Cannabis Musings - June 4, 2025

280E remains undefeated.

Friends – it’s been a rough few weeks for the cannabis industry. AYR announced a “strategic review process” for “capital structure alternatives”, including negotiations with their debtholders. 4Front, once a large, respected MSO, filed for receivership in anticipation of liquidation. Medicine Man, also known as Schwazze, is being sued by its lender, Altmore Capital. President Trump’s 2026 budget request conspicuously is missing the (so-called) Rohrbacher-Farr magic language (as far as that goes). Oy gevalt.

But instead, we’re going to check in on how 280E litigation is coming along. We’ve talked before about the fairly robust losing record on the part of people suing the federal government over cannabis. Particularly when it comes to 280E – tax courts really haven’t embraced the idea that there’s anything wrong with state-licensed and compliant cannabis operators shouldn’t be subjected to the dreck of 280E, which exists because a very entrepreneurial drug dealer dared to write off things like the cost of scales (with which he used to weigh drugs), his apartment rent (in which he weighed said drugs), and mileage and travel expenses (presumably used to sell said drugs), and the U.S. Tax Court (hilariously) agreed. 280E was put into place by Congress shortly after this 1981 decision. It’s hard to see how what 280E is trying to solve for is equivalent to what state-licensed operators are doing, but then again, it’s all illegal.

Rachel Gillette, Partner and cannabis tax whiz at Holland & Hart LLP, pointed out to me a decision from earlier this week in the U.S. District Court for the Western District of Washington that continues the massive losing streak of the cannabis industry v. 280E – Receivership Estate of Solstice v. U.S. The context here is that the plaintiff, the court-appointed Receiver for Solstice, which was a state-licensed cannabis operator, but is apparently now liquidating, filed with the IRS to collect its employee retention tax credit (ERC). You may recall that, during the pandemic (remember that?), Congress created a payment to employers (in the form of a tax credit) to help subsidize the cost of employee wages.

As best as I can tell, Solstice didn’t file for the ERC back when it was issued, so the receiver was going back and amending the tax returns to claim the credit - $1.37 million in total. It was never totally clear whether cannabis operators, what with being illegal and all, would be denied the ERC, but they tried, and, as best as I can tell, they got paid. There wasn’t the blanket rejection that some feared at the time.

Maybe it was because the IRS was now paying attention to the issue a few years later, but the IRS rejected the request, citing 280E as the primary reason. Solstice argued that 280E “concerns income, rather than employment, taxes,” but the court didn’t buy that argument, noting that there’s nothing to suggest that’s the case. It also argued that, since Solstice is in receivership, the money would go to creditors, not a cannabis operator, but the court didn’t buy that either because Solstice apparently didn’t provide any support for this novel argument (although this kind of distinction has kind of been accepted by at least one federal Bankruptcy Court).

Why does this matter? On its face, it’s another clear signal that challenging the sacrosanct nature of 280E is like getting involved in a land war in Asia. Indirectly, it raises the question of what the IRS is thinking regarding cannabis operators who cashed their ERC checks long ago. Is the Service now going to try to claw back those payments? Will operators fight that based on the 280E strategy made popular by Trulieve? If the IRS succeeds, where will the repayments come from – it’s not like the industry is swimming in cash. Even wonkier, will operators, which had to amend their prior returns to reflect the payments, need to reamend to reflect the clawback of those payments?

I’m in the middle of teaching a cannabis law class at UNLV Law, and one of the things I’m teaching my students is the challenge of operating in an environment where uncertainty prevails, and you’re constantly having to pivot to adapt to daily changes that are totally out of your control, many of which defy logic. The U.S. District Court just handed me another good example of this precept, unfortunately.

Be seeing you.

© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín or anyone else who hires me.