Medical marijuana membership dispensary denied exemption

Plain-English summary

A membership organization sought exemption under IRC § 501(c)(3) for operating a medical marijuana dispensary and cultivating and distributing cannabis to members. The organization charged membership fees, set prices for cannabis products and delivery, and required members to reimburse expenses and compensation, but did not explain its pricing, projected finances, or claimed agricultural-research classification. The IRS concluded that the activities primarily benefited members, involved a trade or business, and did not establish operation for public charitable purposes. It also concluded that distributing marijuana served a substantial nonexempt purpose because federal law prohibited the activity despite state authorization for medical use. The IRS issued a final denial after the organization did not protest the proposed adverse determination.

Ruling snapshot

• Question: Did the medical marijuana membership dispensary qualify for exemption under IRC § 501(c)(3)?
• Outcome: Denied
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; 21 U.S.C. §§ 802, 821, and 841; Rev. Proc. 2020-5; United States v. Oakland Cannabis Buyers' Cooperative

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
PO Box 2508
Cincinnati, OH 45201

Date: November 10, 2020

Employer ID number:

Form you must file:

Tax years:

Person to contact:
Name:
ID number:
Telephone:

Number: 202105011
Release Date: 2/5/2021

UIL: 501.00-00, 501.03-05, 501.33-00

Dear

This letter is our final determination that you don’t qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3). Recently, we sent you a proposed adverse determination in response to your application. The
proposed adverse determination explained the facts, law, and basis for our conclusion, and it gave you
30 days to file a protest. Because we didn’t receive a protest within the required 30 days, the proposed
determination is now final.

Because you don’t qualify as a tax-exempt organization under IRC Section 501(c)(3), donors generally
can’t deduct contributions to you under IRC Section 170.

We may notify the appropriate state officials of our determination, as required by IRC Section 6104(c), by
sending them a copy of this final letter along with the proposed determination letter.

You must file the federal income tax forms for the tax years shown above within 30 days from the date
of this letter unless you request an extension of time to file. For further instructions, forms, and
information, visit www.irs.gov.

We'll make this final adverse determination letter and the proposed adverse determination letter
available for public inspection after deleting certain identifying information, as required by IRC Section
6110. Read the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached
letters that show our proposed deletions. If you disagree with our proposed deletions, follow the
instructions in the Notice 437 on how to notify us. If you agree with our deletions, you don’t need to
take any further action.

If you have questions about this letter, you can call the contact person shown above. If you have
questions about your federal income tax status and responsibilities, call our customer service
number at 800-829-1040 (TTY 800-829-4933 for deaf or hard of hearing) or customer service for
businesses at 800-829-4933.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements

Enclosures:
Notice 437
Redacted Letter 4034
Redacted Letter 4038

Department of the Treasury
Internal Revenue Service
P.O. Box 2508
Cincinnati, OH 45201

Date:

September 1, 2020
Employer ID number:

Contact person/ID number:
Contact telephone number:

Contact fax number:

Legend: UIL:

B = State 501.00-00
C = Permit type 501.03-05
D = Date 501.33-00
E = Date

Dear

We considered your application for recognition of exemption from federal income tax under Internal Revenue
Code (IRC) Section 501(a). We determined that you don’t qualify for exemption under IRC Section 501(c)(3).
This letter explains the reasons for our conclusion. Please keep it for your records.

Issues
Do you qualify for exemption under IRC Section 501(c)(3)? No, for the reasons stated below.

Facts
You were incorporated in state of B on D as a mutual benefit corporation. In addition to stating that you are

organized and operated exclusively for public and charitable purposes within the meaning of IRC Section
501(c)(3), your Articles state that your specific purpose is to provide disadvantaged adults suffering with
cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine headaches, or any other illness
for which marijuana provides relief who comes to your facility or uses your delivery services to feel cared for,
valued, safe and respected. Your Articles further state your goal is to provide safe alternatives to treatment by
toxic chemicals. Due to costly high-tech equipment and resources required for indoor cultivation of medical
cannabis, the majority of the patients are unable to grow the medicine. You provide safe access to a wide
variety of dried marijuana, edibles, extracts, and concentrates, in compliance with state and local law.

On E you filed a certificate of amendment to change from mutual benefit corporation to public benefit
corporation. You also later attested that you had amended your Articles to limit your purposes to those
described in IRC Section 501(c)(3) and that your organizing document does not empower you to engage, other
than as an insubstantial part, in activities that do not further an exempt purpose.

You are seeking a foundation classification under Sections 509(a)(1) and 170(b)(1)(A)(ix), which describes an
organization directly engaged in the continuous active conduct of agricultural research in conjunction with a
college or university. You did not provide any information to indicate that you are working with a college or
university, nor did you explain how you meet this classification.

Your narrative description of your activities lists three activities/purposes:

• 60% of your time you spend on providing a safe means for facilitating and coordinating transactions
between qualified patient members and/or primary caregiver members relating top medical cannabinoids
the production and provisions of which only being performed by our members. You charge a one-time
member fee for this transaction and accept donations to fund this activity.

• 20% of your time is dedicated to providing safe access to a wide variety of dried marijuana, edibles,
extracts, and concentrates. You charge a one-time member fee and accept donations to fund this activity.

• 20% of your time will be used for the cultivation of medical cannabis for your members to feel better
naturally. This activity will be funded by donations only.

You are a membership organization. Members must provide a valid B state medical marijuana ID card along
with a valid Driver’s License or State ID card and complete a medical application before taking advantage of
your services/products. Your members understand and agree that while medical cannabis has been authorized
by people of B and its legislature and consistently upheld by all B courts, the federal government persists in
enforcing portions of the Controlled Substances Act, which makes the possession and use of medical cannabis a

federal crime.

All members must complete and sign Collective Membership Application and Agreement (“Collective”). One
provision of the Collective indicates that members understand and agree to indemnify and hold you harmless
from all alleged wrongdoing which may be the fruit of undercover investigations conducted by the patient
during their membership. Any undercover officers, narcotics investigators with or without identification who
join the collective and obtain information about the collective activities must acknowledge to relinquish all
information and agree that said information may not be used in a court of law to support any testimonial
evidence by the member/officer. The members certify that they have been advised by an authorized agent of the
Collective that possession and use of marijuana for medical purposes might be a ground for prosecution under
federal law. Before the member is admitted he/she must to indicate if they would testify in court if you or any of
your members were charged for criminal offences relating to cultivation, possession or transportation of
medical marijuana.

All new patients/members agree that they have no associations with any law enforcement agencies or entities
and agree not to mislead you by failing to admit that the new member is an undercover officer. All officers and
law enforcement agents who pose as an undercover officer or not, agree that all criminal evidence discovered as
a result of the officer being your member is irrelevant hearsay and inadmissible evidence in either a civil or
criminal court setting. For these purposes all undercover investigations mean all evidence and witness
information derived from the undercover officers posing as a new patient, including but not limited to any
patients who may be informants, in witness protection programs, patients possessing fraudulent documents,
licenses, or posing as sales reps or producers.

You inform members that any edible products they purchase from you have been made by your members but
that, due to the current state of the laws in B and the County in which you are operating, said edibles have been

made in private kitchens that are not Certified Commercial Kitchens under B law. In addition, said edibles have
been produced in kitchens by members that do not have a C permit.

You don’t require members to participate in the cultivation process, however, as a part of the application
process, you encourage and request that members participate in cultivation if they so desire and have skills,
time, knowledge or other resources can be useful in cultivation process.

You indicated there is no facility currently, but once acquired, the facility would be set up in the form of the
lounge/coffee shop where members will have the option to view products/items and consume them at one of
designated tables or booth at their leisure.

You require all members to pay all personal out-pocket expenses and reasonable compensation for services
related to providing medical marijuana to them and other member/patients. You indicated anyone can make
donations of any amount at any time. At the same time, you established the prices on medical marijuana options
to satisfy medical treatments your members have. All prices include local and state taxes. Registered members
will have the option of discreet delivery services based on limited amount per delivery and location. You did
not provide any information on how you determine the prices and if you provide the product free of charge if
patient/member is not able to pay.

We requested additional information on three separate occasions. We received a response to our first two
requests for additional information. Some of the details requested in our last (unanswered) request included how
you meet the foundation classification you’re seeking, your pricing strategies (at cost, below cost, above cost)
and a breakdown of the types of the revenues and expenses you were anticipating. Several telephone calls were
made to you regarding our request for additional information, but no calls were returned, and no response was

received.

Law
IRC Section 501(c)(3) provides for the exemption from federal income tax of corporations organized and

operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the
benefit of any private shareholder or individual.

Treasury Regulation Section 1.501(c)(3)-1(a)(1) provides that, in order to be exempt as an organization
described in IRC Section 501(c)(3), an organization must be both organized and operated exclusively for one or
more exempt purposes. If an organization fails to meet either the organizational test or the operational test, it is

not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c)(1) provides that an organization operates exclusively for exempt
purposes only if it engaged primarily in activities that accomplish exempt purposes specified in IRC Section
501(c)(3). An organization will not be operated exclusively for exempt purposes if more than an insubstantial
part of its activities is not in furtherance of an exempt purpose.

Treas. Reg. Section 1.501(c)(3)-1(d)(ii) states that an organization is not operated exclusively for one or more
exempt purpose unless it serves a public rather than a private interest.

21 U.S.C. Section 802(16) defines marijuana as “all parts of the plant Cannabis Sativa L. whether growing or
not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt,
derivative, mixture, or preparation of such plant, its seeds or resin.”

21 U.S.C. Section 821(c), Sch. I(c)(10) lists marijuana as a hallucinogenic substance and includes it on schedule
I of the Schedules of Controlled Substances. A schedule I substance is a substance that (1) has a high potential
for abuse; (2) has no currently accepted medical use in treatment in the United States; and (3) there is a lack of
accepted safety for use of the drug under medical supervision.

21 U.S.C. Section 841(a), known as The Controlled Substances Act, states that it is illegal for anyone to
knowingly or intentionally manufacture, distribute, or dispense, or possess with intent to manufacture,
distribute, or dispense a controlled substance.

Revenue Procedure 2020-5, 2020-1 I.R.B. 241, Section 3 states that a determination letter or ruling on exempt
status is issued based solely upon the facts and representations contained in the administrative record. The
applicant is responsible for the accuracy of any factual representations contained in the application. Section 6
(and its predecessors) provides that a favorable determination letter or ruling will be issued to an organization
only if its application and supporting documents establish that it meets the particular requirements of the section
under which exemption from federal income tax is claimed.

Revenue Ruling 61-170, 1961-2 C.B. 112, holds that a nurses' association, which maintains an employment
register primarily for the employment of its members, is not entitled to exemption under IRC Section 501(c)(3).
The organization is primarily engaged in the performance of personal services by operating an employment
service principally for the benefit of its members. Public participation in the management and support of the
organization is negligible. It draws its support primarily from members, and a board of trustees composed of
professional nurses controls the organization without public participation of any kind. Therefore, the
organization is not free from substantial private benefit considerations in the operation of the nurses' register.

Rev. Rul. 69-175, 1969-1 C.B. 149, holds that a nonprofit organization formed by parents of pupils attending a
private school that provides school bus transportation for its members' children serves a private rather than a
public interest. The organization's income approximately equals the expenses involved in its operations.

Rev. Rul. 73-349, 1973-2 C.B. 179, holds that an organization formed to purchase groceries for its membership
at the lowest possible prices on a cooperative basis is not exempt as a social welfare organization described in
IRC Section 501(c)(4). The organization was a private cooperative enterprise for the economic benefit or
convenience of its members. Any benefit to the community was incidental to the benefit received by the
members.

In Better Business Bureau of Washington, D.C.., Inc. v. United States, 326 U.S. 279 (1945), the Supreme Court
held that the "presence of a single . . . nonexempt purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly . . . exempt purposes."

In Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1071 (6th Cir. 1974), the court held that an
organization has the burden of proving that it satisfies the requirements of the particular exemption statute. The
court noted that whether an organization has satisfied the operational test is a question of fact.

In Federation Pharmacy Services, Inc. v. Commissioner, 625 F.2d 804 (8th Cir. 1980), the Tax Court stated that
the sale of prescription drugs to senior citizens and handicapped persons is a trade or business normally carried
on for-profit. The court ruled that sales of prescription drugs to the elderly and the handicapped even at a
discount is not, without more, in furtherance of a charitable purpose. The Tax Court said that they failed to see
how the fact that it happened to deal in drugs could convert it to an IRC Section 501(c)(3) organization. If it
could be so converted, then so could a store be selling orthopedic shoes, crutches, health foods, or any other
product beneficial to health. Virtually everything we buy has an effect, directly or indirectly, on our health.
They concluded that they did not believe that the law requires that any organization whose purpose is to benefit
health, however remotely, is automatically entitled, without more, to the desired exemption.

In Universal Life Church v. United States, 372 F. Supp. 770 (E.D. Cal. 1974), the court concluded that “one
seeking a tax exemption has the burden of establishing his right to a tax-exempt status.”

Pius XII Academy, Inc. v. Commissioner, T.C. Memo. 1982-97, affd. 711 F.2d 1058 (6th Cir. 1983), provides
that an organization must establish through the administrative record that it operates as an exempt organization.
Denial of exemption may be based solely upon failure to provide information describing in adequate detail how

the operational test will be met.

In La Verdad v. Commissioner, 82 T.C. 215 (1984), the administrative record did not demonstrate that the
organization would operate exclusively in furtherance of an exempt purpose. Therefore, denial of organization’s
request for tax-exempt status was reasonable.

In United States v. Oakland Cannabis Buyers' Cooperative, 532 U.S. 483, 121 S. Ct. 1711 (2001), the court
reiterates that there is only one exception for cannabis: Government-approved research projects. “It is clear
from the text of the Act that Congress has made a determination that marijuana has no medical benefits worthy

of an exception.”

New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), was an action for declaratory judgment
that the petitioner brought to challenge the denial of his application for exempt status. The court, in finding that
the actual purposes displayed in the administrative record supported the Service’s denial, stated “It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved against the
applicant.” The court noted that if the petitioner had evidence that contradicted these findings, it should have
submitted it as part of the administrative process. The court also highlighted the principle that exemptions from
income tax are matters of legislative grace.

In Mysteryboy, Inc. v. Commissioner, T.C. Memo 2010-13 (2010), the Tax Court held that the organization
failed the operational test partly because the organization proposed to promote illegal activities.

Application of law

An organization can be recognized as exempt under IRC Section 501(c)(3) only if it shows that it is both
organized and operated exclusively for charitable, educational, or other exempt purposes. If an organization
fails to meet either the organizational test or the operational test, it is not exempt, per Treas. Reg. Section
1.501(c)(3)-1(a)(1). You fail the operational test for two reasons: you did not provide all the information we
requested and the information we have indicates that even if you did provide the requested information, you
would not qualify for exemption.

You do not satisfy the operational test of Treas. Reg. Section 1.501(c)(3)-1(c)(1) because you did not provide
all of the information we requested. Whether an organization operates exclusively in furtherance of an exempt
purpose is a question of fact. An organization seeking tax-exempt status under IRC Section 501(c)(3) carries the
burden of proving that it satisfies the requirements of the statute as discussed in Harding Hospital Inc.

As stated above, even if you did provide the additional information we had requested, your activities benefit
your members only. Operating for private purposes rather than the public interest is in contravention of Treas.
Reg. Section 1.501(c)(3)-1(c)(2). An organization that operates primarily for the benefit of its members serves
the interests of a select group of individuals rather than the community or the public interest. A business or
other activity that assists the community incidentally and only provides benefits to a limited number of
members of the community more than incidentally is not charitable.

Additionally, you are formed to operate a medical marijuana dispensary for licensed marijuana medical card
holders in B. Federal law does not recognize any health benefits of cannabis and classifies it as a controlled
substance, as detailed in 21 U.S.C. section 812(c), Schedule I(c)(10). Federal law, under 21 U.S.C section 841,
prohibits the manufacture, distribution, possession, or dispensing of a controlled substance. Additionally, as
detailed in Oakland Cannabis Buyers' Cooperative, Congress has determined that marijuana, as defined in 21
U.S.C. section 802(16), has no medical benefits worthy of an exception to the general rule that the manufacture
and distribution of cannabis is illegal. Current federal law prohibits the use of marijuana and cannabis except in
limited circumstances; those limited circumstances do not include its use for medicinal purposes. The fact that
your state legalized distribution of marijuana and cannabis for medical purposes is not determinative because
under federal law, distribution of marijuana is illegal. Because you advocate and engage in activities that
contravene federal law, you serve a substantial non-exempt purpose.

You are similar to organizations described in in Rev. Rul. 61-170, Rev. Rul. 69-175, and Rev. Rul. 73-349,
where the organizations were created to benefit their members. You are a cooperative organization that
cultivates and distributes cannabis only to your members. You have not provided any details on how the prices
are determined, but members reimburse all expenses in addition to the reasonable compensation for your
services related to providing them with medical marijuana. As a cooperative, your activities benefit private
interests more than incidentally, which precludes exemption under Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii).

You sell goods to your members which you state benefit their health. You are like the organization described in
Federation Pharmacy Services, Inc. because selling “health” items is not a charitable activity. Rather, you
operate for the purpose of carrying on an unrelated trade or business and cannot be exempt under IRC Section
501(c)(3) per Treas. Reg. Section 1.501(c)(3)-1(e)(1).

As explained in Universal Life Church, you have the burden of establishing that you qualify for tax exemption.
You have not provided supporting documentation to establish you meet the requirements of IRC Section
501(c)(3) as outlined in Pius XII Academy, Inc. and La Verdad. You have not provided the requested
operational details, including pricing policies, sources of revenue, and how you engage in agricultural research
in conjunction with a college or university. Therefore, you have not established that you are exempt from
taxation as required by Section 501(c)(3) and Rev. Proc. 2020-5.

As provided in New Dynamics Foundation, any gaps in the administrative record will be resolved against the
applicant. You did not provide supplemental information; however, based on the information we do have, it

appears that even if you had provided the required information, you would not qualify for exemption under IRC
Section 501(c)(3) for the reasons described above.

In addition, in the case of Mysteryboy, it was found that the organization was not exempt because they were
encouraging an activity that violated public policy as reflected in federal and state laws. Because your activity
of providing medical marijuana is violating public policy, you do not qualify for exemption under IRC Section

501(c)(3).

Conclusion

Based on the facts and information submitted, you are not operated exclusively for exempt purposes as
described in IRC Section 501(c)(3). You also did not establish that you are operated exclusively for charitable
purposes and that you are not operated for the substantial private benefit of your members. While your
marijuana dispensary activities may be considered legal at the state level where you operate, you are conducting
substantial non-exempt activities as you are promoting an activity that is considered illegal by federal law.
Therefore, you do not qualify for exemption under Section 501(c)(3).

If you agree
If you agree with our proposed adverse determination, you don’t need to do anything. If we don’t hear from

you within 30 days, we’ll issue a final adverse determination letter. That letter will provide information on
your income tax filing requirements.

If you don't agree
You have a right to protest if you don’t agree with our proposed adverse determination. To do so, send us a

protest within 30 days of the date of this letter. You must include:

• Your name, address, employer identification number (EIN), and a daytime phone number
• A statement of the facts, law, and arguments supporting your position
• A statement indicating whether you are requesting an Appeals Office conference

• The signature of an officer, director, trustee, or other official who is authorized to sign for the
organization or your authorized representative

• The following declaration:

For an officer, director, trustee, or other official who is authorized to sign for the organization:
Under penalties of perjury, I declare that I have examined this request, or this modification to the
request, including accompanying documents, and to the best of my knowledge and belief, the request
or the modification contains all relevant facts relating to the request, and such facts are true, correct,

and complete.

Your representative (attorney, certified public accountant, or other individual enrolled to practice before the
IRS) must file a Form 2848, Power of Attorney and Declaration of Representative, with us if they haven’t
already done so. You can find more information about representation in Publication 947, Practice Before the

IRS and Power of Attorney.

We’ll review your protest statement and decide if you gave us a basis to reconsider our determination. If so,
we’ll continue to process your case considering the information you provided. If you haven’t given us a basis
for reconsideration, we'll send your case to the Appeals Office and notify you. You can find more information
in Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status.

If you don’t file a protest within 30 days, you can’t seek a declaratory judgment in court later because the
law requires that you use the IRC administrative process first (IRC Section 7428(b)(2)).

Where to send your protest
Send your protest, Form 2848, if applicable, and any supporting documents to the applicable address:

U.S. mail: Street address for delivery service:
Internal Revenue Service Internal Revenue Service

EO Determinations Quality Assurance EO Determinations Quality Assurance
Mail Stop 6403 550 Main Street, Mail Stop 6403

P.O. Box 2508 Cincinnati, OH 45202

Cincinnati, OH 45201

You can also fax your protest and supporting documents to the fax number listed at the top of this letter. If you
fax your statement, please contact the person listed at the top of this letter to confirm that they received it.

You can get the forms and publications mentioned in this letter by visiting our website at www.irs.gov/forms-
pubs or by calling 800-TAX-FORM (800-829-3676). If you have questions, you can contact the person listed at
the top of this letter.

Contacting the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or if you’ve tried but haven’t
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Sincerely,

Stephen A. Martin
Director, Exempt Organizations
Rulings and Agreements