Tax lawsuit could force reclassification of cannabis to Schedule III

The founder of one marijuana dispensary in California is taking action to prevent the IRS from destroying the entire medical marijuana industry.

Lynette Shaw, the owner and founder of Marin Alliance for Medical Marijuana (MAMM) in Fairfax, California, was stunned when the IRS audited her 2008 and 2009 tax returns and disallowed the foundation's business deductions, then demanded millions of dollars in back taxes.

Now she is planning to fight back by taking the IRS to court, according to The American Independent.

The IRS pursued her under Β§ 280E of the federal tax code, which states that no business deductions will be allowed for companies "trafficking in controlled substances".

Medical marijuana has been legal in California since the passage of Proposition 214 in 1996, but according to federal law, marijuana is classified as a schedule I controlled substance. Schedule I narcotics are not considered to be legitimate for medical use.

"Every dispensary in the nation, past, present and future is dead if this is upheld," Shaw told Marin Independent Journal.

The IRS is asking her to pay "a staggering sum, millions and millions," she said.

The federal criteria for Schedule I substances say that the "drug or other substance has no currently accepted medical use in treatment in the United States." Shaw's case will be based on the premise that those federal criteria do not apply to marijuana because the drug is legal for medical purposes in 15 states, plus Washington, D.C.

If Shaw is successful then marijuana will be reclassified as a Schedule III controlled substance, making tax deductions for dispensaries legal.

Judges may be wary to rule in her favor because reclassification would also affect mandatory minimum sentences for drug convictions.

"This is a very conservative action," she insisted. "We're not trying to end the drug war. We just want reclassification."

-- with earlier reporting by David Ferguson