLC, a Colorado limited liability company; Green Earth Wellness, Inc., a dissolved Colorado limited liability Company; TGS Management, LLC, a Colorado limited liability company; S-Type Armored, LLC, a Colorado limited liability company; IVXX Infuzionz, LLC, a Colorado limited liability company, Petitioners - Appellants,

v.United States of America, through its agency the Internal Revenue Service, Respondent - Appellee.

Medicinal Wellness Center, LLC, a Colorado limited liability company; Medicinal Oasis, LLC, a Colorado limited liability company; Michael Aragon, an individual; Judy Aragon, an individual; Steven Hickox, an individual, Petitioners - Appellants,

v.United States of America, through its agency the Internal Revenue Service, Respondent - Appellee.

No. 19-1214

No. 19-1215

No. 19-1216

Nos. 19-1217

19-1218

United States Court of Appeals, Tenth Circuit.

FILED October 20, 2020

James D. Thorburn (Richard Walker, with him on the briefs), Thorburn Walker LLC, Greenwood Village, Colorado, appearing for Appellants.

Nathaniel S. Pollock, Attorney, United States Department of Justice, Tax Division, Washington DC (Richard E. Zuckerman, Principal Deputy Assistant Attorney General, and Travis A. Greaves, Deputy Assistant Attorney General, United States Department of Justice, Washington, DC; Gilbert S. Rothenberg and Michael J. Haungs, Attorneys, United States Department of Justice, Tax Division, Washington, DC; and Jason R. Dunn, United States Attorney, Office of the United States Attorney for the District of Colorado, Denver, Colorado, with him on the briefs), appearing for Appellee.

Before BRISCOE, MORITZ, and CARSON, Circuit Judges.

BRISCOE, Circuit Judge.

This case examines the power of the Appellee, the Internal Revenue Service ("IRS" or "Agency"), to enforce a provision in the tax code disallowing deductions for business activities concerning controlled substances which are illegal under federal law. That provision states as follows:

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 Appellants are affiliated with marijuana dispensaries in Colorado, where that line of business is legal under state law. This discrepancy between federal and state law gives rise to all of the issues in this case.

The Appellants object to the IRS's attempts to collect and audit information about their marijuana-related business practices. The Appellants argue that (1) the IRS investigation is quasi-criminal, exceeds the Agency's authority, and is being conducted for an illegitimate purpose; (2) even if the investigation had a legitimate purpose, the information sought is irrelevant; and (3) the investigation is in bad faith and constitutes an abuse of process because (a) the IRS may share the information collected with federal law enforcement agents, (b) the IRS summonses are overly broad and require the creation of new reports, (c) the dispensaries have a reasonable expectation of privacy in the data they tender to state regulatory authorities, and (d) those state authorities cannot provide the requested information without violating Colorado law. The Appellants further contend that the district court applied the wrong standard of review when it denied motions to quash and granted motions to enforce the summonses.

These arguments are familiar to us. Over the last several years, multiple Colorado marijuana dispensaries have challenged the IRS's ability to investigate and impose tax consequences upon them. Those dispensaries have been represented by the same attorneys that are representing the dispensaries fighting the summonses in this case. The dispensaries have lost every time. See Standing Akimbo, LLC v. United States , 955 F.3d 1146, 1150–69 (10th Cir. 2020) ; High Desert Relief, Inc. v. United States , 917 F.3d 1170, 1174–98 (10th Cir. 2019) ; Feinberg v. Comm'r of Internal Revenue , 916 F.3d 1330, 1331–38 (10th Cir. 2019) ; Alpenglow Botanicals, LLC v. United States , 894 F.3d 1187, 1192–1206 (10th Cir. 2018) ; Green Sol. Retail, Inc. v. United States , 855 F.3d 1111, 1112–21 (10th Cir. 2017). The same result is warranted here. We affirm the district court's rulings in favor of the IRS. Because Standing Akimbo summarizes much of the relevant case law and is directly on point for almost every argument raised by the Appellants, this opinion liberally quotes that decision from earlier this year.

I. Background

This case involves two sets of Appellants. The first set encompasses Green Earth Wellness, Inc.; Green Solution, LLC; Infuzionz, LLC; IVXX Infuzionz, LLC; S-Type Armored, LLC; TGS Management, LLC; The Green Solution Retail, Inc.; and Eric Speidell (collectively "the Green Solution parties"). Speidell is believed to be (or believed to have been) an owner of some of the Green Solution entities. The Green Solution parties "are engaged in the retail sale of marijuana and marijuana-related products," and advertise themselves as "Colorado's #1 Marijuana Dispensary." Aplt. App., Vol. 1 at 71; id. , Vol. 2 at 60.

Pursuant to § 280E, the IRS is auditing the Green Solution parties' tax returns for 2013 and 2014. Because some of the Green Solution businesses are pass-through entities for tax purposes, the IRS's investigation includes Speidell's individual tax returns. The IRS requested information and sent summonses to the Green Solution parties, but only received partial responses that were insufficient "to substantiate the figures shown on their tax returns." Id. , Vol. 1 at 72–73; id. , Vol. 2 at 60, 81–84. Among other things, the Green Solution parties did not produce information reported to Colorado's Marijuana Enforcement Division ("MED"), including information from MED's Marijuana Enforcement Tracking Reporting and Compliance ("METRC") system. The IRS contends that this information "is particularly valuable during an audit," because "[i]n Colorado, marijuana growers and dispensaries must account for all marijuana plants and products" through METRC, thus potentially confirming "whether a marijuana business properly reported its gross receipts and allowed deductions for cost of goods sold." Id. , Vol. 2 at 61; id. , Vol. 9 at 184. After unsuccessfully seeking such information from the Green Solution parties, the IRS served summonses on MED itself. The IRS also served summonses on the Green Solution parties' financial institutions.

The Green Solution parties petitioned to quash the IRS summonses. The IRS moved to dismiss the petitions to quash and also moved to enforce the summonses. In a series of orders, the district court denied the Green Solution parties' motions to quash and granted the IRS's motions to enforce. Among other things, the district court held that (1) the IRS had a legitimate purpose in issuing the summonses because the Agency has the authority to determine whether a taxpayer is trafficking in a controlled substance; (2) the information sought was not already in the IRS's possession and was relevant to determining the Green Solution parties' tax obligations; (3) the IRS followed the required administrative steps; and (4) the Green Solution parties did not show an abuse of process or bad faith because there was no proof the IRS was seeking to place them in criminal jeopardy. Several of the Green Solution parties filed a motion to alter or amend, which the district court denied as well.

The district court denied Speidell's individual motion to quash on different grounds. The district court observed that the IRS issued summonses regarding Speidell to MED on June 7, 2016, but Speidell did not file his petition to quash until July 29, 2016, missing the 20-day deadline set by 26 U.S.C. § 7609(b)(2)(A). The district court determined that Speidell did not contradict the IRS agent's declaration demonstrating service of the summonses. The district court thus dismissed Speidell's petition to quash for lack of subject matter jurisdiction. The district court went on to say that it was granting the IRS's motion to dismiss the petition and enforcing the summonses to MED.

The second set of Appellants encompasses Medicinal Oasis, LLC; Medicinal Wellness Center, LLC; Judy Aragon; Michael Aragon; and Steven Hickox (collectively "the Medicinal Wellness parties"). The Aragons and Hickox are believed to be (or believed to have been) owners of some of the Medicinal Wellness entities. The Medicinal Wellness parties include a marijuana retail dispensary, "marijuana grow facilities," and a cannabis "superstore" in Colorado. Id. , Vol. 6 at 69; id. , Vol. 9 at 182. The Medicinal Wellness parties advertise themselves as "full service" with the "largest selection of cannabis in the world!" Id. , Vol. 6 at 69; id. , Vol. 9 at 182.

Pursuant to § 280E, the IRS is auditing the Medicinal Wellness parties' tax returns from 2014 through 2016. Because some of the Medicinal Wellness businesses are pass-through entities, the IRS's investigation includes the personal tax returns of the Aragons and Hickox. The IRS sent Information Document Requests ("IDRs") or summonses to the Medicinal Wellness parties, but only received partial responses...