Nonprofits and Marijuana: Lawsuit Threatens Tax-Exempt Groups

A small nonprofit is at the center of a legal battle in central Illinois concerning the contradictory relationship between the federal government and state governments that have enacted some degree of marijuana legalization.

An attorney representing Shiloh Agronomics – a private company which was denied a medical marijuana license – has asked a judge for permission to file a lawsuit against license-recipient Shelby County Community Services, an organization that assists people with issues ranging from autism to substance abuse. According to Executive Director Tom Colclasure, the medical marijuana license is to provide jobs for between 25-30 people with disabilities, as well as revenue for the nonprofit in the face of declining state government funding.

In 2013, Illinois became the 20th state to legalize medical marijuana. Several states – including Oregon, Washington, and Colorado – have legalized the recreational use of marijuana. A handful of cities and towns, such as Portland and South Portland in Maine, as well as Washington D.C., have also passed recreational cannabis laws (though the implementation of D.C.’s law was blocked by Congress).

Under federal law, marijuana is still classified as an illegal narcotic, though the Obama Administration announced that it would permit states to proceed with legalization so long as they adhere to a number of guidelines, largely designed to prevent interstate trafficking.

Shiloh Agronomics’ petition is an attempt to leverage federal law against the nonprofit. Jude Sullivan, daughter of company stake-holder James Sullivan, told the Chicago Sun Times that, “because Shelby County Community Services is a federally recognized 501(c)(3) tax-exempt entity, it is not eligible to apply for a permit to engage in an activity that violates federal law.”

The legal classification of cannabis – however slowly – is changing. As the process inches forward, various legal challenges will emerge. Perhaps this lawsuit presents an opportunity for nonprofits operating in cannabis-friendly states to iron out any issues that could bar them from fully taking advantage of local laws, and could even lead to a higher court and a federal ruling in support of equal rights for nonprofits under the law.

Considering the positive ends for which Shelby County Community Services applied for the license, as well as the de facto legalization granted by the federal government, the petition’s argument against the nonprofit is more technical than it is reflective of the moral and legal zeitgeist. The legal entitlement expressed by Shiloh Agronomics is arbitrary, and should not lead to a precedent that unnecessarily puts tax-exempt nonprofit organizations at a competitive disadvantage.

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