Courtroom Drama: Bribery, the IRS, and a Cautionary Cannabis TaleLisa RoughFebruary 18, 2016
“Have you ever taken a bribe before?”
According to former IRS agent Paul Hurley, that wasn’t an uncommon query. He’d received it many times before. Taxpayers are curious. They tend to ask questions.
But as Hurley recounted the scene in federal court in Seattle last week, this time the ask was a little different. This time it would lead to an actual bribe exchanging hands.
The dramatic case of U.S. v. Paul G. Hurley, which played out in the courtroom of U.S. District Judge John C. Coughenour last week, represented a watershed moment in the short history of legal cannabis. It was one of the first times anyone in the industry had been arrested for a crime connected to the Internal Revenue Service’s onerous 280E rule. The twist here was that the cannabis seller wasn’t on trial. The federal agent was.
Hurley, the now-former Internal Revenue Service agent, had been arrested for soliciting and accepting a bribe. In the summer of 2015, he conducted an audit of Have a Heart Compassion Care, a Seattle-based medical and recreational cannabis company owned by Ryan Kunkel.
It was Hurley’s first time auditing a marijuana business. He knew going in that the case might be difficult. Under the IRS tax code section 280E, businesses that deal with a federally illegal substance cannot make any deductions for business expenses aside from the cost of goods sold. The rule has crippled many cannabis businesses, which have found themselves owing hundreds of thousands of dollars to the government. The IRS, Hurley noted, offers no special training for agents handling cannabis audits.
As Hurley recounted in his testimony last week, he got to know Kunkel, Have a Heart's owner, over small talk in the parking lot of the Aurora Avenue dispensary, where Kunkel and the IRS agent would take cigarette breaks.
The audit was business as usual, according to both parties. Kunkel had exercised limited oversight of the accounting process and estimated only the cost of goods sold, essentially the only deduction allowed for a cannabis business.
After examining the tax records, Hurley determined that Kunkel owed the IRS $292,175.41, divided between the 2013 and 2014 fiscal years.
What happened next remains hotly disputed.
On the Stand
Hurley didn’t make an exciting villain. As he took the stand, bearing witness to his own downfall, he wore a poor-fitting khaki suit and an expression of shameful reproach.
His lawyer, the famous John Henry Browne, defender of “Barefoot Bandit” Colton Harris Moore and serial killer Ted Bundy, expertly spun the tale of a hardworking public official with immense student loan debt and a new baby to support.
Was a bribe asked for? Hurley said no. He simply wanted to help Kunkel with his taxes and accounting, the former agent said. He was looking to get his foot in the door with other marijuana businesses in the area.
The one phrase that they both agreed upon was Hurley’s: “I’m living paycheck to paycheck,” he told Kunkel. “I saved you over a million dollars.”
Kunkel testified that Hurley then rubbed thumb and forefinger together in a universally understood money sign, implying a bribe.
The Have a Heart owner said was taken aback, but replied, “How much?”
Hurley said simply “Twenty,” which Kunkel understood to mean he wanted $20,000.
Kunkel later admitted to Leafly, “I was going to pay it, to be honest. But I started thinking about it, and he said some things that kind of freaked me out. He said, ‘Can you make small deposits into my account over time?’ That’s structuring, that’s wire fraud, public corruption. I’m thinking this guy’s undercover, he’s wrapping me up in a nice little RICO package for the feds.”
At that point, Kunkel said, he consulted with several legal advisors he’d worked with in the past. They immediately advised him to go to the U.S. Attorneys Office.
By then, Kunkel was concerned about the survival of his business interests due to 280E taxes.
“If 280E didn’t exist, this would have been a straightforward audit,” he said. “There wouldn’t have been any doubt about whether or not we could have the cost of goods. The whole thing was a sham.”
Kunkel and Hurley agreed to meet at a nearby Starbucks on Sept. 16, 2015, the day after Hurley submitted final paperwork for the audit. Kunkel carried the cash in a manila envelope wrapped in a newspaper. He’d arranged the meeting with the assistance of the FBI. Kunkel wore a wire, and undercover agents waited in the shop. A hidden camera captured the whole exchange, during which Hurley received money literally under the table. He picked up the envelope, an action he does not deny.
“Do you regret taking that envelope?” asked Browne, his lawyer.
“Absolutely.” Hurley’s voice broke. “Everything spun out of control with allegations of bribery.” He began to weep on the stand. “I can’t believe I made such a huge mistake.”
In the end, it was a relatively speedy trial. Jury members began their deliberations on Wednesday. The verdict came in late Friday afternoon. Hurley was acquitted of the more serious charge — soliciting a bribe — but was convicted of receiving a bribe as a public official. He's scheduled for sentencing on May 13.
Though the outcome of the trial was technically in his favor, Have a Heart owner Ryan Kunkel said he's dejected by the whole affair. The IRS has scheduled a re-audit of all eight Have a Heart Compassion Care locations. “The IRS will force me into bankruptcy over this,” he said. “That is guaranteed. I can’t imagine anybody who wants to jump on a financial grenade.” He even feels a tinge of regret.
“I never wanted to set anybody up like that, send him to jail, wear wires,” Kunkel told Leafly after the verdict. “I don’t think anybody does. I mean, he’s a human being with a kid and a wife.”