Marijuana MSOs set up high-risk fight with IRS over 280E revolt

Tens of millions of dollars in tax savings and a quick increase in available cash are some of the immediate short-term benefits for the five major marijuana multistate operators that have declared their freedom from Section 280E of the Internal Revenue Code.

But in the long run, Ascend Wellness Holdings, Cresco Labs, Curaleaf Holdings, TerrAscend Corp. and Trulieve Cannabis Corp. are all but guaranteed a lengthy and costly fight with the IRS – the outcome of which could include millions of dollars in penalties on top of existing tax bills, according to tax attorneys and risk experts who spoke with MJBizDaily.

“If something sounds too good to be true, it usually is,” said San Francisco-based tax attorney Henry Wykowski, who has argued several prominent 280E-related cases before federal tax judges.

“We think this more aggressive strategy is reckless and is going to come back to haunt the people who are using them.”

MSOs flee from 280E

The first company to declare independence from 280E was Tallahassee, Florida-headquartered Trulieve, which staked out its bold position last fall and claims to have received substantial refunds.

Companies that followed include:

• Ascend Wellness, a New York-based operator that made its own announcement the quarter after Trulieve that it also had filed amended returns seeking refunds as far back as 2020 and would file for 2023 as a “normal corporate taxpayer.”
• TerrAscend, a Canadian-headquartered company with U.S. assets that staked out its position in March.
• Curaleaf, a New York-based MSO whose chair reiterated in August that 280E no longer applies.

The latest company to risk the gambit, Chicago-based Cresco Labs, told shareholders of the plan during its recent quarterly earnings call.

“Regarding taxes, we intend to file as a normal business in 2023 and beyond,” said Dennis Olis, Cresco’s chief financial officer, who boasted of $65 million in subsequent “estimated tax savings” for 2024.

Tax deductions prohibited

Section 280E says “no deduction or credit shall be allowed” for costs incurred during the “trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).”

The upshot is billions in “excess taxes” levied on American marijuana companies that otherwise would not apply, according to an estimate from Oregon-based economist Beau Whitney.

Freedom from 280E is one of the main advantages of rescheduling, and companies large and small are expected to enjoy significant windfalls once the Biden administration’s proposal to move marijuana to Schedule 3 is finalized.

Until then, however, the IRS has made its position crystal clear.

“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,” the IRS said in June.

“Although the law has not changed, some taxpayers are filing amended returns,” the agency added.

“The grounds for filing such claims vary, but these claims are not valid.

“The IRS is taking steps to address these claims.”

Tax reasoning

Exactly what justifications the major MSOs are using is still a closely guarded secret – and it is likely to remain secret until they are challenged in a public forum such as federal district court or tax court.

The companies that responded to MJBizDaily‘s requests for comment merely pointed to their most recent earnings statement sand investor calls.

Cresco Labs

Cresco said in quarterly filings that it “worked closely with expert advisors to be incredibly thoughtful with our read on Section 280E and its implications.”

In its most recent filings with the Canadian Securities Exchange, Cresco said, “beginning in 2024, the Company is taking an uncertain tax position that its operations are not subject to IRC 280E and therefore intends to deduct such expenses with a related uncertain tax liability offsetting such deductions.”

The company reduced its quarterly tax liability by $3.7 million, or 26.5%, compared to the same time last year. But it also increased its “tax receivable agreement liability” by $61 million.

Curaleaf Holdings

In its quarterly statements, Curaleaf said only that, starting in the second quarter of 2024, it had “adopted a new federal and state income tax position, asserting that the restrictions of Section 280E of the Internal Revenue Code (“Section 280E”) do not apply to the Company’s cannabis operations.”

So far for 2024, the company’s provision for future income taxes is $71.8 million.

Beyond that, Curaleaf wrote that it “intends to file for a refund for tax year 2022 … and to report as a non-Section 280E taxpayer for tax year 2023 and going forward.”

“The decision to adopt this position is supported by legal interpretations that challenge the Company’s tax liability as determined pursuant to Section 280E,” the company added, while also noting that “there is a great likelihood” that the IRS will conduct an audit.

Trulieve Cannabis

Trulieve said it had realized a “$169.8 million impact from the Company’s position that it does not owe taxes attributable to the application of Section 280E,” with only $4.5 million out of $174 million in claimed refunds rejected, according to filings.

The benefits of such positions are obvious.

“Without the effect of 280E, first and second quarter net income would have been positive,” Trulieve noted in its filings.

Ascend Wellness

Ascend noted in SEC filings it had $112 million in “uncertain tax positions … based on legal interpretations that challenge the Company’s tax liability under IRC Section 280E.”

However, the risk might be even greater, experts said.

Fighting the IRS

Preparing for a long siege with the federal tax agency could be a way for marijuana companies to buy time before realizing the financial benefits of major reforms such as rescheduling or potential adult-use legalization in markets such as Florida.

Making an independence declaration from 280E also improves balance sheets, potentially making the companies more attractive to investors.

But all this might come with a price: a showdown with the IRS.

While solving “a short-term problem” with cash flow, “they’re inviting a fight” with the IRS, said Dotan Melech, who worked for decades as a court-appointed receiver and federal bankruptcy trustee and is now CEO of Dallas-based CTrust, a credit-rating and risk-monitoring agency for the cannabis industry.

In Ascend’s case, a dispute with the IRS might already be happening: According to quarterly filings, the company has been “selected for examination of its amended tax return.”

An audit fight that results in relief might prove worthwhile for a well-capitalized, publicly traded MSO, provided investors and the company’s board have set aside resources for what is guaranteed to be a multiyear court battle, Melech noted.

“Maybe they have enough firepower to see this fight through – but nevertheless, it’s a fight,” he said, adding that the MSOs have some chance of winning, however slim.

“I commend them for taking the lead and maybe setting a precedent that could benefit many more.”

Other observers were less sanguine.

“This just isn’t going to work,” said Wykowski, who counts among his 280E cases the 2007 decision that a plant-touching business could deduct expenses not directly related to the sale of cannabis.

Wykowski said several companies, which he declined to identify, approached his firm to present a legal position relieving them from 280E.

“We just said no,” he told MJBizDaily.

“This is just not solid. We’re not going to support it because we know what could go wrong here.”

Among the risks is a 20% penalty the IRS could impose on a company seeking a refund that’s ultimately rejected – that’s 20% on top of the taxes the IRS determines the business owes, plus the cost of paying litigators, he said.

“I don’t know that these people have fully considered and appreciated what the consequences are,” Wykowski said.

“And they’re much more severe than people realize.”

Chris Roberts can be reached at chris.roberts@mjbizdaily.com.