Marijuana Sales Can’t Fund Chapter 13 Plan

by Kent Anderson

Despite state laws legalizing production of marijuana for medical use, it is not a legitimate revenue source to fund a Chapter 13 Plan.  Medical Marijuana laws have been enacted in sixteen states and the nation's capital city, Washington, DC, as of September 2011.  An additional six states have pending legislation to legalize the use of Cannabis for the treatment of various medical maladies.  Oregon is one of the states that issues permits for possession and use of medical marijuana.  Individuals with certain medical conditions designated by the statute or approved by the Health Division of the Oregon Department of Human Resources may apply for and receive a state issued permit that offers protection from criminal prosecution under Oregon law for possession of small amounts of the drug. 

In an unpublished but widely cited opinion, Oregon Chief Bankruptcy Judge Frank R. Alley, III, ruled that a Chapter 13 plan based, in part on income from a medical marijuana growing operation, did not meet the requirements of 11 USC §1325(a)(3) and could not be confirmed.  A Chapter 13 plan, to be approved by the court, must have "been proposed in good faith and not by any means forbidden by law".  Judge Alley explained that Oregon law only permitted reimbursement of medical marijuana growers for supplies and utilities.  Oregon law prohibits the receipt of compensation in excess of those limited reimbursements.  For this reason, receipts that exceed production costs would constitute illegal drug proceeds.

Federal law is unambiguous in its prohibition against the possession or sale of marijuana.  While the current Attorney General may have indicated that the federal government will not take action to disrupt use of medical marijuana in compliance with state law, the US Attorney for Oregon has stated a contrary position.  It is clear that deriving income from the production of marijuana remains illegal under Federal statutes currently in force.

There are, of course, practical concerns about an enterprise based on conduct prohibited by federal or state law.  The bankruptcy code actually requires a certain level of feasibility in that the court must find the debtor will be able to make all the payments proposed in the Chapter 13 plan.  A plan based on growing marijuana for a living, even in part, has an uncertain future. 

In addition to the concerns addressed by Judge Alley in the Oregon case, federal tax law calls into question the financial viability of marijuana growing operations.  Expenses associated with the production of medical marijuana may not be deductable for federal tax purpose.  Medical marijuana dispensory operations in California have been assessed with federal income tax liabilities after their deductions for the cost of producing and distributing medical marijuana have been disallowed.  It would be difficult indeed to generate an after tax profit with which to fund a Chapter 13 plan when ordinary business expenses are not allowed as a deduction against income.  This is particularly true in states with laws like the Oregon statute that only allows reimbursement for supplies and utilities.

 

For more information on these matters, please call our office at 305 548 2050.


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