Green Solution Retail, Inc. v. United States

• Decision Date: 02 May 2017
• Docket Number: No. 16-1281,16-1281
• Citation: 855 F.3d 1111
• Parties: The GREEN SOLUTION RETAIL, INC., a Colorado corporation; Kyle Speidell, Plaintiffs–Appellants, v. UNITED STATES of America; Internal Revenue Service; John Koskinen, Internal Revenue Service Commissioner; David Hewlett, in his official capacity, Auditor for the Internal Revenue Service, Defendants–Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

855 F.3d 1111

The GREEN SOLUTION RETAIL, INC., a Colorado corporation; Kyle Speidell, Plaintiffs–Appellants,

v.UNITED STATES of America; Internal Revenue Service; John Koskinen, Internal Revenue Service Commissioner; David Hewlett,^* in his official capacity, Auditor for the Internal Revenue Service, Defendants–Appellees.

No. 16-1281

United States Court of Appeals, Tenth Circuit.

FILED May 2, 2017

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

Patrick J. Urda, Attorney, Tax Division (Caroline D. Ciraolo, Principal Deputy Assistant Attorney General; Diana L. Erbsen, Deputy Assistant Attorney General; Gilbert S. Rothenberg, Attorney; Richard Farber, Attorney; and Robert C. Troyer, Acting United States Attorney, with him on the brief), United States Department of Justice, Washington, D.C., for Defendants–Appellees.

Before HARTZ, MATHESON, and McHUGH, Circuit Judges.

McHUGH, Circuit Judge.

I. INTRODUCTION

The Green Solution Retail, Inc. and one of its owners, Kyle Speidell (collectively, Green Solution), sued to enjoin the Internal Revenue Service (IRS) and related parties from investigating Green Solution's business records. The district court dismissed Green Solution's complaint for lack of subject matter jurisdiction, concluding the Anti–Injunction Act and the Declaratory Judgment Act bar this action. The court relied on our decision in Lowrie v. United States , where we held that lawsuits challenging "activities leading up to and culminating in" an assessment are barred. 824 F.2d 827, 830 (10th Cir. 1987). On appeal, Green Solution contends the district court had jurisdiction to hear its claims because the Supreme Court has implicitly overruled Lowrie in its recent decision Direct Marketing Association v. Brohl , ––– U.S. ––––, 135 S.Ct. 1124, 191 L.Ed.2d 97 (2015). We conclude we are still bound by Lowrie and affirm.

II. BACKGROUND

Green Solution is a Colorado-based marijuana dispensary with several locations across the state. The IRS is currently auditing Green Solution's tax returns for the 2013 and 2014 tax years to determine whether it should apply 26 U.S.C. § 280E (I.R.C. § 280E ), which forbids federal tax deductions and credits to companies trafficking in a "controlled substance" as defined by the Controlled Substances Act (CSA). The IRS made initial findings that Green Solution trafficked in a controlled substance and is criminally culpable under the CSA. The IRS then requested that Green Solution turn over documents and answer questions related to whether Green Solution is disqualified from taking credits and deductions under § 280E.¹ It is undisputed the IRS has not made an assessment or begun collection proceedings.

Green Solution sued the IRS and related parties in the United States District Court for the District of Colorado, seeking to enjoin the IRS from investigating whether it trafficked in a controlled substance in violation of federal law, and seeking a declaratory judgment that the IRS is acting outside its statutory authority when it makes findings that a taxpayer has trafficked in a controlled substance. Green Solution claimed it would suffer irreparable harm if the IRS were allowed to continue its investigation because a denial of deductions would (1) deprive it of income, (2) constitute a penalty that would effect a forfeiture of all of its income and capital, and (3) violate its Fifth Amendment rights.

The IRS moved to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). According to the IRS, Green Solution's claim for injunctive relief is foreclosed by the Anti–Injunction Act (AIA), which bars suits "for the purpose of restraining the assessment or collection of any tax." I.R.C. § 7421(a). Similarly, the IRS asserted that the claim for declaratory relief violated the Declaratory Judgment Act (DJA), which prohibits declaratory judgments in certain federal tax matters. 28 U.S.C. § 2201.

The district court agreed with the IRS that the AIA and DJA barred Green Solution's claims, relying on Lowrie v. United States , where we held that the AIA applies "not only to the actual assessment or collection of a tax, but [also] to activities leading up to, and culminating in, such assessment and collection." 824 F.2d 827, 830 (10th Cir. 1987). The court further concluded that Green Solution's request for declaratory relief on the ground the IRS was acting outside of its authority was similarly barred by the DJA. Accordingly, the court dismissed the action with prejudice for lack of subject matter jurisdiction. Green Solution timely appealed. We have jurisdiction under 28 U.S.C. § 1291.

III. DISCUSSION

The Controlled Substances Act (CSA) makes it unlawful to knowingly or intentionally "manufacture, distribute, or dispense ... a controlled substance." 21 U.S.C. § 841(a)(1). Despite its legalization in twenty-eight states (and Washington, D.C.) for medical use and in eight states (and Washington, D.C.) for recreational use, marijuana is still classified as a federal "controlled substance" under schedule I of the CSA. Id. § 812(c)(10); 21 C.F.R. § 1308.11 (Schedule I); see also Denial of Petition to Initiate Proceedings to Reschedule Marijuana, 81 Fed. Reg. 53,688, 53,688 (Aug. 12, 2016) ("[M]arijuana continues to meet the criteria for Schedule I."). Schedule I drugs have "a high potential for abuse" and are classified as those for which there is "no currently accepted medical use in treatment in the United States." 21 U.S.C. § 812(b)(1)(A)–(B).

Although still illegal federally, the Justice Department has declined to enforce § 841 when a person or company buys or sells marijuana in accordance with state law. In 2015 and 2016, Congress reinforced this arrangement by defunding the Justice Department's prosecution of the exchange of medical marijuana where it is legal under state law. 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); see also United States v. McIntosh , 833 F.3d 1163, 1169–70 (9th Cir. 2016).

But while "today prosecutors will almost always overlook federal marijuana distribution crimes in Colorado," it does not mean the "tax man" is willing to turn a blind eye. Feinberg v. C.I.R. , 808 F.3d 813, 814 (10th Cir. 2015). Section 280E of the Internal Revenue Code provides:

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 ... 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....

As discussed, marijuana is still a controlled substance under the CSA, and the IRS has pursued numerous marijuana dispensaries in Colorado and elsewhere to recoup unlawful business deductions. See, e.g. , Feinberg , 808 F.3d at 814 ; Olive v. C.I.R. , 792 F.3d 1146, 1147 (9th Cir. 2015).

Green Solution's lawsuit seeks to enjoin the IRS from obtaining information related to its initial findings that Green Solution is dispensing marijuana in violation of the CSA and is thus ineligible for deductions under § 280E. But under the AIA, a litigant may not bring a "suit for the purpose of restraining the assessment or collection of any tax ... in any court by any person, whether or not such person is the person against whom such tax was assessed." I.R.C. § 7421(a). The Supreme Court has long held the AIA is jurisdictional.² See Enochs v. Williams Packing & Navigation Co. , 370 U.S. 1, 5, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962) (AIA's purpose "is to withdraw jurisdiction from the state and federal courts to entertain suits seeking injunctions prohibiting the collection of federal taxes"); see also Jefferson Cty. v. Acker , 527 U.S. 423, 434–35, 119 S.Ct. 2069, 144 L.Ed.2d 408 (1999). Thus, if the AIA applies, we may not reach the merits of Green Solution's claims.

Nor may Green Solution make an end-run around the AIA through its request for declaratory relief. The DJA allows a federal district court to grant declaratory relief "[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes ..." 28 U.S.C. § 2201 (emphasis added). The DJA's tax exception is "coterminous" with the AIA's prohibition. Cohen v. United States , 650 F.3d 717, 730–31 (D.C. Cir. 2011) (en banc). In other words, "with respect to Federal taxes" means "restraining the assessment or collection of any tax." Id. at 727.

On appeal, Green Solution first contends that a suit to enjoin an investigation into whether a business trafficked in a controlled substance is a step removed from a suit to "restrain[ ] the assessment or collection of any tax" and is accordingly not precluded by the AIA.³ Although Green Solution acknowledges that this Circuit in Lowrie held that the AIA bars "activities leading up to, and culminating in assessment," it contends the Supreme Court in Direct Marketing Ass'n v. Brohl , ––– U.S. ––––, 135 S.Ct. 1124, 191 L.Ed.2d 97 (2015), implicitly overruled Lowrie .⁴ Green Solution next argues the AIA does not preclude this suit, even if Lowrie controls, because (1) the IRS is acting outside its authority by investigating whether Green Solution violated criminal law, and (2) section 280E is a penalty and not a "tax" subject to the AIA. We reject Green Solution's arguments and affirm the district court's dismissal of the action.

A. Whether Direct MarketingImplicitly Overruled Lowrie

Green Solution asks us to depart from our holding in Lowrie that the AIA bars "activities leading up to, and culminating in, ... assessment," Lowrie , 824 F.2d at 830, in favor of a holding that the AIA has no application unless the lawsuit restrains—meaning in some degree stops—the assessment or collection of a tax. But "we are bound by the...