Marijuana Businesses Can’t Force Court To Do ‘Imaginary’ Rescheduling Review To Exempt Them From 280E Tax, IRS Says

While marijuana may soon be rescheduled under federal law, that doesn’t
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 a petition to the court filed by the New Mexico marijuana
business Ultra Health—which 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)—IRS said the issue has already been soundly settled by Congress and
various federal courts.

Those courts “have consistently held that section 280E is constitutionally
valid and have created a robust legal authority supporting its validity and
applicability to sellers of marijuana,” it said. “Federal 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.”

Ultra Health’s 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 “*within the meaning* of” 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 “must determine the
ordinary meaning of ‘within the meaning of schedule I and schedule II,'”
and that interpretation shouldn’t be based exclusively on whether cannabis
is simply *listed* as Schedule I.

“A list, by itself, has no ‘meaning.’ To speak of ‘the meaning’ of a list
is to speak of the characteristics that define it,” Ultra Health argued.
“The characteristics that define schedules I and II of the CSA are the
three-part classification criteria” that largely concern abuse potential
and currently accepted medical value.

“If 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,” it said.

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.

President Donald Trump in December separately signed an executive order
directing the attorney general to finalize the process of reclassifying
marijuana—but that hasn’t formally materialized yet. And in the interim,
IRS told the tax court that it’s an improper venue to independently make a
scheduling-related determination.

“This 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 ‘within the meaning of’ verbiage,” IRS said in the reply brief, which
was filed last week. “Petitioner’s 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.”

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 “prohibited” by the CSA and that
Congress “has divested itself of Commerce Clause [of the U.S. Constitution]
power to regulate marijuana,” IRS said in its latest filing.

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 “currently considering rescheduling, it has not
yet published a final rule reclassifying marijuana.”

IRS said “marijuana remains a Schedule I controlled substance, and was so
during the entire period at issue, July 1, 2017, through June 20, 2020″—a
period when Ultra Health argues it should have been eligible to take
federal tax deductions despite selling cannabis. “Since marijuana was a
Schedule I controlled substance during that period, the Court must ‘apply
the law in effect at the time it renders its decision,’ and apply section
280E in those periods.”

“Petitioner’s interpretation ignores the operative fact that marijuana
remains a Schedule I controlled substance pursuant to the CSA,” the filing
states. “Petitioner’s request that the Court reschedule marijuana pursuant
to an imaginary process which is prohibited by the clear procedures of the
CSA must be denied.”

IRS also emphasized that the CSA and 280E “are sister statutes, and must
not be read to conflict, absent clear congressional intent.”

“Petitioner’s 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… Plainly, absent clear intent
to the contrary, Congress did not intend for the CSA and section 280E to
conflict,” it said. “Instead, 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 ‘within the meaning’ of Schedule I or II for purposes of
section 280E.”

The petitioner’s interpretation “effectively bestows rescheduling authority
for controlled substances to the Court and creates incongruity between
section 280E and the CSA,” it continues. “Petitioner’s 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.”

“Absent 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.”

Putting a finer point on the issue, IRS said 280E “should not be
interpreted in a way that leads to inconsistent results with the CSA and
functionally circumvents its procedural requirements for scheduling.”

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’s argument that the
agencies’ conclusion should factor into its eligibility under 280E is
“irrelevant” because “DEA is ultimately responsible for rescheduling,” IRS
said in the filing, which was noted earlier by Law360.

“Moreover, even when rescheduling occurs, there is no authority for the
proposition that it would be retroactive to the tax years at issue,” it
said. “Marijuana *was* ‘within the meaning of schedule I and II’ during the
tax years at issue and still *is* today.”

Further, the petitioner’s claim that a congressional spending bill rider
preventing DOJ from using its funds to interfere in state medical marijuana
programs is “misplaced and confuses funding priorities with the conduct
Congress has clearly prohibited,” IRS said. “Section 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.”

“If medical marijuana is not ‘prohibited’ by the CSA because Congress
limited DOJ’s 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’ only impacts are, as their
texts say, to limit funds being used for limited purposes during limited
periods of time.”

Put simply, “the 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,” it said. “Unless 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.”

“It follows that section 280E applies to petitioner to disallow deductions
in the tax years at issue,” IRS said.

The Congressional Research Service (CRS) has separately discussed prior
attempts to challenge 28oE as it applies to state-legal marijuana businesses.
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’t violate the U.S. Constitution “because the disallowance of
deductions does not constitute a ‘penalty’ for the purposes of the Eighth
Amendment.”

Meanwhile, IRS in 2024 warned the marijuana industry that some companies
have, without a “reasonable basis,” filled out a supplementary form in an
attempt to take federal tax deductions that they’re prohibited from
receiving under a provision known as 280E.

Of course, the federal tax issue may ultimately be resolved if the Justice
Department follows through on Trump’s rescheduling directive, but despite a
mandate to finalize the rule “in the most expeditious manner,” there
haven’t been any updates on the status of that process in the weeks since
the president signed the order.

The post Marijuana Businesses Can’t Force Court To Do ‘Imaginary’
Rescheduling Review To Exempt Them From 280E Tax, IRS Says appeared first
on Marijuana Moment.