Cannabis companies are increasingly taking non-280E positions on their current year federal income tax returns, while many, such as public "MSOs," have amended prior years' returns to reflect this position. Foley Hoag's Tax Practice Chair, Kip Cawley, and Cannabis Practice Co-Chair, Jesse Alderman, recently discussed trends in the application of Section 280E and the status of current legal challenges and IRS enforcement. This is a trend on the mind of taxpayers on extension from tax year 2024 or considering adjusting their 2025 quarterly payments. You can access the slides from this presentation here. Please reach out to kcawley@foleyhoag.com and jalderman@foleyhoag.com to discuss further.
IRC Section 280E – Current Trends
Numerous cannabis companies are taking the position that Section 280E is inapplicable to their state-legal cannabis businesses. This is done through one or more of the following strategies:
- Amending prior year returns
- Taking the position on current year returns and/or prospectively
- Filing a protective claim
In general, taxpayers must file an amended return to claim a refund or credit within three years from the date the taxpayer's original return was filed or within two years from the date the tax was paid, whichever period expires later; the IRS generally has three years from the filing date of a return to undertake an audit of such return.
How Companies are Taking a "Non-280E" Position
A prerequisite is a tax opinion, issued by a law firm, that reaches the conclusion that if the taxpayer takes a "non-280E" position on a tax return and the IRS challenges the position, the taxpayer would have at least a "reasonable basis" to defend the position before a court. This enables a tax preparer to sign the return under IRS Regulations, and it may serve to protect the taxpayer from "substantial underpayment" penalties (but not interest).
To reach a "reasonable basis" level of certainty, the position, as a legal matter considering all relevant precedent, must be more than "merely colorable" or "merely arguable." The position must be "reasonably based" on supporting authorities, whether or not those authorities have substantial weight compared to contrary authorities.
Such an opinion likely covers one or more statutory construction arguments based on the difference in language used under the Controlled Substances Act and Section 280E, and may also include a constitutional argument that is similar to the claims at issue in the case Canna Provisions, Inc., et. al. v. Bondi. More details on the common "reasonable basis" arguments for a non-280E position are found in the presentation slides.
Whether an amended return or a current year return, the position does get disclosed to the IRS on a Form 8275 Disclosure Statement. This could be a "red flag" or increase audit risk.
IRS Response
In general, the IRS may respond in one of the following ways:
- Accept
- Reject
- "No Consideration"
The IRS also can always refer a taxpayer to IRS Examination (i.e., an audit).
The IRS also has made two public statements on the trend of cannabis companies taking a non-280E position. On June 28, 2024, the IRS published an Information Release (IR-2024-177), which states: "Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment."
On December 12, 2024, the IRS published a Fact Statement (FS-2024-32), which stated:
- "Some disclosures [on IRS Form 8275] received with respect to section 280E . . . [are] lacking a reasonable basis."
- "Taxpayers should be aware that Form 8275 disclosures that lack a reasonable basis do not provide penalty protection. Taxpayers in this posture should consult a tax professional or advisor to determine how to come into compliance."
These IRS publications are general and conclusory, and neither one addresses taxpayers' substantive arguments for non-280E positions. Nonetheless, they are precedent that must be considered in a "reasonable basis" opinion, although they may not be controlling.
Current Court Challenges to Section 280E
A case in Tax Court, from New Mexico, is the first to raise the statutory construction arguments discussed above. A petition was filed in Tax Court on December 16, 2024, and the IRS filed an Answer on February 4, 2025. The case is New Mexico Top Organics, Inc. v. Commissioner, Tax Court Docket # 19661-24. The case is being watched closely, although it will take months to reach resolution in Tax Court and likely will be appealed from there regardless of the outcome.
Impact of the Trump Administration
While the rescheduling of cannabis would eliminate the application of Section 280E to cannabis companies, the prospects of a final rule from the DEA are deeply uncertain. Still, the Trump administration could have an indirect impact on taxpayers taking non-280E positions because expected IRS workforce reductions may limit the Service's ability to audit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
