Today, we’re picking up right where we left off last week, shedding more light on Section 280E by examining some of the noteworthy cases (and one memo) that have come to define it.
IRS Chief Counsel Advice Memorandum
In 2015, the IRS Office of Chief Counsel issued guidance on the application of Section 280E in the form of a memorandum. It’s a very technical document, but also very useful in understanding the statute, walking through the distinction between gross receipts and gross income (primarily, COGS) and discussing what constitutes COGS for purposes of Section 280E. The key takeaway from the Chief Counsel Advice Memorandum is that COGS should be determined under the Section 471 inventory rules, and that the Section 263A UNICAP rules have limited bearing, as they require capitalization of otherwise deductible expenses. Effectively, a cannabis business can’t use Section 263A to convert business expenses disallowed under Section 280E into COGS.
Finally, on to some new case law. Alterman doesn’t offer any new issues to contend with. It is, in many ways, similar to Olive, but with somewhat more compelling facts. Alterman sold cannabis products, and in order to meet Colorado licensing requirements, also had … Keep reading
It’s been a busy summer for cannabis business Section 280E controversy, with three published cases (Alterman v. Commissioner; Loughman v. Commissioner; and Alpenglow Botanicals, LLC v. U.S.) construing the statute, and generally not in favor of the taxpayer-cannabis business. The limitations of Section 280E and their effects on after tax profits should be fairly familiar to cannabis entrepreneurs, but to keep things fresh in your minds, the statute provides:
[n]o deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.
What does that single, parens-laden sentence really mean? When it comes to the Internal Revenue Code, one sentence can leave much to unpack. Take Section 482, for example—not a very relevant Code section, unless you’re taking your cannabis business cross-border (maybe into Canada?), but, nevertheless, illustrative. One … Keep reading
As the legal cannabis market continues to explode, extract products, in particular, are receiving a lot of attention. Cannabidiol (CBD), for instance, is a cannabis extract widely produced and sold in the U.S., often advertised as having certain medicinal benefits. And while the laws surrounding these extract products can sometimes be cloudy, the regulatory requirements pertaining to their packaging and advertising can create even more confusion.
CBD is a non-psychotropic cannabinoid that can extracted into edibles, oils, tinctures, capsules, and topical creams. Although neither psychoactive nor addictive, and containing only nominal amounts of THC, the DEA ruled in 2016 that CBD is derived from cannabis and is, therefore, classified as a Schedule I drug under the Controlled Substances Act. While many have argued this ruling, a Ninth Circuit court recently upheld the DEA’s decision, and as a result, CBD remains a Schedule I drug at the federal level.
Regarding packaging and advertising, the U.S. Food and Drug Administration, which is responsible for the control and supervision of dietary supplements and over-the-counter drugs (among other things), has only provided a handful of opinions about what is and is not permissible. First, the FDA has affirmatively decided that CBD products may … Keep reading
Molson Coors Brewing Company is betting big on the cannabis industry by starting a joint venture with Hydropothecary, an “award-winning medical cannabis producer,” to develop non-alcoholic, cannabis-infused beverages for the Canadian market, in a move that Molson Coors believes will give it a leg up as more countries continue efforts toward legalization.
Last week, Molson Coors said the venture will be a stand-alone startup entity, with its own board (three seats for Molson Coors, two for Hydropothecary) and management team. Molson Coors will hold a 57.5% controlling interest, with Hydropothecary, which now brands itself as HEXO, holding the remaining 42.5%. A chief executive officer is expected to be named in the coming weeks.
As part of the deal, which is expected to close by month-end September, HEXO will issue warrants giving Molson Coors the right to purchase 11.5 million of its shares, at a strike price of $4.62 a share.
Recreational marijuana is slated to become legal in Canada on October 17th, but edible products infused with pot — including beverages — will remain illegal until specific government regulations are rolled out in 2019, at the earliest. Independent research firm Euromonitor International estimates that legal marijuana sales in … Keep reading
Back in January, on the heels of the Sessions Memo, U.S. Attorney for Massachusetts Andrew Lelling’s affirmation that his “office [would] pursue federal marijuana crimes as part of its overall approach to reducing violent crime [and] stemming the tide of the drug crisis,” coupled with his stated refusal to “provide assurances that certain categories of participants in the state-level marijuana trade [would] be immune from federal prosecution,” led many to wonder what the future of legalized marijuana would look like here in the Bay State. Earlier this month, however, Lelling, Massachusetts’ most powerful federal law enforcement officer, elucidated his position regarding the prosecution of cannabusinesses in the Commonwealth:
Because I have a constitutional obligation to enforce the laws passed by Congress, I will not effectively immunize the residents of the Commonwealth from federal marijuana enforcement. My office’s resources, however, are primarily focused on combatting the opioid epidemic that claims thousands of lives in the Commonwealth each year.
His focus, he went on say, will be three-fold: overproduction, which “creates the risk of illegal, and lucrative, marijuana sales to users in nearby states where recreational marijuana use remains illegal”; targeted sales to minors, as “study after study confirms that regular … Keep reading