ALPENGLOW BOTANICALS, LLC, a Colorado Limited Liability Company; CHARLES WILLIAMS; JUSTIN WILLIAMS, Plaintiffs - Appellants,
UNITED STATES OF AMERICA, Defendant-Appellee.
from the United States District Court for the District of
Colorado (D.C. No. 1:16-CV-00258-RM-CBS)
D. Thorburn (Richard Walker with him on the briefs), Thorburn
Walker LLC, Greenwood Village, Colorado, for Plaintiffs -
Patrick J. Urda, Attorney, Tax Division (Gilbert S.
Rothenberg and Michael J. Haungs, Attorneys, Tax Division,
and Counsel Robert C. Troyer, United States Attorney, with
him on the brief), Department of Justice, Washington, D.C.,
for Defendant - Appellee.
HARTZ, MURPHY, and McHUGH, Circuit Judges.
McHUGH, Circuit Judge.
Alpenglow Botanicals, LLC ("Alpenglow") sued the
Internal Revenue Service ("IRS") for a tax refund,
alleging the IRS exceeded its statutory and constitutional
authority by denying Alpenglow's business tax deductions
under 26 U.S.C. § 280E. The district court dismissed
Alpenglow's suit under Federal Rule of Civil Procedure
12(b)(6) for failure to state a claim upon which relief could
be granted, and denied Alpenglow's subsequent motion
under Federal Rule of Civil Procedure 59(e) to reconsider the
judgment. Exercising jurisdiction under 28 U.S.C. §
1291, we affirm.
twenty-eight states and Washington, D.C. have legalized
medical or recreational marijuana use, the federal government
classifies marijuana as a "controlled substance"
under schedule I of the Controlled Substances Act
("CSA"). Green Sol. Retail, Inc. v. United
States, 855 F.3d 1111, 1113 (10th Cir. 2017);
see 21 U.S.C. § 812(c), Schedule I(c)(10); 21
C.F.R. § 1308.11(d)(23). The CSA makes it unlawful to
knowingly or intentionally "manufacture, distribute, or
dispense . . . a controlled substance." 21 U.S.C. §
841(a)(1). Under former President Obama, the Justice
Department had declined to enforce § 841(a)(1) against
marijuana businesses acting in accordance with state law,
the IRS has shown no similar inclination to "overlook
federal marijuana distribution crimes." Feinberg v.
Comm'r, 808 F.3d 813, 814 (10th Cir. 2015). Instead,
the IRS consistently denies business deductions to
state-sanctioned marijuana dispensaries under 26 U.S.C.
§ 280E,  which prohibits any "deduction or
credit" for any business that "consists of
trafficking in controlled substances (within the meaning of .
. . the Controlled Substances Act)." E.g.,
id.; Olive v. Comm'r, 792 F.3d 1146,
1147 (9th Cir. 2015).
appeal is the product of the clash between these state and
federal policies. Alpenglow is a medical marijuana business
owned and operated by Charles Williams and Justin Williams,
doing business legally in Colorado. See Alpenglow
Botanicals, LLC v. United States (Alpenglow I), No.
16-cv-00258-RM-CBS, 2016 WL 7856477, at *2 (D. Colo. 2016)
(unpublished). After an audit of Alpenglow's 2010, 2011,
and 2012 tax returns, however, the IRS issued a Notice of
Deficiency concluding that Alpenglow had "committed
the crime of trafficking in a controlled substance in
violation of the CSA" and denying a variety of
Alpenglow's claimed business deductions under §
280E. Id. Alpenglow's income and resultant tax
liability were increased based on the denial of these
deductions. Because Alpenglow is a "pass through"
entity, the increased tax liability was passed on to Charles
Williams and Justin Williams. As a result, Charles Williams
owed the IRS an additional $24, 133 in taxes and Justin
Williams owed an additional $28, 961. The two men paid the
increased tax liability under protest and filed for a refund,
which the IRS denied. Id.
then filed a complaint in the United States District Court
for the District of Colorado seeking to overturn the
IRS's decision. Id. at *1. The United States
filed a Motion to Dismiss the Complaint under Federal Rule of
Civil Procedure 12(b)(6) for failure to state a claim upon
which relief can be granted ("Motion to Dismiss").
In its Motion to Dismiss, the United States identified four
claims raised by Alpenglow, three of which are relevant to
this appeal: (1) the IRS does not have the authority to
disallow deductions under 26 U.S.C. § 280E without a
criminal conviction; (2) § 280E violates the Sixteenth
Amendment's definition of gross income; and (3) §
280E is an excessive fine that violates the Eighth
oral argument on the Motion to Dismiss, Alpenglow filed a
Motion to Amend the Complaint "to allege further detail
as to the specific deductions that the IRS denied."
Id. The Amended Complaint alleged "the
deductions denied were: rent for where the business was
conducted; costs of labor; compensation of officers;
advertising; taxes and licenses for doing business;
depreciation; and other wages and salaries."
Id. at *2. Alpenglow also filed a Motion for Partial
Summary Judgment Refund Claim ("Motion for Partial
Summary Judgment"). In addition to the claims identified
in the Motion to Dismiss, Alpenglow's Motion for Partial
Summary Judgment asserted two new claims: (1) the IRS's
decision to apply § 280E was arbitrary because it had no
evidence Alpenglow trafficked in a controlled substance; and
(2) the IRS incorrectly disallowed exclusions for
Alpenglow's costs of goods sold under 26 U.S.C. §
263A. In its December 1, 2016 Opinion and Order,
the district court granted Alpenglow's Motion to Amend
the Complaint, granted the United States' Motion to
Dismiss, and denied Alpenglow's Motion for Partial
Summary Judgment ("Rule 12(b)(6)
Dismissal"). Id. at *8.
days after the entry of final judgment, Alpenglow filed a
Motion to Alter or Amend the Judgment pursuant to Federal
Rule of Civil Procedure 59(e) ("Rule 59(e)
Motion"). Alpenglow Botanicals, LLC v. United States
(Alpenglow II), No. 16-cv-00258-RM-CBS, 2017 WL 1545659,
at *1 (D. Colo. 2017) (unpublished). The motion contained a
proposed Second Amended Complaint and asserted that the
district court "misapprehended controlling law" by
failing to consider the three new claims Alpenglow raised as
a request to amend the complaint-specifically, that (1) the
IRS improperly disallowed costs of goods sold; (2) the IRS
produced no evidence of trafficking; and (3) § 280E
violates the Eighth Amendment. Id. Alpenglow argued
the district court should grant leave to amend because the
United States would not be prejudiced by allowing Alpenglow
to file the Second Amended Complaint. Id. The
district court denied the motion, concluding it was not
required to consider arguments not alleged in the Amended
Complaint and Alpenglow was not entitled to amend because the
request was untimely. Id. at *1-3.
appeals both the Rule 12(b)(6) Dismissal and the court's
denial of its Rule 59(e) Motion. We address each order in
turn, beginning with the Rule 12(b)(6) Dismissal.
Federal Rule of Civil Procedure 12(b)(6) Dismissal
review a district court's dismissal under Federal Rule of
Civil Procedure 12(b)(6) de novo." Khalik v. United
Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012).
"Under Federal Rule of Civil Procedure 8(a)(2), a
pleading must contain 'a short and plain statement of the
claim showing that the pleader is entitled to
relief.'" Id. While "the pleading
standard Rule 8 announces does not require 'detailed
factual allegations, '" Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007)), the "complaint
must contain enough allegations of fact, taken as true,
'to state a claim to relief that is plausible on its
face, '" Khalik, 671 F.3d at 1190 (quoting
Twombly, 550 U.S. at 570). "A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged."
Iqbal, 556 U.S. at 678.
the Twombly/Iqbal pleading standard, courts
take a two-prong approach to evaluating the sufficiency of a
complaint. Iqbal, 556 U.S. at 678-79. The first
prong of the test requires the court to identify which
pleadings "are not entitled to the assumption of
truth." Id. at 679. This includes "legal
conclusions" as well as "[t]hreadbare recitals of
the elements of a cause of action, supported by mere
conclusory statements." Id. at 678. The second
prong of the test requires the court to "assume th[e]
veracity" of the well-pleaded factual allegations
"and then determine whether they plausibly give rise to
an entitlement to relief." Id. at 679.
"Accordingly, in examining a complaint under Rule
12(b)(6), we will disregard conclusory statements and look
only to whether the remaining, factual allegations plausibly
suggest the defendant is liable." Khalik, 671
F.3d at 1191.
argues it raised three legal theories that plausibly stated a
claim and therefore precluded the district court's
dismissal of the Amended Complaint under Rule 12(b)(6).
First, Alpenglow asserts the IRS lacks the general authority
to investigate and deny tax deductions under § 280E
without a criminal conviction, and that, even if it had such
authority, the IRS has insufficient evidence of trafficking
to apply § 280E in this case. Second, Alpenglow claims
the IRS's calculation of Alpenglow's income violates
the Sixteenth Amendment. Third, Alpenglow contends §
280E violates the Eighth Amendment. We now explain why none of
these arguments supports a conclusion that the district court
erred in dismissing the complaint, beginning with the
IRS's application of § 280E.
Denial of Deductions Under 26 U.S.C. § 280E
indicated, Alpenglow raises two arguments relating to the
IRS's denial of its business deductions under §
280E: the IRS (1) lacks the authority to investigate whether
Alpenglow trafficked in controlled substances because such a
determination requires the IRS to conclude that the business
violated federal drug laws and (2) acted in an arbitrary
manner because it did not have any evidence that Alpenglow
trafficked in controlled substances.
Authority to investigate
claims the IRS could not use § 280E to deny the
deductions in the absence of a conviction from a criminal
court that its owners had violated federal drug trafficking
laws. At the core of Alpenglow's argument is the
assumption that a determination a person trafficked in
controlled substances under tax law is essentially
the same as a determination the person trafficked in
controlled substances under criminal law. Because
Alpenglow sees the two as inextricably linked, it contends
the IRS lacks the authority to apply § 280E until
after a federal prosecutor has investigated and
charged the taxpayer with violating federal criminal law and
a judge or jury in a criminal proceeding has issued a verdict
recently rejected this argument in Green Solution,
855 F.3d at 1120-21. There, Green Solution sued to enjoin the
IRS from investigating Green Solution's business records
in connection with an audit focused on whether certain
business expenses should be denied under § 280E. We
concluded the Anti-Injunction Act ("AIA") prevented
the court from exercising jurisdiction over Green
Solution's "suit for the purpose of restraining the
assessment or collection of any tax." Id. at
1119 (quoting 26 U.S.C. § 7421(a)). In an attempt to
avoid that conclusion, Green Solution argued the AIA did not
preclude the action because a determination of "whether
[it] trafficked in a controlled substance . . . is a criminal
investigation properly carried out by the United States
Attorney," id. at 1120, and thus "a
determination of whether a taxpayer violated the CSA is not
within the authority of the IRS," id. at 1121
(internal quotation marks omitted). In rejecting this
argument, we noted that "§ 280E has no requirement
that the Department of Justice conduct a criminal
investigation or obtain a conviction before § 280E
applies." Id. at 1121. And we noted that under
26 U.S.C. § 6201(a), "the IRS's obligation to
determine whether and when to deny deductions under §
280E falls squarely within its authority under the Tax
Code." Id. But because our analysis was limited
to determining that the AIA precluded Green Solution's
suit, we lacked subject matter jurisdiction to address the
merits of the claim that "the IRS exceeded its authority
under the Internal Revenue Code." Id. at 1121
& n.8. Instead, we decided "only that the IRS's
efforts to assess taxes based on the application of §
280E fall within the scope of the AIA." Id. at
not directly on point, our analysis in Green
Solution is persuasive. Alpenglow offers no reason why
we should conclude the IRS has the authority to
assess taxes under § 280E, but cannot
impose excess tax liability under § 280E. There
is also no evidence that Congress intended to limit the
IRS's investigatory power. Indeed, the Tax Code contains
other instances where the applicability of deductions or tax
liability turns on whether illegal conduct has occurred.
See 26 U.S.C. § 162(c)(2) (denying deductions
for illegal bribes, kickbacks, etc.); id. §
6663 (imposing civil tax penalty for fraud); id.
§ 165(e) (allowing deduction for theft loss). And other
courts have upheld tax deficiencies against state-sanctioned
marijuana dispensaries based on application of § 280E,
without questioning the IRS's authority on this issue.
See Olive, 792 F.3d at 1151; Beck v.
Comm'r, 110 T.C.M. (CCH) 141, *5-6 (2015); Canna
Care, Inc. v. Comm'r, 110 T.C.M. (CCH) 408, *3-4
(2015), aff'd, 694 Fed.Appx. 570 (9th Cir.
2017); Californians Helping to Alleviate Med. Problems,
Inc. v. Comm'r (C.H.A.M.P.), 128 T.C. 173, 181-82
Alpenglow argues that because Congress has not expressly
delegated the IRS authority to investigate violations of
federal drug laws, the IRS cannot make the predicate finding
necessary for a denial of deductions under § 280E. In
support of this proposition, Alpenglow points to a series of
cases from the Supreme Court striking regulations involving
the taxation of illegal conduct: Leary v. United
States, 395 U.S. 6 (1969); Grosso v. United
States, 390 U.S. 62 (1968); Haynes v. United
States, 390 U.S. 85 (1968); and Marchetti v. United
States, 390 U.S. 39 (1968). But these cases concern the
invocation of the privilege against self-incrimination where
the IRS investigation involved gambling, marijuana, or, in
Haynes, possession of an unregistered firearm.
See Leary, 395 U.S. at 13. Critically, these cases
struck down IRS regulations that required the taxpayers to
disclose information such as the names and addresses of the
sellers and buyers, their registration numbers, and the
quantity of the products sold. See id. at 15;
see also Marchetti, 390 U.S. at 42-49. The Supreme
Court concluded these tax provisions violated the Fifth
Amendment due to the "substantial and 'real' . .
. hazards of incrimination." Marchetti, 390
U.S. at 53 (quoting Rogers v. United States, 340
U.S. 367, 374 (1951)); Leary, 395 U.S. at 15. For
example, in Marchetti, the Court noted that the
regulation in question required the taxpayer to obtain a tax
stamp, which necessarily "declar[ed] . . . a present
intent" to violate gambling laws, and that federal and
state courts had consistently relied on payment of the tax in
subsequent criminal cases against the taxpayer.
Marchetti, 390 U.S. at 47-48, 53. Indeed, some
states and municipalities criminalized the mere possession of
a tax stamp, making it impossible to comply with both laws.
Id. at 48 n.10.
case is easily distinguishable from these cases. First,
Alpenglow has not raised a Fifth Amendment challenge on
appeal and is instead citing these cases for the IRS's
authority to tax based on its conclusion that the
taxpayer is engaged in illegal conduct. But the Supreme Court
has repeatedly asserted, including in the cited opinions,
that "the unlawfulness of an activity does not prevent
its taxation." Id. at 44. The cases cited by
Alpenglow were challenges to "the methods
employed by Congress" in enforcing these statutes,
id. (emphasis added), not the authority of
the IRS to investigate and tax illegal activity. Second,
these statutes involved the imposition of a
tax for specific illegal conduct, not the
denial of a tax deduction. Third, the tax
information at issue in the cited cases was routinely shared
with the Department of Justice and frequently used to support
criminal charges, creating a tax provision that served as a
proxy for a criminal investigation. Here, Alpenglow has
failed to cite a single case in which the government relied
on a denial of deductions under § 280E as evidence of
guilt in a criminal trial. Accordingly, these decisions do
not prohibit the IRS from applying § 280E to deny
summary, it is within the IRS's statutory authority to
determine, as a matter of civil tax law, whether taxpayers
have trafficked in controlled substances. Thus, the IRS did
not exceed its authority in ...