Posts in JDSALaw Original
Cannabis Business Woes: What if you can't pay?

The cannabis industry is walking a fine line between state legality and federal illegality; constantly having to navigate the uncertainty of changing governmental policies, rules and regulations.  Given that recreational cannabis is newly legal in only a handful of states, there is not a lot of history on which business owners can base decisions, which has resulted in unexpected expenses and in some unfortunate cases, failed business ventures.

What happens if you can’t pay the bills?  It turns out that bankruptcy is not an option, but negotiation with the IRS may be possible.

Typically, if a federal tax lien is levied against a business, it can have the debt discharged in bankruptcy. However, the United States Trustees office’s is taking the position that they do not have the ability to lawfully administer Chapter 7 or Chapter 13 bankruptcies if the debtor is part of a cannabis growing or selling operation.  In the case of In re Arenas, the taxpayers owned a marijuana production business in Colorado and filed Chapter 7 bankruptcy.  The Tenth Circuit granted the Trustee’s motion to dismiss the grower’s bankruptcy for cause and disallowed the grower from converting the bankruptcy from a Chapter 7 to a Chapter 13 due to the illegality of the crop.   The Court found that the Trustee could not administer the assets without violating the Controlled Substances Act, a federal law.  Similar cases have been dismissed in California on the same grounds. This ruling would likely apply to all businesses that are directly involved in the growing, processing or selling of cannabis.

If you are in the cannabis industry, you are unable to discharge a federal tax debt through bankruptcy, leaving the options of paying the debt in full or negotiating with the IRS as the only viable paths to discharging the debt.  One such method of negotiation is called an Offer in Compromise (often called an OIC).  In a recent Federal Taxes Weekly Alert, issued May 19, 2016, the IRS has stated that it will not reject marijuana businesses’ offers in compromise on public policy grounds.

If an individual or business has received notice that the IRS has assessed a tax deficiency, the taxpayer may (if it qualifies) issue to the IRS an OIC.  The IRS will only consider an OIC where: (i) the taxpayer can viably dispute all or a portion of the tax debt; (ii) the taxpayer cannot to pay the tax; or (iii) a compromise would promote effective tax administration because collection of the full amount of tax would cause economic hardship for the taxpayer, or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

The Internal Revenue Manual (IRM) Section 5.8.7.7.2 provides that if there are indicators showing that the taxpayer financially benefits from criminal activity, the case manager may reject an OIC on public policy grounds.  The recently issued IRS Alert clarifies that if the taxpayer otherwise meets the requirements for an OIC, the case manager cannot reject the OIC just because the taxpayer is involved in a cannabis business so long as the business is legal under state law.

This Alert may seem small, but it is a step toward legitimizing cannabis businesses at the federal level and may be a sign for things to come.

Trademark 101: Choose It, Own It, Protect It, Police It

It is a word, slogan, symbol, design, color, sound, or a combination of these things. It tells consumers that particular goods or services originate from a particular source. It is vital to your brand identity as it helps distinguish the goods or services of one party from those of another.

It is your trademark. And you want a strong trademark.

Some strong, and well-known trademarks, are logos (Apple for computers); sounds (MGM’s roaring lion); and color (Home Depot Orange). 

So how do you pick a strong and protectable mark? It might be easy to choose one, but getting your trademarks approved and registered might not be so easy. Not every mark is strong and protectable. Trademarks fall along a spectrum of “distinctiveness” – the more distinctive the mark is to consumers, the stronger and more protectable the mark.

On the flip side of this is the fact that you can’t trademark what it is you sell. A generic trademark is the same exact term as the goods or services that it covers. For example, you cannot trademark the term “beer” to cover the beer you are selling. This is because others in the beer industry need to be able to market their beer using the generic term “beer”.

There are three main categories of trademarks. They are:

  • Descriptive. These are weak and generally are not protectable or registrable. A descriptive mark literally describes an essential element of the goods or services it covers; for example, “cold and creamy” for ice cream.
  • Suggestive. These are strong and eligible for protection and registration. These suggest a quality or characteristics of the goods or services; for example, “Java City” for coffee bar services.
  • Arbitrary or Fanciful. These are the strongest and most protectable type of mark.  These marks either do not exist in language, or have nothing to do with the goods or services they cover; for example,“Google” for the online search engine.

Next, how do you protect it? That’s where trademark rights come into the equation. In purely legal terms, trademark rights are the legal interest in a protectable trademark that may permit the trademark owner to prevent others from unauthorized uses of the trademark. Essentially, if you own it, no one else can use it.

The first step in protecting your trademark right is very simple. The minute you associate a protectable mark with your goods or services and begin marketing or selling those goods or services to the public, you are establishing rights in that mark - even if you have not formally registered your mark.

Formally registering your mark with a state trademark office or the United States Patent and Trademark Office (“USPTO”) may be the best course of action for your business, and certainly gives you the most benefits.

And finally, how would you police your mark? Well, whether trademark rights exist only at common law, or via state or federal registration, a mark is only as strong as the owner’s efforts to police and enforce it.  As owner of a trademark, you really have to monitor the business activity in your region—including online—for uses that may generate a likelihood of consumer confusion with your protectable mark.  If you find a potentially infringing use, you will want to notify the owner of the challenged mark and request that they stop using the challenged mark.  If they do not stop using the mark, you may want to consider a lawsuit for trademark infringement.

Bringing it all together: Trademark law is complex. It is recommended that you consult a trademark attorney when choosing, filing an application to register, and policing and enforcing your trademark. It’s the best way to protect your business interests and your brand.

To learn more about this topic in depth, and to explore the benefits to USPTO registration, read the full article. To better understand Trademark Law, call us today at JDSA Law.