BY CAROLYN WITKUS AND JON ERIC STUEBNER
As more and more states pass legislation legalizing cannabis for both medicinal and recreational purposes, issues regarding cannabis are being addressed more frequently by the courts. Domestic courts are no different, and unique issues regarding cannabis have become more prevalent in many domestic cases. From the highs of increased revenue from cannabis entities (and the valuation of those entities) to the lows of cannabis use and parenting issues, cannabis and family law often intersect in unique ways.
Since the sale of marijuana for recreational use first began in January 2014, cannabis has grown into a multibillion-dollar industry with total sales exceeding $6 billion. As with most industries, owners of cannabis businesses have not been immune to divorce. In the context of a divorce, it is often necessary to value a business for purposes of equitably dividing the marital estate. The valuation of a cannabis business often presents distinct valuation issues. For instance, as most cannabis dispensaries are purely cash businesses and business deals are often not public affairs, it is often only in the context of a divorce that a full valuation of these businesses is ever performed. While most valuation methodologies are generally applicable to these businesses, the fact that many dispensaries still operate on a purely cash basis provides opportunities for owners to dissipate funds or mischaracterize income. However, as more and more local credit unions, and some banks, are becoming more willing to provide services to cannabis businesses, some of these valuation issues are diminishing. Additionally, as the industry has grown, many smaller entities are being forced out or bought by larger entities, requiring more complex valuation approaches.
In some respects, the comprehensive regulations regarding marijuana can make information regarding cannabis businesses more readily available than other businesses. For example, dispensary owners are required to track products from seed to sale through an electronic METRC inventory system and must make the businesses’ financial record keeping available for inspection and audit by the State Licensing Authority at all times. Working with a financial expert familiar with marijuana businesses or other primarily cash businesses is strongly advised in valuing the business for allocation in the divorce.
For purposes of calculating maintenance and child support, income from self-employment, proprietorship of a business, or joint ownership of a partnership equals gross receipts minus ordinary and necessary expenses. Since owners of marijuana dispensaries are not able to deduct many of the standard ordinary business expenses from their federal tax returns, issues can arise when determining income for the purposes of maintenance and support, as these tax returns are inherently unreliable as to income under the statutory definition.