Complaining about the cannabis tax penalty under 26 U.S.C. § 280E is just another way of saying cannabis does not belong in Schedule 1 of the Controlled Substances Act, 21 U.S.C. § 812.
New Mexico Top Organics Inc. v. Commissioner, Docket No. 19661-24 in the U.S. Tax Court, involves a New Mexico medical cannabis company, Ultra Health, challenging the cannabis tax penalty under 26 U.S.C. § 280E.
BUZZ Cannabis Newsletter Feb Tax Edition 2025 provides a brief summary of the case:
While courts have widely rejected constitutional challenges to 280E, soon a court will weigh in on whether Section 280E can be interpreted differently. A former DOJ attorney who argued and won several 280E cases for the government has filed a petition in U.S. Tax Court challenging the application of 280E to a New Mexico medical marijuana company for the tax years ended June 30, 2018, 2019 and 2020. This case is not based on an amended return filing, but rather arises from an IRS examination, which raises the issue without penalty exposure, because a “no-280E” position was not the basis for a return filing. The case brings two statutory interpretation arguments that no court has previously considered:
First, the Petitioner in New Mexico Top Organics vs. Commissioner argues that marijuana is not “within the meaning of” Schedule I or II of the CSA because it does not satisfy the statutory criteria set forth in the CSA. Because 280E doesn’t say substances “listed on” Schedule I or II, but rather uses the words “within in the meaning of”, we can ignore the fact that marijuana is listed on Schedule I and instead look to whether marijuana satisfies the statutory criteria for Schedule I or II controlled substances as set forth in the CSA. Because the HHS, FDA and NIDA have all found that marijuana does not satisfy the CSA’s criteria for Schedule I or II controlled substances, then it is not within the meaning of Schedule I or II.
The Petitioner’s second argument applies only to medical marijuana and asserts that medical marijuana is “not prohibited” by either federal or New Mexico law, which takes it outside the scope of 280E. It is clear that once a state legalizes marijuana it is no longer prohibited by the state, but how can one argue that marijuana is not prohibited by federal law? In short, because Congress has prohibited the Department of Justice from using funds to prosecute medical marijuana businesses since 2014 under the various Appropriations Acts, (also known as “Rohrabacher-Farr Amendment”), medical marijuana is no longer prohibited by federal law. Time will tell whether these arguments are convincing enough to end the application of 280E to cannabis businesses.
A copy of the petition can be found here: Medical Marijuana Business Challenges Deficiency, Seeks Refund, taxnotes.com, Dec. 16, 2024. A recent update can be found here: Cannabis News & Policy Update | October 2025, October 24, 2025.
The direct arguments for removing the cannabis tax penalty are 21 U.S.C. § 811 (removing cannabis from Schedule 1) or 21 U.S.C. § 822 (exempting cannabis from Schedule 1).
Removing cannabis from Schedule 1
The Trump Administration is proposing a new rule removing cannabis from Schedule 1 and placing it in Schedule 3, but that process seems to have gotten stalled. See Notice of Proposed Rule Making.
The Department of Justice is proposing to transfer marijuana from schedule I of the Controlled Substances Act (“CSA”) to schedule III of the CSA, consistent with the view of the Department of Health and Human Services (“HHS”) that marijuana has a currently accepted medical use as well as HHS’s views about marijuana’s abuse potential and level of physical or psychological dependence. The CSA requires that such actions be made through formal rulemaking on the record after opportunity for a hearing.
Several parties to the proposed rule making filed an administrative appeal last year and the Department of Justice hasn’t issued a briefing schedule yet. In July, the Administrative Law Judge for the rule making hearing retired. Marijuana Rescheduling, Notice to the Parties, July 23, 2025.
The first argument New Mexico Top Organics makes uses this proposed rule to argue that 26 U.S.C. § 280E is out-dated and no longer applies to cannabis.
Exempting cannabis from Schedule 1
To understand an exemption, start by looking at one, 21 C.F.R. § 1307.31.
§ 1307.31 Native American Church.
The listing of peyote as a controlled substance in Schedule I does not apply to the nondrug use of peyote in bona fide religious ceremonies of the Native American Church, and members of the Native American Church so using peyote are exempt from registration. Any person who manufactures peyote for or distributes peyote to the Native American Church, however, is required to obtain registration annually and to comply with all other requirements of law.
Click on “Details” on the left sidebar. Authority: U.S.C. 821, 822(d), 871(b), unless otherwise noted.
The Attorney General is authorized to promulgate rules and regulations and to charge reasonable fees relating to the registration and control of the manufacture, distribution, and dispensing of controlled substances and to listed chemicals.
The Attorney General may, by regulation, waive the requirement for registration of certain manufacturers, distributors, or dispensers if he finds it consistent with the public health and safety.
The Attorney General may promulgate and enforce any rules, regulations, and procedures which he may deem necessary and appropriate for the efficient execution of his functions under this subchapter.
Click on “Details” on the left sidebar. Source: 36 FR 7801, Apr. 24, 1971, unless otherwise noted. Redesignated at 38 FR 26609, Sept. 24, 1973.
307.31 Native American Church.
Authority: The provisions of this Part 307 issued under secs. 301, 302(d), 501(b), 84 Stat. 1253, 1271; U.S.C. 821, 822(d), 811(b).
The Office of the Federal Register has notified the Drug Enforcement Administration that the Food and Drug Administration intends to republish and redesignate its regulations in a series covering Parts 1—1299, and has asked the Drug Enforcement Administration to redesignate its parts and sections beginning with Part 1300. Therefore, pursuant to the authority vested in the Attorney General by sections 201, 202(d), 301, 302(f), 304, 305, 306(f), 307, 308, 501(b), 505, 507, 511, 513, 704(c), 705, 1002, 1003, 1004, 1006, 1007(b), 1008(d), 1008(e), and 1015 of the Comprehensive Drug Abuse Prevention and Control Act of 1970, and delegated to the Administrator of the Drug Enforcement Administration by § 0.100 of Title 28 of the Code of Federal Regulations (38 FR 18380), it is hereby ordered that all parts and sections now contained in Title 21, Chapter II, of the Code of Federal Regulations be redesignated upward by one thousand (e.g., Part 301 becomes Part 1301, and § 303.37 becomes § 1303.37).
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