With October's deadline for taxpayers on tax return filing extension for tax year 2024 quickly approaching, this alert provides updates to our post in May on the exploding trend of cannabis tax filers taking the uncertain tax position that Internal Revenue Code Section 280E is inapplicable.
Update
Litigation Update
A closely watched case in Tax Court from New Mexico, New Mexico Top Organics, Inc. v. Commissioner, Tax Court Docket # 19661-24, is the first to raise the statutory construction arguments discussed below challenging Section 280E. There has been some recent procedural movement in the case as this summer, the Tax Court granted the parties' joint motion to submit the case on a stipulated basis under Tax Court Rule 122. This means the IRS and taxpayer have no disagreement on the facts, and the case boils down to only a legal dispute to be determined on the briefs. The taxpayer's opening brief is due October 17, 2025. The Internal Revenue Service's (IRS) reply brief is due January 16, 2026, and then the taxpayer gets the last word with a reply brief due to be filed on February 27, 2026. Although, as discussed below, the IRS has categorically stated it disagrees with any legal basis claiming an inapplicability of Section 280E, the IRS has not articulated specific legal justification for the position. That will change when it submits its substantive brief in January. The cannabis world will be watching closely.
In Canna Provisions, Inc., et. al. v. Bondi, a coalition of licensed, state-legal cannabis businesses has argued that application of the Controlled Substances Act and Section 280E to their business activities is not a rational exercise of Congress' authority to regulate interstate commerce under the Commerce Clause or the Necessary and Proper Clause of the U.S. Constitution. The U.S. District Court (Mass.) granted the Department of Justice's (DOJ) motion to dismiss; the U.S. Court of Appeals for the First Circuit affirmed the order, and the businesses have signaled their intention to appeal to the U.S. Supreme Court (Supreme Court). If the Supreme Court hears the appeal and rules in favor of the businesses, it would overturn its own 20-year-old precedent, which generally would result in rendering Section 280E inapplicable, at least as applied to separable lines of state-legal medical cannabis businesses. At this point, it is uncertain whether the Supreme Court will accept the case or, in that event, how it will decide.
"No Consideration" of Amended Returns
Anecdotally, many filers of amended returns report receiving "No Consideration" letters from the IRS, which create longer pathways to appeal than outright rejections.
Regulatory and Legislative Updates
In August 2025, President Donald Trump said he would soon make a decision on rescheduling cannabis, although we've seen no further action. If any move from the Trump administration mirrors the Notice of Proposed Rulemaking from the Biden administration, cannabis would be reclassified as a Schedule III controlled substance to which Section 280E no longer applies. The announcement from the President prompted a schism within his own party, as on September 10, 2025 the powerful Republican-led House Appropriations Committee advanced a federal funding bill containing a rider that would prohibit the DOJ from using any funds to remove cannabis from Schedule I. In contrast, other Republican representatives introduced legislation that would reclassify cannabis as a Schedule III controlled substance with without the need for the current administrative rescheduling process; a coalition of Democratic representatives introduced legislation that would "deschedule" cannabis by removing it from the scope of the Controlled Substances Act entirely.
Separately, bills have been introduced in the House and Senate that would, if enacted, amend Section 280E to maintain the prohibition on allowing any deduction or credit associated with a trade or business involved in trafficking cannabis. Both bills were introduced and referred to the relevant committees in February, but no further action has been taken as of the date hereof.
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.
