Marijuana Businesses and Divorce
Marijuana continues to have a presence in the news, not only in Colorado, but across the nation as well. Colorado is one of 29 states that have legalized marijuana for medical purposes, and one of nine states that has legalized marijuana for recreational purposes. Despite indications from the current federal administration regarding the legalization of marijuana, this trend is likely to continue as more and more states observe the degree of success to which legalization is implemented and the potential tax revenue that becomes available. Colorado has seen tax revenue from marijuana sales nearing or surpassing $1 billion in each year since 2015, and almost $5 billion in total tax revenue since 2014.
Valuation Issues with Marijuana Dispensaries
So, how do Courts handle the financial issues in a divorce concerning marijuana businesses? Under Colorado law, domestic relations courts are required to value marital property as of the date of divorce decree or as of the date of a hearing on the disposition of property. As such, Courts must determine the value of a marijuana business much the same as it would for any other business and using similar valuation methodologies. However, because of the unique aspects of the marijuana industry, there are certain challenges to valuing a marijuana business. For instance, because most marijuana dispensaries operate primarily, or solely, on a cash basis, this provides opportunities for owners to dissipate funds or mischaracterize income, particularly in the context of a divorce. Additionally, when analyzing income for support purposes, because of the conflict between federal and state laws regarding marijuana, owners of marijuana businesses are not able to deduct many of the standard business expenses from their federal tax returns as other business owners can do.
However, in some respects, because of the comprehensive regulations regarding marijuana, obtaining information regarding these businesses may be more readily available than in other industries. For example, Colorado marijuana businesses are required to track the inventory and sales of every marijuana product from seed to sale through an electronic METRC inventory system. This information, as well as the businesses’ financial record keeping must be available at all times for inspection and audit by the State Licensing Authority.
Appointing a Receiver over Marijuana Businesses
Another interesting issue which has begun to arise in Colorado relates to the ability to appoint a receiver over marijuana businesses. The appointment of a receiver to take property or a business into the custody of the court pending the outcome of litigation has been a long recognized equitable and inherent power of the courts. In the context of a divorce, a receiver may be an important consideration if there are concerns that one party is dissipating marital assets through the business or taking actions to attempt to minimize the businesses’ value. This is particularly true with marijuana businesses as they often operate on a cash basis. However, the Colorado Court of Appeals has recently ruled that a receiver who is appointed over a marijuana business must have the required licensure through the State Licensing Authority. Although this issue may be addressed by the Colorado Supreme Court, for the time being, it limits who the court can appoint as a receiver for a dispensary. Additionally, new legislation and State Licensing Authority Rules were recently enacted providing a mechanism for appointed receiver’s to obtain temporary registration and licensing.
Given the nature of most marijuana businesses, valuations of those businesses in a commercial sense are rare. As such, it is often in the context of a divorce that a business valuation occurs, and so it is often family law attorneys and related financial experts who have become uniquely familiar with the marijuana legislation and the nature of the industry. As the marijuana industry is still in its infancy, it is inevitable that other challenges and issues will arise as the industry continues to grow and expand. Therefore, if a marijuana business is at issue in a divorce, it is integral to have attorneys and experts who are experienced and knowledgeable in this area.
Jon Eric Stuebner earned his J.D. from the University of Denver Sturm College of Law. While attending law school, Jon Eric worked as a legal assistant for a local non-profit organization advocating for individuals with disabilities before joining Griffiths Law in 2014 as a paralegal and finishing law school. Jon Eric’s background allows him to zealously advocate for clients with the degree of compassion necessary to help them through what is often the most emotionally turbulent time in their lives.