Originally published on Forbes.com Aug 20th, 2013
The latest in the IRS war on drugs is PLR 201333014. An unnamed organization, I’ll call them Cheechchong.org (CCO), whose purpose was to “facilitate and organize transactions between members who collectively cultivate and possess marijuana for medical purposes” was denied exempt status by the ruling. They were applying for exemption under 501(c)(16).
501(c)(16) ?
You have probably heard of 501(c)(3). That is the gold standard for exempt organizations, since it allows for tax exempt charitable deductions. Thanks to the IRS unrelenting campaign of terror against the Tea Party or its bumbling mismanagement, depending on your point of view, you are also now aware of 501(c)(4). It is a reasonable and correct inference that there must be organizations exempt under 501(c)(1) and 501(c)(2). But how high does it go ? It goes to 501(c)(29) and then on to 501(d). Everybody agrees that it is way too complicated, but just try to eliminate one of them and see what happens.
501(c)(16) exempts organizations formed to finance the ordinary crop operations of its members.
What is the problem with CCO ?
It really looks like CCO just picked the wrong section.
Although you appear to satisfy the provisions relating to capital stock and a reserve, you do not satisfy the other organizational requirements of § 501(c)(16). State has suspended your corporate status; therefore you do not meet the first organizational requirement of § 501(c)(16). You also have not shown that you were created by a § 521 farmers’ cooperative or that your incorporators were members of a § 521 exempt farmers’ cooperative, and as such, do not meet the second organizational requirement. Finally, your articles of incorporation state that you were “formed for the pleasure, recreation and other non-profit purposes authorized under § 501(c)(16).” As ‘pleasure’ and ‘recreation’ are not exempt purposes listed under § 501(c)(16) or the accompanying regulations, you do not completely satisfy the third organizational requirement.
It seems like that should have been enough, but perhaps the IRS was worried CCO would come back to apply under some other section. So they decided to rub it in.
Marijuana is Still Illegal
Citing Revenue Ruling 75-384 the IRS drilled in the point that you can’t have an exempt organization that promotes doing things that are illegal.
The common law of trusts specifies that a charitable trust is invalid if its purpose is unlawful, or if its performance calls for the commission of a criminal or tortious act.
Your activities violate this general principle. Your primary activity, facilitating and organizing transactions between members who cultivate and possess cannabis, is illegal under Federal law. You enter into agreements that give you title to the cannabis grown by your members. Once you obtain title, you process, sell, and otherwise dispose of it as you decide. Federal law does not recognize any health benefits of cannabis and classifies it as a controlled substance.
You can get exemption for an organization that advocates for change in the marijuana laws. The NORML Foundation is an example, but talking about it is not the same as doing it.
You can follow me on twitter @peterreillycpa.