Waiting on NMTO and the Meaning of 280E

We are waiting with white knuckles for a decision in New Mexico Top Organics, the Tax Court case challenging the application of 280E and seeking refunds for lost deductions in 2017, 2018, and 2019 tax years. NMTO is challenging the IRS's interpretation of the statutory language "within the meaning of schedule I and II of the Controlled Substances Act." It argues that applying 280E requires looking at the actual criteria for those schedules and the medical and scientific conclusions reached by HHS, FDA, DOJ, and DEA. The IRS argues that 280E applied because marijuana is listed as a Schedule I substance during those tax years.

The parties finished another round of briefs in September. On October 2, Judge Kashi Way denied NMTO's request for oral argument, saying the additional written briefing made it unnecessary.

I really would have liked to hear the arguments. I find the briefs, especially those written by the IRS, overly erudite at best and cryptic at worst. The IRS has a lot to lose, so I understand why it is pulling out all the stops. I just hope the judge can read between the lines, look past the potential economic impact of the decision, and focus on the language Congress wrote. The Colorado Leads amicus brief put it well, questioning "whether it is intellectually honest to believe that marijuana should have ever been listed as a Schedule I (or II) substance." I could not agree more; and therefore, 280E should never have applied to the cannabis industry at all.

With that said, here are the primary "within the meaning" arguments being made by NMTO, how the IRS has responded, and my thoughts on each.

What Does "Within the Meaning" Actually Mean?

Section 280E does not say substances "listed in" Schedule I or II. It applies to controlled substances "within the meaning of" Schedule I or II. Nathaniel Pollock argues that those words should be given their ordinary meaning and points to Tax Court precedent stating that courts should presume Congress says what it means and enforce the plain language of the statute. He also cites the Supreme Court in Burgess v. United States: "As a rule, a definition which declares what a term 'means' excludes any meaning that is not stated." In other words, if marijuana does not meet the criteria that define Schedule I or II, NMTO argues that it falls outside the meaning of those schedules regardless of where it was listed.

Nathaniel also points out that Congress knows how to refer to a list when that is what it intends. Other federal statutes use phrases like "listed in" when referring to listed substances, and the Tax Code uses similar language when incorporating other lists. His point is simple: if Congress wanted 280E to apply based solely on whether a substance appeared on the Schedule I or II list, it could have said so. Instead, Congress chose "within the meaning of." As Nathaniel writes in the brief, "if Congress meant to limit Section 280E's coverage to illegal trafficking in substances 'listed on' or 'listed in' schedule I or II, it would have used either of those phrases, rather than 'within the meaning of.'" He then cites the Supreme Court in Rotkiske v. Klemm: "A textual judicial supplementation is particularly inappropriate when, as here, Congress has shown that it knows how to adopt the omitted language or provision."

Probably the IRS's best argument is its emphasis on the "parenthetical," which they interpret much differently. By "parenthetical," the IRS is referring to the words in parentheses: "within the meaning of Schedule I and II of the Controlled Substances Act." Like I said, they like big words. Its lawyers rely on what is known as the "canon of the last antecedent" and argue that the parenthetical directly modifies the words "controlled substances." Because the CSA defines controlled substances as drugs included in Schedules I through V, the IRS says the parenthetical simply narrows 280E to controlled substances in Schedules I and II. In its words, the parenthetical "directly interprets the preceding term 'controlled substances.'" Under that interpretation, marijuana was within the meaning of Schedule I because it was listed and "controlled" there.

I have lost sleep over this IRS argument more than any other, trying to understand the jargon, particularly the "canon of the last antecedent." But now that I understand it, I do not think the IRS is wrong, but I am not convinced that it gets them very far. The real question is not what the parenthetical refers to; it is what "within the meaning of Schedule I and II" actually means. The "canon of the last antecedent" does not answer whether Congress was referring to the substances appearing on those lists, as the IRS claims, or to the criteria that define what belongs in those schedules; as both are included within the canon of the CSA. So, in my opinion, that question is still open. Congress knew how to say "listed in" or "listed on" and used those words elsewhere. Here, it chose "within the meaning of." I still think the Court should interpret those words in their most basic form.

Did Congress Mean to Cast a Wider Net?

NMTO argues that Congress "may have selected 'within the meaning of' rather than 'listed on'" because it wanted §280E to reach controlled substances listed in Schedules III, IV, or V that "really belong on (fit within the meaning of) schedule I or II." Nathaniel uses hydrocodone combination products such as Vicodin and Norco as the example. Those drugs were listed in Schedule III before being moved to Schedule II in 2014. His point is that the formal list can lag behind the criteria. Under NMTO's interpretation, a drug can already fit the criteria of Schedule II even though the government has not yet formally moved it there. If §280E applied only to substances already listed in Schedule I or II, illegal trafficking in that drug could fall outside §280E while the rescheduling process catches up. NMTO argues that Congress avoided that problem by using "within the meaning of," allowing §280E to reach a controlled substance based on the criteria it satisfies rather than solely on where it appears on the list.

The IRS pushes back by arguing that NMTO's interpretation would create a second, informal scheduling process. If the criteria can control before a formal scheduling change, courts and taxpayers could be left deciding for themselves when a substance actually began to fit a different schedule. The IRS argues that the CSA already provides a formal process for making those determinations and that a substance remains in its existing schedule until Congress or DEA formally moves it.

I think Nathaniel makes a compelling point with the Vicodin example because we are watching the same problem play out with cannabis right now, but in reverse. In 2023, HHS concluded that marijuana met the criteria for Schedule III and formally recommended that DEA reschedule it. More than three years later, the legal cannabis industry is still being penalized under §280E while the administrative process continues to catch up with the federal government's own medical and scientific findings. So what interpretation of the statutory language is the most just and fair?

I would also be remiss if I did not point out that when Congress enacted §280E in 1982, marijuana's Schedule I classification was already being challenged. The Shafer Commission had issued its report a decade earlier, which found that cannabis did not fit the criteria of schedule I. NORML had been pursuing rescheduling since 1972, federal courts had repeatedly sent the matter back to the DEA, and another scientific and medical review was still underway when §280E became law.

Which begs the question: Did Congress use the words "within the meaning of" because it understood that a substance's formal placement on a schedule could lag whether it actually fit the criteria of that schedule? Was marijuana itself part of that concern? We will probably never know exactly what Congress had in mind. But when we are trying to determine congressional intent, I do not think we can ignore the environment in which Congress chose those words.

Is the Tax Court the Wrong Place to Decide This?

The IRS argues that NMTO is essentially asking the Tax Court to conduct its own rescheduling proceeding. Under the Controlled Substances Act, Congress gave the Attorney General and DEA the authority to add, remove, and transfer substances between schedules through an administrative process. The IRS says requiring the Tax Court to independently decide whether marijuana meets the criteria of a Schedule I substance would be confusing and allow taxpayers to challenge 280E for other substances.

NMTO says that mischaracterizes what it is asking the Court to do. It is not asking Judge Way to reschedule marijuana. It is asking him to interpret §280E and decide whether its business expenses are deductible. As NMTO put it in its reply brief: "Petitioner asks this Court to interpret section 280E, not to usurp rescheduling." A decision in NMTO's favor would determine its federal income tax liability, not marijuana's classification under the CSA.

I agree with NMTO. Nobody is asking the Tax Court to move marijuana from one schedule to another. The question before the Court is what Congress meant when it wrote §280E. If Congress incorporated the meaning of Schedules I and II into the tax law, then interpreting that language is exactly what the Tax Court should be doing. The IRS may ultimately convince the Court that marijuana's placement on the schedule is enough, but arguing that the Court lacks the authority to reschedule marijuana misses the point. NMTO is not asking the Court to reschedule marijuana. It is asking the Court to decide what §280E means.

Can 280E Be Separated from the Controlled Substances Act?

The IRS also argues that §280E and the Controlled Substances Act are "sister statutes" that have to be read together. It relies on the principle that courts should interpret statutes as a "harmonious whole" rather than create conflicting results. Under the IRS's interpretation, if a substance is legally controlled in Schedule I or II under the CSA, then it is also within the meaning of Schedule I or II for purposes of §280E. Otherwise, the IRS argues, marijuana could effectively be Schedule III for tax purposes while remaining Schedule I under the CSA.

NMTO's response is that there is no conflict. Marijuana remains a controlled substance under the CSA, but §280E asks a separate tax question: whether that controlled substance is also "within the meaning of Schedule I or II." Congress chose to connect the two statutes using that phrase, and the Tax Court still has to decide what it means. A tax decision does not change marijuana's schedule under federal drug law. The dispute is simply whether "within the meaning" refers only to where marijuana was formally listed or whether it requires looking at the criteria that define those schedules. I believe the latter is true.

The problem with the old DEA test

NMTO also challenges the reliance on earlier DEA decisions rejecting marijuana rescheduling. In 2024, the Justice Department's Office of Legal Counsel concluded that DEA's approach to accepted medical use was "impermissibly narrow," and that HHS's alternative two-part test was sufficient. NMTO argues that the earlier denials should therefore carry less weight. It also relies on Loper Bright, the Supreme Court decision requiring courts to exercise their own judgment when interpreting statutes, while still allowing them to consider agency expertise.

The IRS responds that Loper Bright doesn't give the Tax Court additional jurisdiction or reopen earlier scheduling decisions. Those decisions had their own review process. It also says the Court can't take later findings, put them into an older administrative record, and use them to make a scheduling change retroactive. The IRS continues to argue that following formal scheduling is the correct reading of 280E.

I have a hard time accepting the earlier denials as the final word when the government's own lawyers have said the approach was too restrictive. The old test was not the only way to establish accepted medical use, even though DEA had treated it that way. Loper Bright does not decide this case for NMTO, but it reinforces that the Court has to make a decision and cannot just cop out by deferring to an agency because it has held the same position for years.

And once again, NMTO is not asking the Tax Court to reschedule marijuana. It is asking the Court to interpret §280E and decide whether marijuana falls "within the meaning of Schedule I or II." The Court can answer that tax question without moving marijuana from one schedule to another under the CSA.

The treaty argument

The April medical marijuana order relied on the Attorney General's authority to comply with international treaties. NMTO says that authority allows the government to proceed without certain formal findings and procedures, while the schedules still retain their underlying meaning. It points out that the order considered HHS's findings and identified Schedule III as the most appropriate placement.

The IRS responds that the treaty provision allows the Attorney General to reschedule a substance without making all of the findings ordinarily required under the CSA. From the IRS's perspective, that means the Attorney General's decision to move marijuana to Schedule III does not necessarily establish that marijuana failed to meet the criteria for Schedule I or II in earlier years. In other words, the IRS argues that the rescheduling decision itself does not carry as much weight as NMTO says it does.

What the findings tell us about earlier years

NMTO argues that the HHS and FDA's report issued in 2023 can establish facts about earlier years. Marijuana didn't acquire its effects on the human body when HHS published its recommendation. NMTO points to evidence that predates the report, including the National Academies' 2017 review finding substantial evidence that cannabis effectively treats chronic pain in adults. It also makes an alternative argument: even if the Attorney General had to reach that conclusion first, the Attorney General has now done so based on evidence from earlier years.

The IRS emphasizes the date the rescheduling order took effect. It says medical practice, state programs, and the available evidence developed over time, and the order didn't establish an earlier date when marijuana met the criteria. The IRS also says each tax year must be decided under the law and regulations applicable to that year. In its view, the Court can't use the later findings to give an earlier effective date to the scheduling change.

I don't think the date printed on the HHS report settles this. A later report can tell us something about an earlier period, especially when the conclusions are consistent with evidence that existed long before the report was published. The Shafer Commission was questioning many of the assumptions behind marijuana's treatment more than 50 years ago, and NMTO has also pointed to research from the years involved in the case. Marijuana did not suddenly develop accepted medical use, a lower abuse potential, or a different risk of dependence in 2023 simply because HHS published its findings that year.

The real question is what the medical and scientific evidence tells us about marijuana during the years at issue. The publication date of the HHS report does not erase the decades of evidence that came before it. Using that evidence to determine whether marijuana fit "within the meaning of Schedule I or II" for purposes of §280E is a different question from making the rescheduling order retroactive.

The invitation to consider relief for earlier years

The medical rescheduling order encouraged Treasury to consider retrospective 280E relief for years when an operator held a qualifying state medical marijuana license. NMTO argues that Treasury can't simply ignore the tax law. If the government is asking Treasury to consider relief for earlier years, there must be a lawful way to provide it. The AG would not ask the IRS to do something illegal. NMTO says its interpretation supplies that explanation by looking at the substance's characteristics rather than relying entirely on where it appeared on the schedules at the time.

The IRS argues that, under its reading of the law, Treasury has no authority to apply the rescheduling order retroactively to these earlier years, just because the AG asks for it.

After going through all of these arguments, I keep coming back to the same place. Congress did not say "listed in Schedule I or II." It said "within the meaning of Schedule I or II." We now have decades of medical and scientific evidence, the Shafer Commission's findings dating back to 1972, HHS and FDA's most recent review, and the federal government's own conclusion that marijuana belongs in Schedule III. To me, the equation still adds up. Marijuana does not fit within the meaning of Schedule I or II, and I do not believe §280E should apply simply because the administrative process took decades to catch up with the science.

I understand why other tax professionals disagree with me. I understand the risk, and I certainly understand how much is riding on Judge Way's decision. Believe me, I lose enough sleep thinking about it. But after studying this issue for nearly a decade, I cannot ignore what I believe the statute actually says simply because taking the opposite position would be safer.

Join us on November 9

I continue to agree with NMTO's reading of "within the meaning." Congress chose those words, and the federal government's own findings give us a basis for applying them. We are still waiting to see whether the Tax Court agrees. For businesses that paid taxes without deducting their ordinary operating expenses, the treatment of those earlier years is a major reason to keep watching this case.

I will be going through these arguments and the latest developments in our free webinar, Challenging 280E: Cannabis Rescheduling & the Continued Fight Ahead, on Monday, November 9, at 10:00 a.m. Pacific and 1:00 p.m. Eastern. We will also discuss what medical rescheduling means for 280E and why the fight over prior years continues. I hope you will join us.

Register for the November 9 webinar