Since the April 2026 filing season, the landscape surrounding Section 280E of the Internal Revenue Code has continued to evolve in significant ways. President Trump’s Executive Order directing the rescheduling of medical marijuana from Schedule I to Schedule III of the Controlled Substances Act (“CSA”), the advancing litigation in New Mexico Top Organics Inc., d/b/a Ultra Health v. Commissioner of Internal Revenue, and shifting regulatory signals have all added new dimensions to the calculus facing cannabis taxpayers.
Key Takeaways
For cannabis taxpayers, so much is changing, but so much also remains the same:
- For Tax Year 2025, medical and adult use cannabis remained listed on Schedule I of the CSA. While taxpayers are presenting arguments about the inapplicability of Section 280E to their state-legal businesses (and disclosing the uncertain tax position on their returns), the in a press release that rescheduling will generally be considered to first apply for a business's full taxable year that includes the effective date of the Final Order – i.e., for medical cannabis only, as of January 1, 2026.
- For cannabis taxpayers that elect to take the calculated risk of disclosing a “non-280E” uncertain position and who have not yet filed their 2025 (or prior years) returns, a “Reasonable Basis” Opinion is required either as an update to the Opinion received in prior years or for taxpayers disclosing the position for the first time.
- The medical cannabis Rescheduling Order tantalizingly encourages the IRS to consider retrospective relief, but so far not only has the IRS not taken the bait, they have not even published the promised transitional guidance on apportioning expenses between adult use and medical, and other uncertainties resulting from medical rescheduling. Still, the question arises whether taxpayers might consider amending prior years’ returns on the hope (however faint) of retroactive relief or, alternatively, submitting protective claims.
- While monumental policy changes proceed, on the ground the IRS is dug in. There is more cannabis audit activity than ever and the IRS, true to its previous public statements, does not accept the “non-280E” position.
- With the IRS dug in, the furthest advanced U.S. Tax Court case to raise the most common arguments in favor of the “non-280E” position is pending and no decision has been reached.
- For those taxpayers that have not considered these and other impacts on their businesses, there is a careful risk balancing discussion that must occur and every taxpayer has a unique legal, financial, corporate and even psychological profile to consider. Taxpayers should consult their legal and accounting teams.
Background: Section 280E and the Cannabis Industry
As we have discussed in previous alerts, Section 280E provides that "[n]o 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."
Because adult use cannabis (and before April 2026, medical cannabis) is listed as a Schedule I controlled substance under the CSA, the IRS has consistently maintained that Section 280E applies to state-licensed cannabis businesses, dramatically increasing their effective tax rates.
Nonetheless, cannabis companies are increasingly taking “non-280E” positions on their current year federal income tax returns, while many have amended prior years’ returns to reflect this position. This is done through one or more of the following strategies:
- Amending prior year returns
- Taking the position on current year returns and/or prospectively
- Filing a protective claim
A prerequisite to taking a “non-280E” position is a tax opinion, issued by a law firm, that reaches the conclusion that if the taxpayer takes a “non-280E” position on a tax return and the IRS challenges the position, the taxpayer would have at least a “reasonable basis” to defend the position before a court. To reach a “reasonable basis”, the position, as a legal matter considering all relevant precedent, must be more than “merely colorable” or “merely arguable.” The position must be “reasonably based” on supporting authorities, whether or not those authorities have substantial weight compared to contrary authorities. Taxpayers are monitoring recent developments in light of this standard. We discussed the arguments that taxpayers are setting forth as reasonable bases in:
- Past webinars and the accompanying slides;
- An appearance by Cannabis group Co-Chair Jesse Alderman on the High Functioning Podcast; and
- A joint webinar by Alderman and Tax practice Chair Kip Cawley with MGO Accounting experts.
The IRS Answering Brief in New Mexico Top Organics, Replies and Sur-Replies
In a significant litigation development, the IRS filed its answering brief on March 6, 2026, in New Mexico Top Organics Inc., d/b/a Ultra Health v. Commissioner of Internal Revenue, Docket No. 19661-24, before the United States Tax Court. This brief is noteworthy because it marks the first time that the IRS has set forth its substantive legal reasoning for determining that cannabis remains "within the meaning" of Schedule I of the CSA for purposes of Section 280E, and for rebutting arguments that Section 280E does not apply. Previously, when addressing the question of whether Section 280E continues to apply to cannabis businesses — most notably in a Fact Sheet and Information Release issued in 2024 — the IRS simply rejected contrary positions without providing any substantive analysis or reasoning to support its conclusions.
The IRS argues that the petitioner's reading of the phrase "within the meaning of" would require the Tax Court to independently evaluate whether marijuana satisfies the scheduling criteria under the CSA. The taxpayer argues that the Department of Health and Human Services has already done this when it published its Recommendation to reschedule cannabis to Schedule III under the CSA, finding, among other things, that based on medical and scientific research that cannabis has currently accepted medical use in treatment (a Schedule I controlled substance, under the CSA’s definition, must have no accepted medical use).
On May 18, 2026, the taxpayer filed a reply brief – in our view rather convincingly – arguing that the Court is not being asked to independently evaluate whether marijuana should be rescheduled, but rather to accept HHS’ findings that the definitional criteria of a Schedule I substance are not met for cannabis. The taxpayer also noted that medical cannabis has already been rescheduled, negating the argument.
The IRS addressed the medical rescheduling order in a sur-reply on July 31, 2026, where it continued to argue that consideration of the definitional criteria for a Schedule I substance is not permitted in enforcing Section 280E, and the IRS may only look to whether a substance is listed or not.
Interestingly, the Tax Court also asked the parties to brief whether the Court is bound by DOJ’s decision to not make the medical rescheduling order retroactive – one implication being that the Court may be asking whether DOJ had the chance to agree with the taxpayer that Section 280E did apply (at least as of the HHS 2023 Recommendation).
Foley Hoag Resources
Foley Hoag has provided extensive resources and commentary for cannabis companies navigating these issues. In addition to our prior blog post on Section 280E, we have published presentation slides from our webinar on Section 280E, and recently partnered with MGO to host a webinar discussing these developments in depth. Please see the Related Resources to view those materials and access on-demand webinar recording.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
