Were IRS Refunds to Trulieve Strategic?
It came as a surprise to many, tax professionals included, when Trulieve announced that they had received 113 million of the 143 million in tax refunds they had filed for just a few months ago. In addition, TerrAscend announced last week that they had received $26 million in refunds and willingly unveiled their strategy towards addressing 280(e). So now all cannabis business owners want to know, how does this change our tax strategy?
The best answer?
It depends.
If it seems like that’s your tax pro’s answer for everything, it’s because every company’s situation is unique, including owner/investor risk tolerance. There is still significant risk with these refund strategies and it’s important to understand that before deploying them.
To start with, the IRS maintains the right to open Trulieve’s returns for audit for any years still within the statute of limitations. In other words, they can retain the right to recall those refunds at any point if they decide to audit the returns and determine that the refunds were given out erroneously. That creates a massive future liability for Trulieve with a big unknown hanging over their head.
The case law that TerrAscend has hung their hat on isn’t bulletproof either. It’s important to know that TerrAscend’s current stance is based on an open court case that is in District Court right now, hasn’t been decided and hasn’t been heard by the Supreme Court. Anyone relying on this as a “law of the land” for deciding case law could be extremely disappointed.
The argument in TerrAscend’s case is that the Federal government doesn’t have the right to impose the Controlled Substances Act on state legal markets. However, the court disagreed in previous lawsuits. It’s likely that this one will eventually make its way to the Supreme Court, but in the meantime, relying on it is shaky.
So why did the IRS so willingly cut checks? Believe it or not, it could have been a money-saving strategy.
Suppose cannabis businesses suddenly realize that these strategies may have a foothold but don’t want to roll the dice without a court decision. In that case, the IRS could have been facing a flood of protective claim filings, which would essentially allow millions of cannabis taxpayers to lay a future claim to a potential refund even past their statute of limitations. Beyond just being a paperwork nightmare for the IRS, it could cost the government billions, and deterring business owners from making those claims is beneficial to them.
By issuing the refunds, the IRS keeps Trulieve’s strategy quiet. Until there is actual litigation, no one knows precisely what Trulieve filed that resulted in the refunds and the tax positions. The IRS knew strategically that if they had denied the refunds, they would have ended up in a legal battle that would ultimately have built a road map for other cannabis business owners. Combine that with protective claim filings and the bill to the government, and at the end of it, all would have far exceeded the check they wrote to Trulieve.
So now what? What do business owners do?
This still truly comes down to risk-reward analysis. Cannabis businesses can file their returns by disclosing uncertain tax positions and follow in TerrAscend’s footsteps, essentially not applying 280(e) but accounting for the potential liability should the IRS disagree with that uncertain position.
The downside in that scenario is you’re waiving around an “audit me” flag to the IRS and pointing out exactly where they should be auditing your return. Not ideal.
Smaller businesses need to tread carefully here. Remember, Trulieve can afford to give the $113 million back if necessary. If your cannabis business received a million-dollar refund, it might sound amazing, but if you had to pay it back in two years, would you be able to do so without going bankrupt? That’s the real deciding factor.
Unfortunately, there’s no one-size-fits-all answer. Business owners need to have these discussions with an experienced tax professional who not only knows cannabis very well but also understands case law and has dealt with uncertain tax positions. Most small business owners don’t want to be the guinea pig for these strategies against the IRS because it’s not a matter of profiting back to their shareholders; it’s literally a matter of survival.
The best strategy you can take right now is to find a cannabis tax professional who can have these pro and con discussions with you with your specific business in mind, understanding your cash flow and understanding your long-term goals.