In January, we published an article in this newsletter on the state of cannabis taxation, including a discussion of the crippling impact of Internal Revenue Code §280E (IRC §280E) on the industry. Since that article was published, the industry has been shaken and encouraged by the news that Trulieve Cannabis Corp. received refunds totaling $113 million from the Internal Revenue Service (IRS). To date, Trulieve has refused to divulge the specific basis for the refunds, citing competitive, trade-secret, and pending litigation reasons. In an article in Cannabis Business Times posted on February 29, however, it was reported that Trulieve CEO Kim Rivers responded “yes” to a question on X (formerly Twitter) on whether the refund was related to IRC §280E.[1] In addition to Trulieve, another cannabis business, Ascend Wellness Holdings, has also reported it has amended federal tax returns for several years and is expecting to receive refunds.[2] Before jumping into the speculation as to what the specific basis of the refunds are, it is helpful to briefly review IRC §280E.

IRC §280E

IRC §280E was enacted in 1982 to prevent drug traffickers from deducting business expenses related to the sale of Schedule I or II substances under the Controlled Substances Act (CSA).[3] The enactment of IRC §280E was in response to a Tax Court case, Edmondson v. Commissioner.[4]

In Edmondson, the Tax Court allowed the taxpayer to take business deductions for expenses incurred in an illicit drug business, including amphetamines, cocaine, and cannabis.[5]

In response, Congress quickly passed IRC §280E, which provides:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

Despite the legalization of cannabis in many states, it remains a Schedule I substance at the federal level.[6] The Tax Court has assigned “trafficking” the meaning of “to engage in commercial activity: buy and sell regularly.”[7] As a result, nearly anything connected to the cannabis industry will meet the definition of “trafficking.” Accordingly, cannabis businesses are unable to deduct most business expenses that are typically deductible for other industries.

Mitigation Possibilities

In our previous article, we also discussed some possible mitigation strategies that businesses might explore in reducing their federal tax burden and limitations placed on them by IRC §280E. These included segregating activities and IRC §471(c).

First, regarding the segregation of activities, the Tax Court has drawn a distinction between “trafficking” and other business activities that are separate and apart from the trafficking, and in doing so, permits the deduction of business expenses related to the separate activity.[8] Therefore, opportunities exist for segregating activities that are separate and distinct from the cultivation, production, distribution, or sale of cannabis. These businesses handle the cannabis plant itself in their operations and would be restrained by IRC §280E. These activities include growers who cultivate the plants, processors who extract compounds from the plant, and dispensaries that sell the product to consumers.

On the other hand, activities that do not “touch the plant” are those that operate in the cannabis industry but do not directly handle the plant. These can include businesses that provide ancillary services or products to the cannabis industry, such as equipment suppliers or IT providers. Another good example is provided in the Californians Helping to Alleviate Medical Problems, Inc. case, where the Tax Court drew a distinction between the provision of medical cannabis and the provision of counseling and care-giving services.[9] The use of such distinctions will require diligent attention to documentation and accounting practices.

Regarding IRC §471(c) [10], a feature of the Tax Cuts and Jobs Act of 2017, certain cannabis businesses may be able to rely on this new provision to lessen their tax burden. The provision was designed to simplify accounting for inventory and cost of goods sold (COGS) for businesses with less than $25 million in gross income. The new provision provides alternative methods for calculating COGS not previously available, as long as the methods are based on appropriate books and records of the company. An example of the new flexibility for a business is the ability to include 100% of facility costs in its inventory calculation. If the calculation was based on the books and records of the business, it would be permissible. Simplifying, in the cannabis business context, the argument is that the business could include the expenses of renting a warehouse as part of its COGS calculation.

There is much debate whether this IRC §471(c) COGS approach would pass judicial muster in light of IRC §280E, although anecdotal evidence suggests that the IRS is not challenging the use if appropriate books and records are kept. To those ends, businesses should use care to appropriately value inventory, make sure not to include indirect costs, such as overhead in the calculation, maintain detailed records and documentation, and remain consistent in accounting methods.

So What Is Happening?

With that IRC §280E background and possible mitigation strategies reviewed, we can now turn our attention to trying to determine the basis for the recent Trulieve and Ascend Wellness Holdings refunds.

As mentioned previously, Trulieve has not revealed the basis for its refunds, other than that they are related to IRC §280E, which obviously is very broad. We also have limited knowledge of the expected IRC §280E refunds. Therefore, we are left to only speculate as to what might be happening with the refunds.

First, it is possible that the refunds are based on the businesses more precisely segregating business activities that “touch the plant” from those that do not. Perhaps the businesses decided to implement the documentation and accounting practices necessary for using this strategy to mitigate the impact of IRC §280E. This strategy seems obvious, but for some businesses, such segregation may face significant hurdles related to initial restructurings, implementing internal controls and accounting practices, and dealing with other financial issues related to loan covenants and contractual provisions. It is possible that the refunds are a result of the companies finally being able to implement segregation strategies.

Second, it is possible that the opportunities presented by IRC §471(c) were used to obtain refunds. Importantly, IRC §471(c) only applies to businesses with less than $25 million in gross income. Perhaps businesses with gross income under that threshold that are part of the taxpayers’ consolidated groups took advantage of the simplified accounting and inventory provisions allowed by IRC §471(c), and those benefits flowed up to the filing taxpayer.

Third, it is possible that the companies had just been very conservative in their prior filings and decided to take a more aggressive approach in the amended filings, which resulted in refunds.

Fourth, it is possible that the companies have come up with a novel argument regarding IRC §280E that the IRS does not want to publicize or fight at this time. Remember, the IRS can always audit these taxpayers and claw-back any refunds that are later found to be improper.

Regardless of the basis for these refunds, this is an area that the industry will continue to follow with great interest given the severe impact that the limitations of IRC §280E have on cannabis businesses. We will continue to monitor developments in this area and will keep you updated in this newsletter.

[1] Cannabis Business Times, “Trulieve Reports Receiving Refund for 280E Taxes Paid,” Michelle Simakis, February 29, 2024 (

[2] MJBizDaily, “Cannabis MSO Ascend Wellness Expecting 280E Tax Refunds,” Solomon Israel, March 12, 2024 (

[3] 21 U.S.C. §801-971.

[4] Edmondson v. C.I.R., 42 T.C.M. (CCH) 1533 (T.C. 1981).

[5] Id.

[6] 21 U.S.C. 812.

[7] Californians Helping to Alleviate Medical Problems, Inc. v. C.I.R. (T.C. 2007).

[8] See Californians Helping to Alleviate Medical Problems, Inc., supra (company that provided medical cannabis to patients along with non-cannabis related services could deduct business expenses attributable to the non-cannabis services).

[9] Id.

[10] 26 U.S.C. §471(c).

Our Cannabis Practice provides advice on issues related to applicable federal and state law. Marijuana remains an illegal controlled substance under federal law.