On March 6, 2026, the IRS filed its first substantive response to the arguments presented in New Mexico Top Organics, Inc. v. Commissioner and forcefully rejected them.
At the core of this case are 2 key positions by the taxpayer. The first is whether §280E should apply at all to state-legal medical cannabis businesses. The company argues that §280E applies only to substances “within the meaning of” Schedule I or II of the Controlled Substances Act, and that cannabis no longer meets those criteria given federal health agency findings recommending rescheduling. It also contends that congressional budget riders preventing DOJ enforcement against state-legal medical cannabis mean its activities are not “prohibited by federal law,” placing them outside Internal Revenue Code §280E. These arguments have drawn significant attention, including multiple amicus briefs supporting the taxpayer.
The response from the IRS was the same, as in all prior unsuccessful cases brought to court by cannabis operators – §280E is the tax law until cannabis gets rescheduled, period.
Furthermore, the IRS asserted that the Tax Court has no authority to reassess cannabis scheduling, emphasizing that marijuana remains a Schedule I substance under current federal law until formally changed through the Controlled Substances Act’s rescheduling process, which is overseen by the Drug Enforcement Administration (DEA), not the courts or Department of Health and Human Services (HHS), making the HHS recommendation insufficient grounds for changing a company’s tax position.
The IRS also argued that congressional enforcement restrictions do not legalize cannabis and do not remove it from §280E’s scope, stating that treating cannabis as Schedule I for criminal law but not for tax law would be an “absurd result.”
The overall response from the IRS signals that taxpayers taking “non-280E” positions may face not only back taxes, but also penalties if their positions lack a “reasonable basis.”
A growing number of cannabis companies are taking the position that IRC §280E does not apply to their state-legal operations. It has included amending prior-year returns, taking the position on current-year filings, or submitting protective refund claims.
Given the evolving enforcement environment, cannabis operators should carefully evaluate risk, documentation, and long-term strategy before taking or modifying a 280E position. Our team continues to advise clients on measured, compliance-focused approaches.
Navigating §280E tax scenarios
| Taxpayer Profile/Situation | Recommended Path | Risk Level | Key IRS Considerations | Advisor Notes |
|---|---|---|---|---|
| Operator who stopped paying §280E taxes prospectively | Reassess this position | Very High | IRS signals penalties may apply for lack of reasonable basis | Consider voluntary correction; exposure may exceed tax alone (penalties + interest) |
| Medical cannabis operator considering first-time amended return to remove §280E | Do not amend now | High | IRS explicitly rejected “within the meaning of Schedule I” and DOJ-rider arguments; signals lack of reasonable basis | Strong likelihood of denial, possible penalties; difficult to defend preparer position |
| Operator that already filed amended return claiming non-280E treatment | Prepare for audit/appeal/denial | High | IRS position now clearly articulated; refund claims vulnerable even if rescheduling occurs later | Ensure documentation, reassess opinion letters, consider litigation reserve |
| Operator seeking refund solely based on anticipated federal rescheduling | Do not pursue | High | IRS states future rescheduling does not retroactively change tax law | Rescheduling timing irrelevant to closed tax years |
| Taxpayer filing protective refund claim (no position change on return) | Proceed cautiously | Moderate | Protective claims preserve statue without asserting deductions now | Safer than amended returns; must be clearly labeled and narrowly drafted |
| Taxpayer currently under IRS exam on §280E years | Defend COGS aggressively; avoid non-280E arguments | Moderate | IRS response focuses on statutory authority, not COGS substantiation | COGS remains best-supported avenue; non-280E theory may escalate dispute |
| Taxpayer currently using 471c position on §280E years | Defend COGS aggressively | Moderate | IRS response focuses on statutory authority, not COGS substantiation | COGS remains best-supported avenue; non-280E theory may escalate dispute |
| Operator with large historic §280E exposure but no amended filings | Wait-and-see | Low-Moderate | IRS insists law applied is law in effect during tax year | Monitor Tax Court decision; avoid premature filings |
| Advisor asked to sign return removing §280E deductions | Decline without court ruling or legislation | Professional risk | IRS directly challenges reasonable-basis standard | Circular 230 and preparer penalty exposure elevated |
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