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When the World Innovates but the Law Stands Still

by Andrew Ittleman on Categories: federal law

When the World Innovates but the Law Stands Still

By Andrew S. Ittleman and Stephen H. Wagner

When is an airplane a “motor vehicle”? Only when federal law is 45 years behind the innovation.

The year was 1926 – 23 years after the Wright Brothers’ first flight at Kitty Hawk – when William McBoyle ordered an airplane (that he may or may not have been stealing) to be flown from Illinois to Oklahoma. Because of the interstate nature of his act, he was charged with a federal offense: violation of the National Motor Vehicle Theft Act. He was found guilty on the premise that a “vehicle” is a conveyance, and an airplane is a conveyance, so the law applies. The case made it to the U.S. Supreme Court where the justices overturned Mr. McBoyle’s conviction while reasoning, with alacrity and clarity:

When a rule of conduct is laid down in words that evoke in the common mind only the picture of vehicles moving on land, the statute should not be extended to aircraft simply because it may seem to us that a similar policy applies, or upon the speculation that if the legislature had thought of it, very likely broader words would have been used.
McBoyle v. United States, 51 S.Ct. 340, 341, 75 L.Ed. 816 (1931).

The problem facing the federal government in McBoyle was that federal law had not yet caught up to the invention of the airplane. It wasn’t until 1948 that 18 U.S.C. § 2312 was codified to make it a federal crime to steal motor vehicles, vessels, and aircraft. Thus, the government, wishing to prosecute something it did not like, had no choice but to pound a round peg into a square hole.

While we may find it laughable that the lower courts in McBoyle went to such convoluted lengths to apply a motor vehicle law to something that is so clearly not a motor vehicle, McBoyle-esque convolutions of law still occur quite frequently today.

One prominent example of the federal government continuing to apply outdated and unsuitable laws to emerging trends is bitcoin, the “virtual currency” now exploding in popularity worldwide. Despite bitcoin being introduced over five years ago, the Internal Revenue Service only issued its first guidance on bitcoin in March 2014. While the IRS is now stating that bitcoin is property, not a currency, and should be treated as such for tax purposes, the guidance leave many critical questions unanswered. Should bitcoin be treated as a capital or non-capital asset? What are the tax consequences of “mining” or “trading” or “dealing” in bitcoin (which may all be different)? What is the proper basis in the bitcoin, given that different bitcoin in different virtual wallets may have different bases? Many of these critical questions remain unanswered, leaving bitcoin users and exchangers in legal limbo.

What about those who deal in bitcoin as a business? Recent guidance issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), draws a distinction between bitcoin “users” and “exchangers” in determining whether individuals or businesses will be considered money services businesses (MSB) for purposes of the Bank Secrecy Act. Indeed, bitcoin parties have already been indicted for “operating an unlicensed money transmitting business” in violation of 18 U.S.C. § 1960. The basis of the charge is derived from non-binding FinCEN guidance that states, with no public comment or legal support, “[A] person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.” This guidance unilaterally turns a bitcoin exchange service into a money transmitter without the presence of a third-party recipient of funds, something not supported in existing federal law. However, this type of legal convolution occurs because the law has not yet changed to catch up with ongoing paradigm shifts in payment systems.
This same type of regulatory lag is present in the field of legalized and medicinal marijuana. Despite more and more states passing laws that legalize marijuana in various forms, the federal government still lists marijuana as a Schedule I controlled substance under the Controlled Substances Act (CSA). The implications of this CSA Schedule I listing for state-sanctioned marijuana are enormous as legal uses and medical procedures are now being turned into “drug trafficking”:

  1. Under federal law, physicians are prohibited from prescribing marijuana and their DEA licenses can be revoked for doing so – even in states in which medicinal marijuana is legal.
  2. FinCEN guidelines require financial institutions to file a Suspicious Activity Report (“SAR”) for virtually every transaction with a marijuana dispensary “including those duly licensed under state law[.]”
  3. Section 280E of the IRS Code disallows marijuana dispensaries from taking business deductions for “trafficking in controlled substances.” This results in dispensaries paying an effective tax rate as high as 75%.

These draconian and seemingly incongruous federal laws have left the state-sanctioned marijuana industry scrambling and improvising ways to merely conduct ordinary business activities. Meanwhile, an entire emergent industry waits for the monolithic federal government to catch up with developments in state law and society as a whole.

For lawyers whose clients are seeking to embrace the business promise (and profits) that these emerging markets can bring while seeking to understand and mitigate (or eliminate) the legal risks, this leg in federal law can be maddening. It may require extensive and expensive federal litigation. It may require analyzing and applying laws in novel or attenuated ways (that could expose the lawyer to risk as well). Regardless, it is incumbent upon all lawyers as members of the bar pledged to devotion to “the public good” to embrace the legal change within their states and to help force the federal government to shift its own regulatory paradigms to mirror those changes taking place in society.

The attorneys at Fuerst Ittleman David & Joseph, PL have extensive experience in many of these emerging areas of law. If you have any questions pertaining to your cutting-edge business, please contact us at

South Florida Legal Guide Midyear 2014 Edition

Tags: innovation federal law

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