DENVER – Cannabis companies underpaying or withholding taxes based on presumed nullification of Internal Revenue Code Section 280E after rescheduling are setting themselves up for costly disappointment and the potential for asset seizure, according to an attorney at the Internal Revenue Service (IRS).
Senior Counsel Luke Ortner, who prosecutes tax cases against cannabis businesses, delivered a stern dose of reality during a meeting of the American Institute of Certified Public Accountants.
“The IRS’s policy is not to look the other way because things have changed going forward,” he said. “For now, unless courts say otherwise, the IRS interprets [the section of the tax code pertaining to inventory accounting] narrowly and will defend its position that it is not an end run around the application of 280E.”
The section of the tax code known as 280E prohibits companies and individuals who deal in federally illegal drugs from deducting most common costs of doing business from their tax liability as other businesses do. Inventory is one of the few exceptions.
If the Drug Enforcement Administration follows through with a recommendation by U.S. health officials that cannabis be moved from Schedule I to Schedule III under the Controlled Substances Act, 280E won’t become inapplicable to the cannabis industry until the day the DEA’s decision is published in the Federal Register.
That day probably won’t happen in 2024, according to Nick Richards, a former leading trial attorney for the IRS and current tax partner in legal firm Greenspoon Marder LLP’s Denver office.
“It’s not going to have a bearing on this year’s filing season,” Richards told Green Market Report in June. “That seems pretty clear.”
With a DEA hearing about cannabis rescheduling set for December 2, betting on a positive outcome before the end of the year is risky. Even if the DEA were to update the Federal Register in December—which is highly unlikely—280E relief probably would not be retroactive to the beginning of the year.
“The other question, which is kind of up in the air right now, is if [rescheduling] gets resolved in 2024, will it be retroactive to January 1? Or would it be the actual date of resolution going forward?” mused Daniel Corsaro, a partner specializing in tax law in the Indianapolis office of Ice Miller LLP. “My personal suspicion is it will be … from the date of resolution going forward.”
Some companies, including Florida-based multistate operator Trulieve, have filed amended federal returns going back three years with some success. As of June, Trulieve received a federal refund of $113 million. But the issue is far from settled.
“Trulieve continues to make tax payments as a customary U.S. taxpayer without tax payments associated with 280E of the tax code until final resolution is reached,” the company noted in a prepared statement.
If companies like Trulieve have placed the wrong bet, consequences could include increased IRS scrutiny, a near-certainty of future audits, and federal litigation to recoup improper refunds.
In June, the IRS released a statement clarifying that grounds for amended returns seeking a refund of taxes paid related to 280E are “not valid.” The agency also noted it’s “taking steps to address these claims [amended returns].”
Trulieve Chief Executive Officer Kim Rivers referred to the company’s substantial refund as a “trade secret” in February, declining to share the details during an earnings call.
“We are not going to be sharing that information publicly, given the fact that it could be in a litigation posture,” she said.
According to the IRS, the agency typically includes returns within the past three years during an audit. If a substantial error is noted, the IRS can audit additional years and even request an extension of the statute of limitations for tax assessment.
