In an adverse determination letter, the IRS ruled that an organization formed to operate a medical marijuana dispensary failed to qualify for exemption from federal income tax under section 501(c)(3) because the distribution of marijuana is illegal under federal law, and a section 501(c)(3) organization cannot be created for a purpose that is illegal or otherwise contravenes public policy.
LTR 201224036 (issue date March 19, 2012; release date June 15, 2012)
The organization was formed as a state nonprofit public benefit corporation after the passage of state legislation permitting the cultivation and use of marijuana by seriously ill individuals upon a physician’s recommendation.
Under the guidelines issued by the state’s attorney general, the dispensary operates as a cooperative and permits only its members to purchase or receive marijuana. Membership criteria require that members be at least 18 years old, have a written referral from a qualified doctor, and provide a picture identification card.
The organization represented that:
- It runs its clinic in a manner similar to a doctor’s office, requiring members to make an appointment to receive services and obtain marijuana.
- It provides information to members regarding how to ingest and otherwise use marijuana.
The organization’s primary activity is the distribution of marijuana.
Although legal under state law, the IRS stated that the distribution of marijuana is illegal under federal law and, therefore, violates public policy.
Citing numerous cases, IRS rulings, and secondary sources, the IRS stated that a section 501(c)(3) organization cannot be created for a purpose that is illegal and violates public policy.
The IRS also held that the organization is operated for private purposes because it operated solely for the benefit of its members.
For more information, contact
Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax),
at (202) 533-3084
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