I.R.S. Raid of Oaksterdam Part of Massive Attack on California Patients



Little-known fact: Income earned from crime is taxable. So if you make $15,000 thieving this year, the IRS doesn't care how you made it, you owe them income taxes on it. If you get caught, the IRS might come after you for back taxes. Crazy, right? It gets better.

Back in the Eighties, a convicted meth and coke dealer in Michigan was audited by the IRS for his illicit business. The IRS determined he owed. So the polydrug dealer did what any other business owner did. He claimed his deductions, writing off his rent, car insurance, pager bill and the like. The IRS allowed it!

This was the tough-on-crime Eighties. Congress was incensed, and so it passed a law banning "drug trafficking organizations" from taking business deductions, adding section 280-E to the tax code.

Fast-forward three decades to Saturday's Chronicle, where reports indicate the IRS is using the thirty-year-old drug-dealing law against a city-permitted, lawful medical marijuana dispensary in Oakland:

IRS Special Agents participate in search of the Oaksterdam Gift Shop and four other locations April 2
  • David Downs
  • IRS Special Agents participate in search of the Oaksterdam Gift Shop and four other locations April 2

"[Oaksterdam founder Richard] Lee believes that he is a target of the IRS because of section 280-E of the tax code, ... his tax rate without deductions is roughly double what it would be with deductions. ... The IRS began scrutinizing his businesses by looking at his 2010 returns. ... He agreed to a payment plan, but then they told him they were also going to audit his business going back to 2007.

The huge payments crippled his business. 'We paid them as much as we could,' Lee said. 'We were losing more money every day because there was more and more IRS debt being loaded on.'"

Sources familiar with the matter say the IRS is targeting dozens of Bay Area dispensaries — including Oakland's Harborside Health Center and San Francisco's The Vapor Room — for the same thing, quietly and successfully undermining state law without all the drama of a raid.

Dispensary operators are encouraged to check out the group 280-E Reform.org.

Tax day is April 17th.