Alpenglow Botanicals, LLC v. United States
| Decision Date | 01 December 2016 |
| Docket Number | Case No. 16-cv-00258-RM-CBS |
| Parties | ALPENGLOW BOTANICALS, LLC, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — District of Colorado |
OPINION AND ORDER
On February 3, 2016, plaintiffs Alpenglow Botanicals, LLC ("Alpenglow"), Charles Williams, and Justin Williams (collectively, "plaintiffs") filed a Complaint against defendant the United States of America ("defendant"), seeking declaratory, injunctive, and monetary relief so as to overturn the Internal Revenue Service's ("IRS") decision to deny deductions to income obtained during the course of plaintiffs' business for the tax years 2010, 2011, and 2012. (ECF No. 1.) More specifically, plaintiffs raised the following claims: (1) the IRS went beyond its jurisdiction in administratively determining that plaintiffs were not entitled to certain deductions pursuant to 26 U.S.C. § 280E ("§ 280E"); (2) Congress exceeded its power under the Sixteenth Amendment in passing § 280E; (3) the IRS violated the Fifth Amendment in taking evidence from plaintiffs without informing them that they were under investigation for violating the Controlled Substances Act ("the CSA"); and (4) § 280E violates the Eighth Amendment's prohibition on excessive fines and penalties. (Id.)
On April 19, 2016, defendant filed a motion to dismiss the Complaint ("the motion to dismiss"), pursuant to Fed.R.Civ.P. 12(b)(1) ("Rule 12(b)(1)") and Fed.R.Civ.P. 12(b)(6) ("Rule 12(b)(6)"). (ECF No. 11.) Defendant asserts that the IRS properly determined that plaintiffs were not entitled to deductions pursuant to § 280E, plaintiffs' claims for relief are meritless, and this Court lacks subject matter jurisdiction to issue an injunction. (Id.) Plaintiffs have responded in opposition to the motion to dismiss (ECF No. 12), and defendant has filed a reply (ECF No. 17). Plaintiffs then requested oral argument as to the motion to dismiss (ECF No. 18), which the Court granted (ECF No. 23), holding a hearing on June 23, 2016, and taking the motion to dismiss under advisement (ECF No. 29).
Just prior to the oral argument hearing, plaintiffs filed a Motion for Order to Certify Question of Constitutionality of Colorado's Medical Marijuana Laws to Colorado State Attorney General Pursuant to 28 U.S.C. § 2403(b) () (ECF No. 26). Plaintiffs assert that this Court should certify to the Colorado State Attorney General that the constitutionality of Colorado's medical marijuana laws has been questioned. (Id.) Defendant has responded to the motion to certify (ECF No. 33), and plaintiffs have filed a reply (ECF No. 35). At the oral argument hearing, the Court also took under advisement the motion to certify. (ECF No. 29.)
Following the oral argument hearing, plaintiffs filed a Motion to Amend Complaint ("the motion to amend"), by which plaintiffs sought to allege further detail as to the specific deductions that the IRS denied. (See ECF No. 30; ECF No. 32-1 at ¶ 11.) Plaintiffs also sought to delete any suggestion that the IRS was required to provide plaintiffs with Miranda warnings prior to taking evidence from them. (ECF No. 32-1 at ¶ 22.) Defendant has filed a response to the motion to amend (ECF No. 34), and plaintiffs have filed a reply (ECF No. 37).
Finally, on August 25, 2016, plaintiffs filed a Motion for Partial Summary Judgment Refund Claim ("the motion for summary judgment"). (ECF No. 40.) Plaintiffs assert that they are entitled to summary judgment because the IRS has not produced any evidence that plaintiffs trafficked in a controlled substance, plaintiffs properly capitalized business expenses as costs of goods sold, the IRS does not have authority to investigate violations of criminal statutes, and the Sixteenth Amendment requires that plaintiffs' ordinary and necessary business expenses be removed from their income. (Id.) Defendant has filed a response to the motion for summary judgment, asking that the same be denied on the merits, denied without prejudice pending resolution of the motion to dismiss, or denied without prejudice so that defendant may engage in discovery. (ECF No. 42). Plaintiffs have filed a reply. (ECF No. 46.)
Motions to dismiss for lack of subject matter jurisdiction take two principal forms: (1) a facial attack, or (2) a factual attack on the allegations in the complaint. Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995). Here, defendant facially attacks the sufficiency of the allegations in the Complaint. (See ECF No. 11 at 9-12.) As a result, this Court accepts the allegations in the Complaint as true for purposes of any jurisdictional analysis. Holt, 46 F.3d at 1002.
In evaluating a motion to dismiss under Rule 12(b)(6), a court must accept as true all well-pleaded factual allegations in the complaint, view those allegations in the light most favorable to the non-moving party, and draw all reasonable inferences in the plaintiff's favor. Brokers' Choice of America, Inc. v. NBC Universal, Inc., 757 F.3d 1125, 1135-36 (10th Cir. 2014); Mink v. Knox, 613 F.3d 995, 1000 (10th Cir. 2010). In the complaint, the plaintiff must allege a "plausible" entitlement to relief. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-556, 127 S.Ct. 1955 (2007).Conclusory allegations, however, are insufficient. Cory v. Allstate Ins., 583 F.3d 1240, 1244 (10th Cir. 2009). A complaint warrants dismissal if it fails "in toto to render [plaintiff's] entitlement to relief plausible." Twombly, 550 U.S. at 569 n.14.
The facts as alleged in the Complaint are as follows. Alpenglow is a Colorado company that does business in the State. (ECF No. 1 at ¶ 1.) Charles Williams and Justin Williams are owner/operators of Alpenglow. (Id. at ¶¶ 2-3.) Alpenglow is a "pass through" entity, which means that income and tax liability pass through to its owners. (Id. at ¶ 7.) Alpenglow filed federal and State tax returns for the years 2010 through 2012. (Id. at ¶ 6.) Alpenglow's tax liability for the years 2010 through 2012 passed through to Charles Williams and Justin Williams. (Id. at ¶ 8.)
Alpenglow's tax returns for the years 2010 through 2012 were audited by the IRS. (Id. at ¶ 9.) As a result of the audit process, the IRS issued a Form 921 on December 21, 2014, denying deductions and increasing the income of Alpenglow. The deductions were denied because the IRS administratively determined that Alpenglow committed the crime of trafficking in a controlled substance in violation of the CSA. (Id.) Charles Williams and Justin Williams paid the increased tax liability under protest, and filed claims for refunds. (Id. at ¶¶ 12-13.) Thereafter, the IRS either denied the claims for refunds or did not respond to the claims within 180 days, which acted as a denial. (Id. at ¶ 13.)
In the Amended Complaint, plaintiffs allege that the deductions denied were: rent for where the business was conducted; costs of labor; compensation of officers; advertizing; taxes and licenses for doing business; depreciation; and other wages and salaries. (ECF No. 32-1 at ¶ 11.)
As an initial matter, the Court explains the order in which it will address the pending motions. The motion to amend (ECF No. 30) is GRANTED. The changes made in the Amended Complaint provide greater detail on the type of expenses for which plaintiffs sought a deduction, as well as (sensibly) removing any suggestion that the IRS was required to read Miranda warnings to plaintiffs. There is no reason why the complaint should not be amended to make these changes. Whether the complaint as amended remains subject to dismissal is a matter that is best left while resolving the motion to dismiss, which the Court will not require defendant to re-file simply because the complaint has been amended.
In their reply in support of the motion for summary judgment, plaintiffs assert that resolution of the motion to dismiss should be subsumed into resolution of the motion for summary judgment because the two motions have the same subject matter. (ECF No. 46 at 1.) The Court does not entirely agree that the motion to dismiss and motion for summary judgment involve the same subject matter. The motion for summary judgment seeks summary judgment with respect to: (1) plaintiffs' Sixteenth Amendment claim that its business expense deductions are constitutionally required; (2) plaintiffs' claim that the IRS does not have authority to investigate whether a criminal statute has been violated; (3) plaintiffs' treatment of costs of goods sold under 26 U.S.C. § 263A being proper; and (4) defendant's failure to produce any evidence showing that § 280E applies to plaintiffs. (ECF No. 40 at 10-19.)
The first two matters are claims brought in the Complaint (and Amended Complaint) and were briefed in the motion to dismiss. Thus, that subject matter is the same. The latter two matters, though, were not mentioned in the Complaint (or Amended Complaint) and were not briefed in themotion to dismiss. They are entirely new subjects. Thus, where necessary, the Court will address the latter two matters separately. As for the first two matters, they are legal questions, and the parties' arguments with respect thereto are largely the same. To the extent any additional arguments are raised in the motion for summary judgment, the Court will consider those arguments in ruling on the claims. As a result, the Court will address the motion to dismiss first, then any claims remaining from the motion for summary judgment, followed last by the motion to certify.
In the motion to dismiss, defendant seeks dismissal of all claims in this action, as well as plaintiffs' request for injunctive relief. The Court will address the substantive claims first.
Depending on the perspective of plaintiffs or defendant, this question could be re-phrased as either: does the IRS have authority to perform a criminal investigation,...
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