On May 16, 2024, the US Department of Justice submitted a Notice of Proposed Rulemaking (NPRM) to reschedule marijuana from Schedule I to Schedule III within the Controlled Substances Act.

As the NPRM recognizes, this action would have a significant economic impact on a substantial number of businesses – specifically, medical and recreational marijuana dispensaries – because Internal Revenue Code (IRC) Section 280E “bars businesses from claiming tax deductions for otherwise allowable expenses where the business ‘consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act.’” Thus, “[i]f marijuana is ultimately transferred to schedule III, [IRC] section 280E would no longer serve as a statutory bar to claiming deductions for those expenses.” Because IRC Section 280E’s impact has meant marijuana businesses were not able to deduct their ordinary and necessary business expenses when computing their taxable income, the reversal of IRC Section 280E could be a gamer changer for the industry.

Businesses currently impacted by IRC Section 280E are now asking whether they will be able to claim refunds for deductions and other tax benefits that Section 280E previously denied them. In other words, will the rescheduling be treated as retroactive for tax purposes?

Nothing in the NPRM speaks to this question, and the answer may likely be determined at the discretion of the US Department of the Treasury and the Internal Revenue Service (IRS) in anticipated future guidance. If the rescheduling is implemented during a tax year (without a stated effective date), taxpayers may be able to apply the treatment to the entire tax year in which the change was made.

Practice Point: Taxpayers in the marijuana industry should consider whether to file protective refund claims for past tax years before definitive guidance is issued. As we have previously reported here and here, a taxpayer can file a “protective” refund claim that is expressly contingent on a specified future event, like guidance from the Treasury to the effect that the rescheduling of marijuana is retroactive to open tax years prior to the change. The Supreme Court of the United States has endorsed protective refund claims to toll the statute of limitations and thereby protect a taxpayer’s right to claim the refund if a favorable event should occur. But taxpayers should keep in mind that, in the IRS’s view, meritless protective refund claims made without “reasonable cause” can be subject to substantial penalties under IRC Section 6676. Therefore, when determining whether to file a protective refund claim, taxpayers should first consider consulting with a tax advisor on the pros and cons of filing.

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