Cannabis Musings - March 18, 2024
Ask the Law-Talking Guy answers reader questions on rescheduling and 280E refunds!
Friends – it’s time for the first installment of Ask the Law-Talking Guy. Paid subscribers ($5/month – cheap!) get to ask a question quarterly and have it answered. If you want to get in on the fun, more info is here.
Last quarter, we had zero questions (but not zero paid subscribers!). This quarter, we have two question so far. That, to me, is progress!
Our first question is about rescheduling:
“Any opinion or insight from recently disclosed participation around OLC's involvement in the current rescheduling process (cited in WSJ over the weekend)?”
Our eagle-eyed reader is asking about a March 9th article in the Wall Street Journal that reported on divisions between the White House and the DEA over whether cannabis should be rescheduled. In particular: “HHS officials in recent weeks have asked the Justice Department's Office of Legal Counsel to weigh in on legal issues related to moving pot to a less-restrictive status, the people said.”
I don’t know for sure (in fact, I’m not sure if anyone outside of the Executive Branch knows for sure), but I think the key background here is that the Department of Justice’s Office of Legal Counsel acts as sort-of outside legal counsel to Executive Branch departments. So, I read this as the DEA is probably asking its lawyers to weigh in on the various issues – what the DEA’s own rules and regulations say, as well as the implications of the Single Convention treaty for a rescheduling action (which, at least theoretically, could have implications for more than just the DEA).
The other question is a corollary to our recent discussion of Trulieve’s 280E tax position:
“Trulieve just received a $113M tax refund from the IRS. Ascend has filed a request for refund, and will file future tax refunds as a regular corporation and a non 280E corporation. What is the basis for not having to follow 280E?”
This is referring to comments made by MSO Ascend Wellness Holdings in its recent year-end earnings call that it will be filing amended IRS tax returns to get refunds on prior year 280E taxes.
Unlike the first question, I actually have a somewhat definitive answer to this one. It comes from Ascend’s own CEO, John Hartmann, who was on the Higher Exchange podcast earlier this week talking about the company’s financial results. At about the 25:00 mark, he explains that the basis for their refund claim is rooted in the Canna Provisions lawsuit, also known as the Boies Schiller lawsuit (for the law firm), which we discussed last year when it was filed. Recall that the heart of the lawsuit’s argument, which is in Federal district court, is that the Controlled Substances Act doesn’t apply to intrastate cannabis activities.
There was a fair amount of speculation that Canna Provisions was the basis for Trulieve’s refund claims, but they never acknowledged that publicly. Well, Ascend confirmed that the lawsuit’s argument is the basis for its own refund claim, and TerrAscend just did the same. Per an MJBiz Daily report, TerrAscend’s CFO, Keith Stauffer, said that its “legal interpretation is ‘along the lines of the Boies Schiller lawsuit, and some of the same legal aspects that are outlined in that lawsuit.’”
So, there you have it. Will it work? I have no idea – I’m an amateur when it comes to tax controversies (another legal term I love).
Some things to consider, however. From what we’ve learned, these companies are getting legal opinions to back up their refunds, although tax opinions, unlike most other legal opinions, vary in degrees of certainty – they’re routinely qualified from levels like “reasonable basis” and “substantial authority” on the low end to “should” and “will” on the strong end. We don’t know what kind of legal opinion is being given here.
Also consider the fact that Ascend, TerrAscend, and Trulieve are all booking the refund amounts on their financials as an “uncertain tax position.” This generally means that the company and its accountants acknowledge that the 280E tax argument has a less than 50% chance of being upheld if challenged by the IRS. (Not tax, accounting, legal, or investing advice). I don’t know for sure, but I suspect this accounting determination is tied to the level of the tax legal opinions being issued.
I think the universe of companies that will take this approach will be limited – this isn’t a cheap endeavor, even if the refund ends up effectively being a temporary loan back from the IRS at lower interest rates than what’s commercially available. Law firms make tax opinions expensive because they put the issuing firm at risk, and then there’s the potential cost of defending the tax position if the IRS challenges it later. Moreover, there’s the risk that the IRS successfully gets a penalty on the amount, though I’m told the penalty risk is arguably lowered by the fact that there’s a tax opinion backing up the position.
Ultimately, it all boils down to whether the IRS challenges these 280E refund claims. If that happens, perhaps the Boies Schiller argument also gets played out in Tax Court (although, even though I was never a litigator, I’d bet the Tax Court abstains/defers to the main, federal district court lawsuit, because does anyone really want a judge that spends all of their time deciding tax controversies, and usually finding for the IRS, considering the constitutional implications of intrastate cannabis commerce?).
I’ve got my popcorn ready.
Finally, contrition. Back in December, we talked about the politics of cannabis, and I posited:
In my mind, it’s just not worth it for a Presidential candidate to very publicly take on cannabis as a campaign issue if there’s zero practical chance of it passing Congress, on the off chance that a handful of voters might be swayed by cannabis policy, of all things. It’s way too hot button an issue, and, relative to the zillion other problems in the country and the world, it’s way too inconsequential. I hope I’m wrong about this – it would be great to see cannabis policy be front-and-center in the Presidential debate. I just really doubt it’ll happen any time soon.
Welp, it looks like I was wrong.
Be seeing you!
© 2024 Marc Hauser and Hauser Advisory. 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.