Can Cannabis Companies Recover Past 280E Taxes? The TerrAscend Case Offers a Warning

Federal cannabis rescheduling has raised a long list of questions for operators, but none looms larger than whether operators can ever recover taxes already paid under Section 280E. With medical cannabis now classified under Schedule III of the federal Controlled Substances Act, many companies have wondered whether years of disallowed deductions might finally be recoverable. The Department of Justice’s lawsuit against TerrAscend suggests the answer may not be so simple.

The TerrAscend Lawsuit

In May, the government sued TerrAscend in federal court in New Jersey to claw back an $8.3 million refund the company received in 2024 for the 2020 tax year. According to the complaint, TerrAscend filed an amended return claiming $64.2 million in deductions that Section 280E barred, prompting the IRS to issue the refund. The government now argues the payment was an erroneous refund because cannabis remained a Schedule I controlled substance during 2020, meaning TerrAscend “was not entitled to take deductions for any amount incurred in carrying on its trade or business during tax year 2020.” 

The TerrAscend lawsuit has become a central issue for operators seeking to understand how the IRS may handle refund claims under 280E. Publicly traded multistate operators collectively carry an estimated $1.6 billion in uncertain tax position liabilities related to 280E enforcement, a figure that reflects the industry’s exposure as rescheduling moves forward.

What Schedule III Changes

To help operators understand what the TerrAscend case signals, I spoke with Adam Korenfield, a partner at CohnReznick Advisory who advises cannabis companies on 280E exposure and refund strategy.

Korenfield says the excitement around rescheduling has created confusion about what Schedule III actually changes. He notes that some operators assumed rescheduling would allow them to revisit past tax years, but the IRS’s posture does not support that assumption.

He explains that Schedule III provides meaningful relief for medical cannabis operators going forward, since 280E no longer applies to businesses trafficking in a Schedule III substance. But the change does not automatically reach backward.

“At the time of the filing in those past years, Section 280E applied. It was a Schedule One substance,” he said. “No part of the rescheduling has spoken to us about retroactivity.”

What TerrAscend Suggests About Refunds

The TerrAscend lawsuit, he says, should be interpreted as a warning that operators should not assume retroactive refunds will be available. The government’s willingness to claw back an already-issued refund reinforces that point.

“They said it was erroneously issued,” he said, referring to the IRS and the 8.3 million dollar refund it issued to TerrAscend. “For me, it’s obviously a large number, but it really shows this is now the government’s stance.”

Korenfield notes that the IRS has consistently signaled that amended returns claiming retroactive 280E relief may be challenged. In June 2024, the IRS issued a bulletin stating that operators filing amended returns to claim 280E relief were “not entitled to a refund or payment” and that the agency was “taking steps to address these claims.”

Who Should Consider Protective Claims

For operators wondering whether they should act now, Korenfield says the key factor is the statute of limitations. Under IRS rules, taxpayers generally have three years to file an amended return. For companies with meaningful 280E exposure in years for which the statute of limitations is nearing expiration, he says protective refund claims may be worth considering.

“It’s preserving the taxpayers’ rights,” he said. “If future developments become favorable, those protective claims can become very fruitful.”

A protective claim does not guarantee a refund. Instead, it serves as a placeholder, keeping the claim open until the government issues guidance. Korenfield says operators should evaluate whether the potential benefit outweighs the cost of preparing and filing the claim, which depends on the size of the prior-year tax burden and the quality of available records.

He also notes that a single line in the April 2026 DOJ final ruling has kept operators hopeful. The document instructs the Secretary of the Treasury to consider retrospective relief under Section 280E for qualifying years. Korenfield cautions that the language is vague.

“The key word is ‘consider,’” he said. “After that sentence, it goes dark.”

Looking Ahead

For now, operators should not assume retroactive refunds will materialize. Korenfield advises companies to focus on forward-looking tax planning opportunities newly available under Schedule III, including accelerated depreciation and research and development studies, while keeping a close eye on federal guidance.

Rescheduling may ultimately reshape the tax landscape for cannabis operators, but the question of 280E refunds will not be answered until the federal government provides clear direction, either through IRS guidance or legislation from Congress.