‘Reckless’ 280E gamble backfires as feds demand millions from cannabis MSO

This story has been updated to add comment from TerrAscend USA.

Key points:

• The U.S. Justice Department is seeking $8.3 million plus interest from cannabis multistate operator TerrAscend USA for an “erroneous” refund it received after filing an amended tax return.
• That tax return contained deductions not allowed under Internal Revenue Service Code Section 280E, government attorneys said in a May 18 federal court filing.
• Tax experts warned the situation may signal the government’s position on the collective $1.6 billion in 280E tax debt owed by publicly traded cannabis companies as of earlier this year.
• And federal marijuana rescheduling, which reclassified medical cannabis as a Schedule 3 drug in April, may be no defense.

In an ominous sign for the cannabis operators deep in arrears with the federal taxman, the U.S. Internal Revenue Service wants TerrAscend USA to return an “erroneous” refund the New Jersey-based cannabis multistate operator received after wrongly claiming deductions not allowed under Internal Revenue Code Section 280E.

Filed Monday, a few weeks after the Justice Department reclassified medical cannabis as a Schedule 3 drug, the case may shed light on the government’s position on other outstanding tax cases, tax experts interviewed for this story said.

Publicly traded companies reported owing a collective $1.6 billion in past-due tax liabilities earlier this year.

The U.S. Justice Department’s Tax Litigation Branch wants TerrAscend to return $8.3 million “plus statutory interest” dated from June 2024, according to the complaint filed May 18 in U.S. District Court in New Jersey.

TerrAscend CEO Ziad Ghanem did not immediately respond to a telephone message seeking comment on Wednesday.

Cannabis MSO says 280E refund was ‘properly received’

In a statement Thursday, a company spokesperson said TerrAscend believes the refund was “properly received.”

$8.3 million is the exact amount the company reported as its “deferred income tax liability” during its most recent quarterly earnings statement earlier this month.

Bloomberg Law first reported the Justice Department’s May 18 complaint against the company.

Do cannabis operators owe past-year 280E taxes?

The case comes as many cannabis operators are eagerly awaiting promised guidance from the U.S. Treasury Department that, they hope, will absolve them of looming past-year 280E tax bills.

While many operators are hopeful that federal marijuana rescheduling will eventually include retroactive 280E relief, clearing the books, the TerrAscend situation suggests the government will maintain what’s always been its position: Those taxes are owed.

“I think it’s safe to say that this is the beginning of something big,” said California-based tax attorney Henry Wykowski, who has argued several major 280E-related tax cases in federal court.

In 2024, Wykowski told MJBizDaily that claiming 280E relief before any change in cannabis’ classification was a “reckless” strategy.

“We warned people about this years ago,” he said. “If the IRS knows they can get money back, they are going to pursue it.”

Cannabis MSOs’ declaration of 280E tax independence may have been premature

According to the complaint filed by attorneys from the Justice Department’s Tax Litigation Branch, TerrAscend received an $8.3 million refund for the 2020 tax year in June 2024, a few months after filing an amended tax return.

TerrAscend initially filed a 2020 tax return in October 2021 that claimed $0 in business deductions.

However, according to the complaint, the company in April 2024 filed an amended return that claimed $64.2 million in deductions.

That was the year many multistate operators began declaring their independence from 280E, which forbids entities that traffic in Schedule 1 or 2 controlled substances from claiming many common business expenses on their federal returns.

Among the first was Florida-based multistate operator Trulieve Cannabis Corp., which boasted in February 2024 that it had received $113 million in refunds after filing amended tax returns seeking $143 million back the previous October.

Trulieve did not immediately respond to a request for comment on Wednesday. That company reported $696 million in uncertain tax liabilities as of March 31, according to its most recent filings.

IRS has always claimed 280E is owed

At the time, tax experts such as Wykowski warned the “aggressive” strategy could come back to haunt the companies. Nevertheless, cannabis companies across the country continued withholding taxes nominally due under 280E.

That was despite clear direction from the IRS that the taxes were owed.

“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 a June 2024 bulletin.

“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.”

By early 2026, back taxes potentially owed by publicly traded MSOs had ballooned to $1.6 billion.

Justice Department: Cannabis MSO ‘not entitled’ to 280E deductions

TerrAscend received a refund check in June 2024 for $8.3 million and deposited it the same day.

According to tax attorney Katherine Allen, it’s not uncommon for the IRS to issue a refund check before later determining whether the refund was properly issued.

In TerrAscend’s case, the company “was not entitled to take deductions for any amount incurred in carrying on its trade or business during tax year 2020,” the government argued in its May 18 filing.

“For tax year 2020, cannabis was a controlled substance prohibited by Federal law within the meaning of 26 U.S.C. § 280E,” the filing stated.

The complaint adds that for some unknown reason, TerrAscend’s refund claim was not internally reviewed by the IRS’ Joint Committee on Taxation as required.

While this is the first known instance of the government attempting to claw back a wrongly issued 280E refund to a cannabis operator, other companies could have settled similar matters quietly, outside of the courts, Allen said.

TerrAscend “has not voluntarily returned the erroneous refund to the United States,” the complaint said.

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