Harborside Health Center proclaims itself the world's largest marijuana dispensary. For certain, it is California's most ambitious – a holistic care center with a naturopathic physician, acupuncturist, chiropractor, yoga instructors and therapists in "universal life force energy."

Its Oakland facility handles $22 million in annual medical marijuana transactions.

Now Harborside is attracting scrutiny from the Internal Revenue Service. Since last year, the IRS has been auditing 2008 and 2009 federal tax returns for the Oakland location, one of two outlets Harborside operates for 70,000 medical marijuana users. The other facility is in San Jose.

The outcome may eventually establish whether U.S. tax authorities treat medical marijuana as a legitimate enterprise or illicit drug trafficking.

IRS tax code passed during the Reagan administration to keep drug dealers from making business deductions could cost Harborside millions of dollars in tax deductions for salaries, overhead and the expenses of buying and furnishing medical pot.

Steve DeAngelo, Harborside's director, said the IRS has been examining the nonprofit dispensary's books for months and has informed him it is being audited for compliance with IRS code 280E, which covers rules for "expenditures in connection with the illegal sale of drugs."

While the IRS would not confirm or deny the audit, Harborside is lobbying Congress to change the code for dispensaries in states where medical marijuana is legal. Marijuana remains an illegal narcotic under federal law.

"We're ... objecting to the fact that something designed for cocaine kingpins is being applied to licensed medical cannabis facilities following state law," DeAngelo said.

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