Key Points

• Potential 280E relief may allow cannabis businesses to deduct ordinary and necessary expenses if marijuana is placed on Schedule III and retroactivity is recognized.
• File protective refund claims now to preserve refund rights while the Ultra Health case and federal rescheduling progress through litigation and rulemaking.
• Rescheduling to Schedule III would prospectively end Section 280E disallowance for cannabis taxpayers even if prior years remain unaffected.

Litigation and Rulemaking

Two developments are converging that could reshape how Section 280E applies to cannabis businesses. The Tax Court is considering a case that raises whether a change in marijuana’s federal scheduling could have retroactive implications for prior‑year deductions. At the same time, a federal move toward rescheduling marijuana to Schedule III would end 280E disallowance on a go‑forward basis.

For cannabis businesses, the tax litigation could create a narrow window for potential refunds and companies should weight filing protective refund claims before statutes of limitations run.

Under Section 280E, taxpayers “trafficking” in Schedule I or II controlled substances, such as cannabis, may not deduct ordinary and necessary business expenses. A principal issue in New Mexico Top Organics, Inc. d/b/a Ultra Health v. Commissioner is whether the Tax Court will reschedule marijuana to Schedule III retroactively, thereby permitting deductions previously disallowed. We previously wrote about the Taxpayer's opening brief in Ultra Health here.

And if the administration proceeds with the rescheduling of marijuana to Schedule III, then by its own terms Section 280E will no longer apply to cannabis businesses on a going forward basis.

Protective Claims

Due to expiring statutes of limitation for refund claims, taxpayers should consider protective refund claims now to preserve their rights while the law continues to evolve. 

A protective claim is a timely, written request for refund contingent on future events or legal determinations. It must (1) be filed before the refund statute of limitations expires, (2) identify the specific years and (estimated) amounts at issue, and (3) identify the legal and factual basis, including the contingent event supporting the protective refund claim. Corporations typically file protective refund claims on Form 1120X. For pass-through owners, the appropriate amended return or administrative adjustment request depends on the year and entity type. Taxpayers must sign protective refund claims, substantiate them to the extent feasible, and file them with the appropriate service center by a method which will establish timely filing.

Timing here is critical. The general refund statute of limitations is the later of three years from filing the original return or two years from payment. Many 2022 tax years are approaching expiration, depending on filing dates and extensions. Taxpayers should immediately inventory open years, assess their exposure and potential benefit if Section 280E no longer applies, and prepare and file protective refund claims to meet imminent deadlines. If rescheduling only takes place prospectively, taxpayers may still obtain full deductibility for post-effective-date periods without protective refund claims; however, protective refund claims are the primary mechanism to keep earlier years open if retroactivity is later recognized.

Bottom line

The Ultra Health case and Executive Order 14370 create a narrow but meaningful window to safeguard a tax refund opportunity. Cannabis business owners, operators, and investors should act promptly to file protective claims for still-open years while monitoring rescheduling developments and related litigation.

For more information, please contact Joshua Horn at jhorn@foxrothschild.com, Kristy Caron at kcaron@foxrothschild.com, Brian C. Bernhardt at bbernhardt@foxrothschild.com, Meeren Amin at mamin@foxrothschild.com, or another member of Fox Rothschild’s Cannabis Law Practice Group or Taxation & Wealth Planning Department.

This information is intended to inform firm clients and friends about legal developments, including the decisions of courts and administrative bodies. Nothing in this alert should be construed as legal advice or a legal opinion. Readers should not act upon the information contained in this alert without seeking the advice of legal counsel. Views expressed are those of the author(s) and not necessarily this law firm or its clients. Prior results do not guarantee a similar outcome.