While marijuana may soon be rescheduled under federal law, that doesn\u2019t currently exempt state-legal cannabis businesses from an Internal Revenue Service (IRS) code known as 280E that bars them from taking federal tax deductions, the agency argues in a new filing with the U.S. Tax Court.<\/p>\n
In response to a petition to the court filed by the New Mexico marijuana business Ultra Health\u2014which challenged the conventional interpretation of the IRS code, which applies to tax deduction claims connected to the sale of Schedule I and Schedule II drugs under the Controlled Substances Act (CSA)\u2014IRS said the issue has already been soundly settled by Congress and various federal courts.<\/p>\n
Those courts \u201chave consistently held that section 280E is constitutionally valid and have created a robust legal authority supporting its validity and applicability to sellers of marijuana,\u201d it said. \u201cFederal courts have addressed the applicability of section 280E in over 40 published orders or opinions. No resulting order or opinion include a ruling or holding that section 280E is unconstitutional or inapplicable to cannabis sellers.\u201d<\/p>\n
Ultra Health\u2019s novel argument in support of its alleged eligibility for tax deductions is based on the fact that 280E applies to businesses that sell controlled substances \u201cwithin the meaning<\/em> of\u201d Schedule I and Schedule II drugs under the CSA. (Emphasis added.) In its opening brief filed last year, the petitioner said that means the tax court \u201cmust determine the ordinary meaning of \u2018within the meaning of schedule I and schedule II,’\u201d and that interpretation shouldn\u2019t be based exclusively on whether cannabis is simply listed<\/em> as Schedule I.<\/p>\n \u201cA list, by itself, has no \u2018meaning.\u2019 To speak of \u2018the meaning\u2019 of a list is to speak of the characteristics that define it,\u201d Ultra Health argued. \u201cThe characteristics that define schedules I and II of the CSA are the three-part classification criteria\u201d that largely concern abuse potential and currently accepted medical value.<\/p>\n \u201cIf a substance does not meet the section 812(b)(1) criteria, it does not fall within the statutorily defined meaning of schedule I and thus cannot be placed on the schedule I list. And if a substance on the schedule I list is revealed not to meet the section 812(b)(1) criteria, the CSA provides for its removal from that list,\u201d it said.<\/p>\n To that end, the Drug Enforcement Administration (DEA) and U.S. Department of Health and Human Services (HHS) under the Biden administration completed a review finding that marijuana does not meet the CSA criteria for a Schedule I drug and should be moved to Schedule III, which would make 280E tax restrictions inapplicable.<\/p>\n President Donald Trump in December separately signed an executive order directing the attorney general to finalize the process of reclassifying marijuana\u2014but that hasn\u2019t formally materialized yet. And in the interim, IRS told the tax court that it\u2019s an improper venue to independently make a scheduling-related determination.<\/p>\n \u201cThis would create a seismic rift between how substances are controlled and identified under the CSA and how they are applied under tax law, and plainly Congress did not intend to hide this elephant in the mousehole of the \u2018within the meaning of\u2019 verbiage,\u201d IRS said in the reply brief, which was filed last week. \u201cPetitioner\u2019s statutory text argument is inconsistent with the text of section 280E, established precedent, and the statutory and administrative framework that Congress created under the CSA and section 280E.\u201d<\/p>\n The petition from Ultra Health, which was also supported by several cannabis trade associations that submitted amici briefs in the case, further maintained that marijuana is not \u201cprohibited\u201d by the CSA and that Congress \u201chas divested itself of Commerce Clause [of the U.S. Constitution] power to regulate marijuana,\u201d IRS said in its latest filing.<\/p>\n But the agency pointed to statute stipulating that only the Drug Enforcement Administration (DEA) or U.S. Department of Health and Human Services (HHS) can initiate a drug scheduling review. And while it acknowledged that DEA is \u201ccurrently considering rescheduling, it has not yet published a final rule reclassifying marijuana.\u201d<\/p>\n IRS said \u201cmarijuana remains a Schedule I controlled substance, and was so during the entire period at issue, July 1, 2017, through June 20, 2020\u2033\u2014a period when Ultra Health argues it should have been eligible to take federal tax deductions despite selling cannabis. \u201cSince marijuana was a Schedule I controlled substance during that period, the Court must \u2018apply the law in effect at the time it renders its decision,\u2019 and apply section 280E in those periods.\u201d<\/p>\n \u201cPetitioner\u2019s interpretation ignores the operative fact that marijuana remains a Schedule I controlled substance pursuant to the CSA,\u201d the filing states. \u201cPetitioner\u2019s request that the Court reschedule marijuana pursuant to an imaginary process which is prohibited by the clear procedures of the CSA must be denied.\u201d<\/p>\n IRS also emphasized that the CSA and 280E \u201care sister statutes, and must not be read to conflict, absent clear congressional intent.\u201d<\/p>\n \u201cPetitioner\u2019s argument thus runs afoul of black letter law on interpreting sister statutes harmoniously and presuming that similar terms operate and contain consistent meanings across statutes\u2026 Plainly, absent clear intent to the contrary, Congress did not intend for the CSA and section 280E to conflict,\u201d it said. \u201cInstead, the CSA and section 280E must be read in harmony and to avoid inconsistent outcomes; if a substance is currently identified as a Schedule I or II controlled substance under the CSA, then it is a substance \u2018within the meaning\u2019 of Schedule I or II for purposes of section 280E.\u201d<\/p>\n The petitioner\u2019s interpretation \u201ceffectively bestows rescheduling authority for controlled substances to the Court and creates incongruity between section 280E and the CSA,\u201d it continues. \u201cPetitioner\u2019s argument fails because it ignores this important context within the CSA and would implicitly repeal the administrative process and roles delineated in the CSA for rescheduling substances.\u201d<\/p>\n \u201cAbsent clear intent to the contrary, Congress did not intend for the CSA and section 280E to conflict by having conflicting avenues for rescheduling. Instead, the CSA and section 280E must be read in harmony to avoid such inconsistent outcomes and the implicit repeal of the procedures by which a provision might be rescheduled. This conflicting interpretation and inconsistent outcome are not supported by the legislative history of section 280E or case law. The Court does not have authority to undertake an independent evaluation of the CSA scheduling criteria to determine where a drug fits within the Schedules. Such a reading is inconsistent with the plain language of the statute and canons of statutory construction.\u201d<\/p>\n Putting a finer point on the issue, IRS said 280E \u201cshould not be interpreted in a way that leads to inconsistent results with the CSA and functionally circumvents its procedural requirements for scheduling.\u201d<\/p>\n As for the scientific review into marijuana conducted by HHS and the Food and Drug Administration (FDA) that led to a rescheduling recommendation under former President Joe Biden, Ultra Health\u2019s argument that the agencies\u2019 conclusion should factor into its eligibility under 280E is \u201cirrelevant\u201d because \u201cDEA is ultimately responsible for rescheduling,\u201d IRS said<\/a> in the filing, which was noted<\/a> earlier by Law360.<\/p>\n \u201cMoreover, even when rescheduling occurs, there is no authority for the proposition that it would be retroactive to the tax years at issue,\u201d it said. \u201cMarijuana was<\/em> \u2018within the meaning of schedule I and II\u2019 during the tax years at issue and still is<\/em> today.\u201d<\/p>\n Further, the petitioner\u2019s claim that a congressional spending bill rider preventing DOJ from using its funds to interfere in state medical marijuana programs is \u201cmisplaced and confuses funding priorities with the conduct Congress has clearly prohibited,\u201d IRS said. \u201cSection 280E provides that no deduction is allowed for amounts paid in carrying on any trade or business if such business consists of trafficking in controlled substances which is prohibited by state or federal law.\u201d<\/p>\n \u201cIf medical marijuana is not \u2018prohibited\u2019 by the CSA because Congress limited DOJ\u2019s funding in one year, it would retroactively become prohibited if, in a subsequent year, DOJ funding were to be reinstated. And this still cannot explain how this would apply in partial year funding scenarios, or if Congress were to again subsequently restrict DOJ enforcement funding. This miasma of a system is, of course, easily avoided by applying the CSA (and appropriation riders) as written, which is the only permissible approach to statutory construction; selling marijuana is prohibited by the text of the CSA, and the appropriations riders\u2019 only impacts are, as their texts say, to limit funds being used for limited purposes during limited periods of time.\u201d<\/p>\n Put simply, \u201cthe CSA clearly prohibits the sale of marijuana, and section 280E has a clear and consistent meaning when read as a whole. Accordingly, the judicial inquiry is at an end,\u201d it said. \u201cUnless Congress or the DEA reschedule marijuana, or Congress amends section 280E, we must conclude that Congress intended to prohibit marijuana traffickers from taking deductions and credits.\u201d<\/p>\n \u201cIt follows that section 280E applies to petitioner to disallow deductions in the tax years at issue,\u201d IRS said.<\/p>\n The Congressional Research Service (CRS) has separately discussed prior attempts to challenge 28oE as it applies to state-legal marijuana businesses<\/a>. In a report published last month, CRS pointed out that judges in the Tax Court issued a majority opinion upholding 280E and determining that the statute doesn\u2019t violate the U.S. Constitution \u201cbecause the disallowance of deductions does not constitute a \u2018penalty\u2019 for the purposes of the Eighth Amendment.\u201d<\/p>\n Meanwhile, IRS in 2024 warned the marijuana industry that some companies have, without a \u201creasonable basis,\u201d filled out a supplementary form in an attempt to take federal tax deductions that they\u2019re prohibited from receiving<\/a> under a provision known as 280E.<\/p>\n Of course, the federal tax issue may ultimately be resolved if the Justice Department follows through on Trump\u2019s rescheduling directive, but despite a mandate to finalize the rule \u201cin the most expeditious manner,\u201d there haven\u2019t been any updates on the status of that process in the weeks since the president signed the order.<\/p>\n The post Marijuana Businesses Can\u2019t Force Court To Do \u2018Imaginary\u2019 Rescheduling Review To Exempt Them From 280E Tax, IRS Says<\/a> appeared first on Marijuana Moment<\/a>.<\/p>\n
While marijuana may soon be rescheduled under federal law, that doesn\u2019t currently exempt state-legal cannabis businesses from an Internal Revenue Service (IRS) code known as 280E that bars them from taking federal tax deductions, the agency argues in a new filing with the U.S. Tax Court. In response to aContinue Reading<\/a><\/span><\/p>\n","protected":false},"author":458,"featured_media":0,"comment_status":"false","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[18,81],"tags":[],"_links":{"self":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/85590"}],"collection":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/users\/458"}],"replies":[{"embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/comments?post=85590"}],"version-history":[{"count":1,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/85590\/revisions"}],"predecessor-version":[{"id":85591,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/posts\/85590\/revisions\/85591"}],"wp:attachment":[{"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/media?parent=85590"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/categories?post=85590"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cannabiscultivatornews.com\/home\/index.php\/wp-json\/wp\/v2\/tags?post=85590"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\nRead More: Marijuana Businesses Can\u2019t Force Court To Do \u2018Imaginary\u2019 Rescheduling Review To Exempt Them From 280E Tax, IRS Says<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"