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Section 280E of the IRS Code has long been a thorn in the side of regulated cannabis businesses.
We’re all looking for a way to avoid its harsh tax consequences while hoping for federal action.
Recent news of Trulieve Cannabis Corp.’s highly publicized $143 million federal income tax refund claims for the 2019, 2020 and 2021 tax years created a frenzy of hope in the industry that seems to offer a way out.
But does it?
In its Oct. 13, 2023, news release, Trulieve announced a bold plan to seek 280E refunds “based on legal interpretations that challenge the Company’s tax liability under 280E.”
While Trulieve might have arguments that could succeed, without more details about its business operations and the basis of its legal arguments, other cannabis companies should obtain their own legal and tax advice rather than blindly follow the Florida-based multistate operator’s path.
Cannabis executives must consider that refund claims are not immune from penalties.
In some circumstances, refund claims deemed “excessive” can be subject to a 20% penalty.
Canna Provisions vs. Garland is another current case that might also offer hope for the industry.
However, in challenging the constitutionality of the Controlled Substances Act (CSA), Canna Provisions does not directly attack 280E.
The plaintiff’s arguments in this case also should be carefully analyzed before filing a refund claim based on a possible reversal of the CSA as it applies to state-legal marijuana businesses.
As tax attorneys, we know that in order to protect themselves from preparer penalties, tax preparers should conduct a legal analysis to determine if there is a “reasonable basis” that 280E does not apply – or rely on an attorney’s well-reasoned analysis that there is a reasonable basis.
While reasonable basis is not defined by the tax authorities as a certain likelihood of success, the reasonable-basis standard is not satisfied by a return position that is merely arguable.
Filing a refund claim based on speculation about how a law might change going forward based on refund claims filed by other taxpayers, shifts in the makeup of the U.S. Supreme Court or the potential narrowing of the commerce clause might not meet the reasonable-basis standard.
Trulieve refund claims: What we know and what we don’t
We don’t know much beyond the information in Trulieve’s release, which claims the company is entitled to a refund of $143 million in previously paid taxes.
Importantly, the public does not know the legal basis for Trulieve’s refund claims – at least not yet.
Tax law provides that if the IRS does not act on a refund claim within six months, the claimant can file a claim for refund in district court or in the court of federal claims.
If/when this happens, the rest of the industry could learn details about the legal basis for Trulieve’s refund claims.
We don’t know whether Trulieve filed refund claims asserting it was not subject to 280E for all types of its operations (medical and adult use) in all states, or if its approach was more selective.
During the tax years for which the refund claims were filed, many of Trulieve’s largest markets were medical-only or CBD/hemp markets.
Similarly, we don’t know whether Trulieve’s original returns contained errors in how 280E was originally applied, which could be the basis for a refund.
What we know about Canna Provisions
In the Canna Provisions litigation, the plaintiff challenges the ongoing federal marijuana prohibition as unconstitutional, asserting that the CSA – as applied to state-legal regulatory regimes – exceeds Congress’ authority under the commerce clause, among other constitutional claims.
While this case is undoubtedly important and newsworthy for the industry, it could take years for the case to wind its way to the Supreme Court for an ultimate decision – if it ever gets there.
Any positive ruling in favor of the plaintiff might be only prospective and may not apply to previous tax years.
Additional uncertainty about using Canna Provisions as the “reasonable basis” for a tax refund claim comes from the Department of Justice’s Jan. 23, 2024, motion to dismiss the case.
The DOJ has asserted that Congress already has a rational administrative process to reschedule marijuana.
The Canna Provisions case does not directly assert that 280E does not apply.
And because the case focuses on intrastate commerce, not every cannabis company’s business and operational circumstances align with the facts at issue in Canna Provisions.
Again, each cannabis business needs to undertake an individualized business and legal analysis.
Potential tax options for cannabis companies
Protective claims are permitted when expected changes to a current regulation, pending legislation or current litigation could impact a taxpayer’s tax liability.
In this situation, a protective claim would presumably rely on the fact there will be a Trulieve refund litigation case or that Canna Provisions could impact the application of 280E.
Trulieve’s refund claims are not currently in litigation, so companies would need to consider whether there is active litigation to support a valid protective claim.
Any cannabis business considering whether to file a refund claim also should consider Trulieve’s profile and its own company profile to determine whether a potential Trulieve win on 280E would actually impact its operation.
Because the Canna Provisions case does not directly attack 280E itself, another open question is whether a successful outcome in Canna Provisions would provide a reasonable basis to assert that 280E does not apply.
Cannabis companies considering filing refund claims based on the Trulieve and Canna Provisions cases need in-depth legal analysis of the facts as they relate to each taxpayer, from qualified legal counsel and tax professionals.
While it might be tempting to think these cases are coming at a time when the industry could most use relief from 280E, that does not mean that either of them is likely to prevail or that the results will be retroactive to allow relief from 280E in previous years.
The bottom line: Look before you leap, and work closely with your tax professionals.
Rachel Gillette is a corporate and tax partner at Holland & Hart in Denver and leads the firm’s cannabis and psychedelics industry group. She can be reached at rkgillette@hollandhart.com.
Jennifer Benda is a tax controversy and litigation partner at Holland & Hart and handles high-dollar-value, sensitive tax matters with complex legal issues for businesses and individuals, including Section 280E. She can be reached at jebenda@hollandhart.com.
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