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Sean HockingSean HockingApril 15, 2019
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13min370

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  “Jordan Zoot.  “aBIZinaBOX Inc., CPA’s”
PUBLISHER:  CANNABIS LAW REPORT

Lines We Don’t Cross – it is April 14 and we should have had a very smooth day with one day to go to the tax filing deadline. Unfortunately, we had an experience that was both disappointing and potentially harmful to everyone involved. Let’s begin by screaming at the top of our lungs

“JUST BECAUSE CANNABIS IS LEGAL IN CALIFORNIA UNDER CERTAIN CIRCUMSTANCES, IT DOESN’T GIVE ANYONE A GET OUT OF JAIL FREE CARD!!!”.

The simplest way to address this issue without turning it into a rant is for us to reiterate the rules proscribed by various agencies that regulate Circular 230 practitioners in California.

By doing so, no one that has seen this post can ever say that they were not aware of the rules. We should be able to lay out sufficient bright lines with those rules such that we can avoid a discourse about the conduct of specific business owners or their advisors.

The reason we have chosen to frame the discussion by reference to the rules that govern Circular 230 Practitioners is that we seem to be getting a disproportionate number of questions about “is it ok to…” and finish the sentence with myriad forms of conduct that could land a business owner in prison and be a death penalty for a professional license.

We have one very simple thought…we don’t have, have NEVER had, and NEVER will have a client that could offer us ANYTHING, let alone $$$ that would cause us to consider any form of conduct that might put reputation, let alone a professional license at risk…PERIOD.

The California Board of Accountancy [“CBA”]

Regulations state

  • 58. Compliance with Standards. Licensees engaged in the practice of public accountancy shall comply with all applicable professional standards, including but not limited to generally accepted accounting principles and generally accepted auditing standards.

Note: Authority cited: Sections 5010 and 5018, Business and Professions Code. Reference: Section 5018, Business and Professions Code.

The CBA regulations effectively incorporate Circular 230, PCAOB, AICPA and CalCPA rules by reference.

AICPA and CalCPA have:

Acts Discreditable RULE 501. A member shall not commit an act discreditable to the profession.

The California Bar has the following rule for practicing attorneys admitted in California.

Rule 8.4 Misconduct (Rule Approved by the Supreme Court, Effective November 1, 2018)

It is professional misconduct for a lawyer to:

(a) violate these rules or the State Bar Act, knowingly* assist, solicit, or induce another to do so, or do so through the acts of another;

(b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects;

(c) engage in conduct involving dishonesty, fraud,* deceit, or reckless or intentional misrepresentation;

(d) engage in conduct that is prejudicial to the administration of justice;

(e) state or imply an ability to influence improperly a government agency or official, or to achieve results by means that violate these rules, the State Bar Act, or other law; or

(f) knowingly* assist, solicit, or induce a judge or judicial officer in conduct that is a violation of an applicable code of judicial ethics or code of judicial conduct, or other law. For purposes of this rule, “judge” and “judicial officer” have the same meaning as in rule 3.5(c).

The IRS Office of Professional Responsibility enforces – Circular 230 – Paragraph 51 – Incompetence and Disreputable Conduct –

(a) Incompetence and disreputable conduct. Incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to —

(1) Conviction of any criminal offense under the Federal tax laws.

(2) Conviction of any criminal offense involving dishonesty or breach of trust.

(3) Conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service.

(4) Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon Federal tax matters, in connection with any matter pending or likely to be pending before them, knowing the information to be false or misleading. Facts or other matters contained in testimony, Federal tax returns, financial statements, applications for enrollment, affidavits, declarations, and any other document or statement, written or oral, are included in the term “information.”

(5) Solicitation of employment as prohibited under §10.30, the use of false or misleading representations with intent to deceive a client or prospective client in order to procure employment, or intimating that the practitioner is able improperly to obtain special consideration or action from the Internal Revenue Service or any officer or employee thereof.

(6) Wilfully failing to make a Federal tax return in violation of the Federal tax laws, or wilfully evading, attempting to evade, or participating in any way in evading or attempting to evade any assessment or payment of any Federal tax.

(7) Wilfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof.

(8) Misappropriation of, or failure properly or promptly to remit, funds received from a client for the purpose of payment of taxes or other obligations due to the United States.

(9) Directly or indirectly attempting to influence, or offering or agreeing to attempt to influence, the official action of any officer or employee of the Internal Revenue Service by the use of threats, false accusations, duress or coercion, by the offer of any special inducement or promise of an advantage or by the bestowing of any gift, favor or thing of value.

(10) Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any duly constituted authority of any State, territory, or possession of the United States, including a Commonwealth, or the District of Columbia, any Federal court of record or any Federal agency, body or board.

(11) Knowingly aiding and abetting another person to practice before the Internal Revenue Service during a period of suspension, disbarment or ineligibility of such other person.

(12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter.

(13) Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax laws. False opinions described in this paragraph (a)(l3) include those which reflect or result from a knowing misstatement of fact or law, from an assertion of a position known to be unwarranted under existing law, from counseling or assisting in conduct known to be illegal or fraudulent, from concealing matters required by law to be revealed, or from consciously disregarding information indicating that material facts expressed in the opinion or offering material are false or misleading. For purposes of this paragraph (a)(13), reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances. A pattern of conduct is a factor that will be taken into account in determining whether a practitioner acted knowingly, recklessly, or through gross incompetence. Gross incompetence includes conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client.

(14) Wilfully failing to sign a tax return prepared by the practitioner when the practitioner’s signature is required by Federal tax laws unless the failure is due to reasonable cause and not due to wilful neglect.

(15) Wilfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Code, contrary to the order of a court of competent jurisdiction, or contrary to the order of an administrative law judge in a proceeding instituted under §10.60.

(16) Wilfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by the Federal tax laws unless the failure is due to reasonable cause and not due to wilful neglect.

(17) Wilfully preparing all or substantially all of, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid preparer tax identification number or other prescribed identifying number.

(18) Wilfully representing a taxpayer before an officer or employee of the Internal Revenue Service unless the practitioner is authorized to do so pursuant to this part.

(b) Effective/applicability date. This section is applicable beginning August 2, 2011.

If you happen to become aware of a licensed professional that has violated any of these rules, REPORT THEM TO THAT APPROPRIATE REGULATORY AGENCY IMMEDIATELY. if you aren’t sure, REPORT THEM ANYWAY AND LET THE REGULATORS DECIDE.

The question of whether the legal cannabis industry in California succeeds or fails is going to be determined by compliance with tax and regulatory provisions going forward.

Let’s not shoot ourselves in the head.

Lines We Don’t Cross

 


Debra BorchardtDebra BorchardtFebruary 9, 2018
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3min14112

Congress shut down the government for a moment, but then our representatives in D.C. agreed on a 2-year framework for a budget and the government was back in business. Wrapped into this budget agreement was a vote to renew the Rohrabacher-Blumenauer amendment. This legislation protects states with legal medical marijuana from prosecution by the Department of Justice (DOJ) by denying them from spending money on enforcement.

The two years isn’t a done deal because for the next six weeks details in the budget will be hammered out with March 23 as another date to look towards voting on the budget. Yet, it keeps getting included and each time that happens, it becomes more and more secure

The federal budget decides how much money each department gets to spend and the Department of Justice gets lumped in with all the other departments. This particular amendment prevents the DOJ from spending any of the money it gets towards enforcing federal marijuana laws against businesses and individuals in states that have legalized medical marijuana.

Each time the budget has been up for a vote, the cannabis industry would begin biting its nails. Would they include it again? Would this be the year they kick it to the curb and open the money train back up to Attorney General Jeff Sessions? There was even a fear that if the government shut down and the amendment was technically no longer in effect, the DOJ could quickly begin raiding companies in Colorado, Washington, Oregon and more.

There are multiple pieces of legislation that have been written to address issues with the cannabis industry. From outright legalization to more cherry-picked items like banking or veterans access to medical marijuana. Yet, before a piece of legislation can be passed, it must be voted on and in order for it to be voted on the Rules Committee must allow the bill to go to the floor for a vote. The makeup of the committee is skewed towards the majority party – in the case, the Republicans.

The Republicans consistently vote along party lines and refuse to allow any of the legislation get to the floor for a vote. So, the only recourse the legislators have is this amendment.


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5min7772

The marijuana industry is still processing United States Attorney General Jeff Sessions’ recent decision to repeal the Cole Memo, which had directed federal prosecutors to refrain from prosecuting marijuana-related businesses that operated in accordance with a facilitative state law. The effect of Sessions’ policy change is presently unclear because, as of this date, the December 2014 Rohrabacher-Blumenauer amendment precludes the Department of Justice (DOJ) from spending any of its budget for the prosecution of entities that are lawfully participating in a state marijuana program. But, the Rohrabacher-Blumenauer amendment is part of continued, partisan, budgetary conflict, currently scheduled to resume in early February.

Under the recent policy change, United States Attorneys have been given additional discretion to prosecute marijuana businesses, even when they are operated in accordance with state law But no one knows what resources the DOJ will be permitted to direct to those prosecutions. Direct prosecution of state-legal cannabis businesses may be a cost-intensive endeavor. On January 4, 2018, Pennsylvania Governor Tom Wolf indicated that the Commonwealth will oppose efforts to prosecute businesses operating in accordance with the Pennsylvania Medical Marijuana Act. Pennsylvania is one of 29 states (and the District of Columbia) that have legalized medical or recreational cannabis, meaning there is as many as 30 state attorneys general who have an interest to opposing lawsuits that may directly impact legalized marijuana. Add to that the lawyers who may be hired to defend the estimated $10 billion legal marijuana industry, and prosecution becomes a potentially costly proposition.

But, what about less-expensive, indirect enforcement? There are several indirect or “sideways” avenues that the DOJ might explore to undermine medical and recreational marijuana:

  • Firearms. Under the Gun Control Act of 1968, persons who regularly use marijuana cannot legally own firearms. Pennsylvania has pledged not to release the names of patients holding medical marijuana ID Cards to federal authorities. But gun owners must disclose their marijuana use when reregistering their firearms or face charges for making misstatements to federal authorities. Historically, prosecution of firearm offenses has rarely occurred in the absence of another crime, but that could change.
  • Physician licensing. The federal Drug Enforcement Administration (DEA) issues prescribing licenses to physicians. Without a DEA license, a physician cannot prescribe prescription medicines. A physician who prescribes medical cannabis could potentially face difficulty renewing her federal license.Pennsylvania has sought to insulate doctors by having physicians certify that a patient suffers from one of 17 recognized conditions and allowing the dispensaries to counsel clients and suggest products. However, Pennsylvania’s law also allows certifying physicians to “recommend” cannabis products and amounts. Federal authorities may argue that “recommendations” by certifying physicians equates to “prescribing” cannabis. Although Pennsylvania does not permit a certifying physician to work for a dispensary, each dispensary must employ one physician to oversee counseling and dispensing. A physician employed by a licensed dispensary may face more difficulty in maintaining federal licensure based on their role in the actual delivery of medical marijuana directly to patients. A dispensing physician may retain a state-issued license to practice medicine, but be precluded under federal law from prescribing medications.
  • Real property forfeiture. Federal law allows the government to confiscate real estate that is used to advance drug sales and distribution. The Justice Department may seek to pressure landlords of state-legal cannabis businesses to terminate leases or face federal forfeiture actions.

We do not yet know how or if the federal government will seek to curtail state-legal marijuana businesses. There is no guarantee how government enforcement will proceed.


StaffStaffSeptember 27, 2017
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3min9190

The acting chief of the U.S. Drug Enforcement Administration (DEA) Chuck Rosenberg is stepping down according to reports from The Associated Press. Rosenberg is said to have notified employees on Tuesday in an email that he was leaving and thanked them for their hard work.

Rosenberg has been in the position temporarily since 2015 and garnered attention when he distanced himself from President Trump after comments that the police shouldn’t be nice to suspects when putting them in squad cars. At that time he told employees that he did not condone police misconduct. The AP also said that New Jersey State Police Col. Rick Fuentes is a front-runner for the role.

Just last week, he named the President an honorary state trooper bestowing badge number 45 on him. “The New Jersey State Police ‘Roll Call’ roster will forever reflect badge number 45 being honorably issued to President Donald J. Trump,” Fuentes wrote in an order that authorized the ceremonial designation. Fuentes is known for taking a stance against racial profiling. He also holds masters and doctoral degrees in criminal justice from the City University of New York.

Rosenberg is known for being a close associate of fired FBI Director James Comey. According to the New York Times, Rosenberg was asked whether he wanted to be a permanent administrator for the DEA and he said he did not. It was also said that he believed the President had little respect for the law.

This follows a report earlier this week from the FBI that stated that 653,249 arrests were made for marijuana in 2016. “Arresting and citing over half a million people a year for a substance that is objectively safer than alcohol is a travesty,” said Morgan Fox, director of communications for the Marijuana Policy Project. “Despite a steady shift in public opinion away from marijuana prohibition and the growing number of states that are regulating marijuana like alcohol, marijuana consumers continue to be treated like criminals throughout the country. This is a shameful waste of resources and can create lifelong consequences for the people arrested.”

Tom Angell of Marijuana Majority crunched the numbers and found that marijuana drug arrests were rising – up 5.6% from 2015. He said that it is an average of one drug arrest for every 20 seconds. While industry insiders have operated with an attitude of business as usual, it may be that some prefer the devil you know.


Paula CollinsPaula CollinsSeptember 19, 2017
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5min9910

You’ve experimented with watering, lights, nutrients, soil, and harvesting techniques. Your small, dedicated team has come together like a family, nurturing the development of your product like it is the king baby. You’re finally starting to realize a profit. Suddenly, a key employee hits you with notice of resignation. She has decided to go work for a cannabis producer that is closer to where she lives, and who, coincidentally, is willing to pay her $2 an hour more than you can afford and promise her four nights off a week.

As you begin to snap back from the shock of your close-knit team getting torn apart, you realize: that key employee is about to walk out with a goldmine of experience and training that you gave her. She has intimate knowledge of dozens of processes that are unique to your product line. Suppose she takes all of those thousands of dollars of training you invested in her, and she applies that to the competitor’s benefit?

That’s when you remember: you are covered in most states by local trade secrets statutes, and for the aspects of your business that are non-cannabis related, you have federal protection as of May 2016 with the Defense of Trade Secrets Act (DTSA). Through DTSA and the state-level statutes, a trade secret is anything that you consider to be a secret, and from which you derive profit. In other words – if you say an idea, a design, a process, a marketing plan, a billing process – almost anything — is a secret, and you make money from it, it is protected under trade secrets law!

Trade secrets are exposed at any time in the life cycle of your business, but critical hotspots occur when you tour your facilities with eager potential investors, when you discuss possible mergers and acquisitions with lateral partners, or when a key employee moves to work for a competitor. Cannabis business owners, especially those who are developing and producing products, can take three action steps to protect their trade secrets, but they must be done pre-emptively – long before you see trouble brewing.

 

  • Make clear to all who gain exposure to your business what you consider confidential. You don’t want to proudly display your timers, lights, and watering systems, lest someone spot them and try to duplicate them in their own production lab. Don’t assume that all who smile and shake your hand will play as good sports.
  • Err on the side of caution when you talk to investors. Early in discussions – even before they visit your retail or production operation, have them sign non-disclosure agreements (NDA). It won’t stop them from blabbing to their posse, but it will protect you if the matter gets turned over to the lawyers!
  • Once you have decided that something is considered by you to be a secret and you derive income from it, make sure you take regular efforts to keep it under wraps. If it is an oil extraction process, make sure that the area is kept locked, with limited access, and clear records of the comings and goings of all who gain access.
  • Make sure you have an employee manual that is written down. Outline the physical areas of your operation, and the concepts, ideas, and methods, that you consider to be unique to your operation. Have employees sign that they have read it and consent to it.
  • Some states, such as Colorado, permit non-compete agreements. Non-competes generally do not hold up in court in other states, such as New York.

 

Don’t let the unique features of your business waft into thin air when your key employees leave, or when your potential business suitor takes what he can use from your business and leaves the rest. Identify features of your cannabis operation that are unique, take steps to keep them secret, and make sure that people know what you value as a trade secret.

 

 



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