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On March 12, leading cannabis tax lawyer James Mann made an extremely timely virtual presentation to ICLC participants regarding the announcement by Trulieve of its receipt of more than $100 million of tax refunds in connection with a challenge to what it owes under Section 280E of the Internal Revenue Code. 

James described the “reasonable basis” tax opinion on which the challenges to 280E by Trulieve and other cannabis companies are based. He noted that a predicate for such opinions was at least a 20% chance of success on the challenges and encouraged ICLC participants to carefully review the financial statement and footnote disclosures on the challenge contained in Trulieve’s most recent SEC Form 10K. 

While emphasizing the relatively low bar for the reasonable basis opinion, and that a successful challenge would require reversal of a 2005 US Supreme Court precedent, James also noted the apparent receptivity of the current Court to overturning precedent and indications that certain Justices might be sympathetic to: the 280E arguments of Trulieve and others taking a similar position. 

Before taking questions from the participants, James also outlined four potential outcomes from pursuing this approach, discounting one of those—that the IRS would lose interest in pursuing existing/prior 280E claims after a hoped for rescheduling by the DEA—which he emphasized (unlike the challenges underlying the position of Trulieve and the others making similar challenges to any application of 280E) would only prospectively relieve the cannabis industry from the application of 280E. 

To the extent a significant number of cannabis companies seek to use “reasonable basis” opinions to claim refunds and/or in connection with future returns, Newton’s 3rd Law of Motion may come into play: “for every action, there’s an equal and opposite reaction.” Although, unlike James, we are not experts on cannabis taxation, we do understand that the IRS is not without recourse, having options such as denying refund claims and placing the litigation burden on the taxpayer and/or accelerating the audit process, perhaps by establishing a dedicated task force.  

In the aftermath of our announcement that First Citizens, with more than $200 billion of assets the nation’s 19th largest bank, had joined the ICLC, we are also pleased to report that Safe Harbor Financial, a publicly traded financial technology company focused on cannabis industry finance and banking, has joined the ICLC. While not a bank, in addition to direct lending and participations, Safe Harbor facilitates the provision of a full range of banking services, including lending, by its partner financial institutions: Colorado Credit Union; Arvada, CO (Member NCUA; Five Star Bank, Warsaw, NY (Member FDIC) and Pacific Valley Bank, Salinas, CA (Member FDIC). Since its formation in 2015, Safe Harbor reports that it has processed more than $12 billion in cannabis related funds into the financial system.

For more information, please reach out to Stephen Lenn at salenn@bmdllc.com or Brandon Pauley at btpauley@bmdllc.com.