Charitable Organizations and Marijuana?

In Denial 201615018 (released April 8, 2016 and for which I can only find a Tax Notes link) the IRS denied the charitable organization application of a nonprofit organization organized “to provide a way for your members to collectively and cooperatively cultivate and distribute medical marijuana for medical purposes to qualified patients and primary caregivers who come together to collectively and cooperatively cultivate physician-recommended marijuana.” The IRS denied the organization’s applications on two bases: (1) a charitable organization cannot engage in illegal activities and the distribution of marijuana is illegal under federal law; and (2)  it provided too much private benefit. I will focus only on the first basis.

Ben Leff and I have previously debated the issue of marijuana distribution and tax exemption. Ben contended that under certain circumstances a social welfare organization under 501(c)(4) could form to distribute marijuana and operate in a tax-exempt vehicle. The reason to try to do this instead of operating in a taxable vehicle is that under section 280E federal tax law prohibits marijuana distributors from deducting trade or business expenses. While I disagreed with Ben, neither of us argued that a charitable organization could engage in the distribution of marijuana. Both of us, and Ben should absolutely chime in, believed that the public policy/illegality limitation on charitable organizations is absolutely clear on this front: engaging in an illegal activity as a substantial purpose just does not cut it under charitable tax rules.

After this recent IRS denial though I have had reporters contacting me to find out if this recent ruling was consistent with the law. There is a sentiment among some that because a majority of states have made a legislative decision to legalize marijuana, particularly for medical purposes, it seems as though the states find such activity charitable. Such organizations seem tailor-made the claim would be to relieve pain and suffering, which surely must be a charitable purpose.

While this does seem to me to be a compelling argument in part, I think that maintaining a hard and fast rule that an organization fails to be operated for charitable purposes if it violates the law as more than an insubstantial part of its activities is probably the right place for administering charitable tax law. Given the challenges I have written about before of administering the charitable tax law in the form of a standard rather than a rule, such a simple rule seems common sensical and likely to save a lot of time on the part of both organizations and the IRS. It also probably more likely than not gets things right.

And I say this with some trepidation regarding the primary IRS guidance document that seems to establish this illegality principle. Revenue Ruling 75-384, 1975-2 CB. 204, held that an organization, whose purpose was to promote world peace, disarmament, and nonviolent direct action, qualified as neither charitable nor as a social welfare organization because its methods involved violating local ordinances and engaging in civil disobedience. In that particular context, I have always felt a sense that this ruling had to somehow be wrong. How can working for world peace and disarmament using nonviolent direct action not be charitable. My answer to that frustration is that the rule prohibiting charitable organizations from breaking the law as a not insubstantial part of their activities is simply the right place to strike the balance on an administrable rule. And yet, were the Civil Rights groups engaged in direct nonviolent action not charitable? Argh. UPDATE: I was thinking this morning that my civil rights example may have problems as a charitable organization if it is an organization substantially focused on lobbying, which presumably many were, rather than just focused on education.

Of course, along these lines, it should be noted that the IRS was certainly right when it found the Church of Cannabis charitable. The Religious Freedom Restoration Act made this a foregone conclusion. As long as the organization is operated for religious purposes and uses marijuana solely within that religious context, the IRS simply cannot deny the organization its charitable status. If the organization were to be operated for the real purpose of distributing marijuana for secular purposes, then we have a different case entirely.

In spite of my trepidations mentioned above, I still feel comfortable that the IRS is on firm ground on this denial and that it is the right rule at this moment in time. There is some talk of the Drug Enforcement Agency reconsidering the Schedule 1 status of marijuana. The change proposed does not appear like it would change the fact that it is illegal for federal purposes to distribute marijuana though. It looks like its primary effect would be to make it easier to research the topic of marijuana in universities. This illegality restriction on charities in todays environment can present some real problems for genuinely charitable organizations, such as hospices, that want to allow patients to use marijuana within the context of their charitable operation. Unfortunately, they are likely stuck in a bad spot if they want to maintain their charitable status as until Congress changes the law; it seems that the IRS’s hands are tied on this issue.

UPDATE: A former IRS colleague of mine pointed out that the IRS almost does too much in this denial, and I think he is right. Cultivating and selling drugs simply is not recognized as a charitable purpose. Pharmacies attached to a hospital are charitable, but most other pharmacies simply do not get that status. I think it is still possible to have the illegality discussion here, but to bring a strong case, someone such as a hospice would have to make the claim that they allow their patients to use marijuana to relieve some ailments, i.e. we need a charitable activity in order to put a real case to the test.

10 thoughts on “Charitable Organizations and Marijuana?

  1. Phil-

    Nice piece.

    This seems to be a cut and dry case. But, I am not so sure. The normative position is that since the tax-exemption is a federal tax exemption (I’m guessing the states could approve a charity for state purposes), then the federal rule matters. Here we have a federal rule that says distribution of marijuana is illegal. The fact that states have changed their policy is unimportant.

    With that said, I am not sure that it is federal policy that marijuana is illegal. The IRS’s position is different than Justice’s position on the same matter. In,, Justice relies on the state for determination of legality of marijuana. So, we have one executive agency with a different enforcement/interpretation than another agency. That is the same craziness that happened in same-sex marriage! That point is the most troubling to me.

    Liked by 1 person

    1. Thanks David. This Federal/State clash along with discretion to administer the law fascinates me. And I think the same-sex marriage comparison is a good one. I would not say that the IRS’s position is different from the DOJs though. The gist of the DOJ position is as follows: “In a new memorandum outlining the policy, the Department makes clear that marijuana remains an illegal drug under the Controlled Substances Act and that federal prosecutors will continue to aggressively enforce this statute.” Thus, while they choose to exercise prosecutorial discretion, they do not, and cannot say that it is not illegal. The IRS could not make that conclusion either.

      Liked by 1 person

      1. In same-sex marriage, DOJ said that DOMA was unconstitutional which is qualitatively different than this. But, a blanket statement saying that DOJ will exercise prosecutorial discretion in legal marijuana states, seems to be the functional equivalent.

        Liked by 1 person

  2. Yeah, the illegality thing is interesting. I mean, it makes intuitive sense, and it’s been blessed by the Supreme Court, but I feel like the IRS has broadened it beyond what’s actually tenable. And that broadening isn’t stuck solely in the 1970s protest movements—as recently as three years ago, it denied tax-exempt status to Principle Voices of Polygamy. Partly, it said that PVP’s goals would require legislative action, ergo it was going to have to do too much lobbying (though that was prospective; I’m not entirely convinced). But the IRS spent the vast majority of the PLR explaining that polygamy was illegal, and advocating for decriminalized polygamy, or, for that matter, helping polygamists was, while not illegal, still under the illegality rubric, and sufficient for denying tax-exempt status.

    I think I’m fine with denying tax-exempt status to groups that engage in illegal activities (although Ben does make a strong normative case that it’s not a cut-and-dried issue), but I’m uncomfortable when the line bleeds from actually engaging in illegal activities to engaging with those who participate in illegal activities.

    Liked by 1 person

    1. Thanks Sam. The example I have thought to write about is actually the Mysteryboy case where a convicted sex offender created a charitable organization and sought charitable tax status in order to argue that sex with children should be OK. The IRS denied him on a number of grounds and went to litigation with him. I don’t remember, but I don’t believe it argued denial on public policy grounds. However the judge absolutely held in favor of the IRS for the denial explicitly on public policy grounds that advocating for such acts to be so heinous that it violated public policy. I have some trepidation on utilizing public policy on these lines. I think the judge focused on illegality, but there was nothing exactly illegal about putting the ideas out there, but not engaging, for all we know in any illegal acts. I think the denial was correct on other grounds and those would have been sufficient. I will have to take a look at the Principle Voices of Polygamy denial. I happened to have missed that one.

      Liked by 1 person

      1. That’s right, I forgot about Mysteryboy. That’s kind of the perfect storm for making the line bleed a little further than where it originally was. There’s nothing about Mysteryboy that isn’t utterly dispicable but, at the same time, I don’t believe it actually intended to act illegally (though I guess I’d have to refresh myself on the case). So the organization is indefensible, but it probably doesn’t actually violate public policy in the way that the private schools did—it may be advocating stuff contrary to public policy, but it doesn’t actually engage in the practices, unlike schools that wouldn’t allow black students to enter.

        I mean, it’s a tough question, and I look forward to reading your take on it.

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