U.S. Tax Court Denies Cannabis Dispensary To Pursue An Offer In Compromise

An Offer In Compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:

• Ability to pay
• Income
• Expenses
• Asset equity

The IRS generally approves an offer in compromise when the amount you offer represents the most IRS can expect to collect within a reasonable period of time, but if you are a cannabis business with outstanding IRS liabilities, the IRS follows a more restrictive approach which the U.S. Tax Court affirmed.

U.S. Tax Court Case

On December 16, 2025 the U.S. Tax Court issued its opinion in Mission Organic Center Inc. v. Commissioner Of Internal Revenue, 165 T.C. 13 (2025), affirming the IRS’ denial of this cannabis dispensary to pursue an offer in compromise.  In calculating the amount of its offer, the taxpayer reduced its future income by expenses that would not be deductible for tax purposes. The IRS revenue officer disregarded such expenses when calculating the taxpayer’s reasonable collection potential.

IRC Section 280E disallows any deduction or credit of amounts paid or incurred in carrying on any trade or business of trafficking in controlled substances. The Internal Revenue Manual requires expenses that would be disallowed by IRC Section 280E to be disregarded when calculating a taxpayer’s reasonable collection potential. In rejecting P’s offer, R’s revenue officer and settlement officer relied on the Internal Revenue Manual.

President Trump’s December 18, 2025 Executive Order

Just 2 days after the decision in Mission Organic Center Inc., President Trump issued an Executive Order Increasing Medical Marijuana and Cannabidoil Research . President Trump’s executive order shifts cannabis from Schedule I to Schedule III, easing research, tax restrictions and marking the biggest federal cannabis policy change in decades. Under such order, the Attorney General shall take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law, including 21 U.S.C. 811.

Under this framework, cannabis is removed from a Schedule I classification — the most restrictive category under the Controlled Substances Act, alongside heroin and LSD — to a Schedule III classification, which encompasses substances with accepted medical use and a lower potential for abuse, such as ketamine and Tylenol with codeine.

In addition, the Centers for Medicare and Medicaid Services, is expected to launch a pilot program in April 2026 enabling certain Medicare-covered seniors to receive free, doctor-recommended CBD products, which must comply with all local and state laws on quality and safety, according to senior White House officials. The products must also come from a legally compliant source and undergo third-party testing for CBD levels and contaminants.

The Growing Trend In Legalizing Cannabis – Current Standings:

Medical marijuana is legal in 39 states and Washington DC

The medical use of cannabis is legal (with a doctor’s recommendation) in 38 states and Washington DC. Currently, the 39 states with medical marijuana legal include Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Utah, Vermont, Virginia, Washington and West Virginia. The medical use of cannabis is also legal in the territories of the Northern Mariana Islands, Guam and Puerto Rico.

Recreational marijuana is legal in 23 states and Washington DC

Twenty-three states and Washington DC, have legalized marijuana for recreational use — no doctor’s letter required — for adults over the age of 21. Those 23 states being Alaska, Arizona, California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nevada, New Jersey, New Mexico, New York, Ohio, Oregon, Rhode Island, Vermont, Virginia and Washington and the territories of the Northern Mariana Islands and Guam.

Recreational marijuana is legal in 6 tribal nations.

Six Tribal nations have legalized marijuana for recreational use.  Those 6 tribes being the Flandreau Santee Sioux Tribe (South Dakota), Oglala Lakota Sioux Tribe (South Dakota), Suquamish Tribe (Washington state), Squaxin Island Tribe (Washington State), Eastern Band of Cherokee Indians (North Carolina) and St. Regis Mohawk Tribe (New York).

The New Executive Order Will Result In A Tax Regime Similar To What Non-Cannabis Businesses Face.

Generally, businesses can deduct ordinary and necessary business expenses under IRC Section 162. This includes wages, rent, supplies, etc. However, in 1982 Congress added IRC Section 280E. Under IRC Section 280E, taxpayers cannot deduct any amount for a trade or business where the trade or business consists of trafficking in controlled substances…which is currently prohibited by Federal law.

Until the December 18, 2025 Trump executive order reclassification, cannabis was classified in the same category as heroin, ecstasy and LSD under the Controlled Substances Act of 1970. Marijuana, including medical marijuana, is a controlled substance. What this means is that dispensaries and other businesses trafficking in marijuana had to report all of their income and cannot deduct rent, wages, and other expenses, making their marginal tax rate substantially higher than most other businesses.

However, this new reclassification order exempts companies from IRC Section 280E, allowing them to deduct standard expenses like rent and payroll for the first time.

However, the Executive Order, DOES NOT Change Reporting Of Cash Payments.

The Bank Secrecy Act of 1970 (“BSA”) requires financial institutions in the United States to assist U.S. government agencies to detect and prevent money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, and file reports of cash purchases of these negotiable instruments of more than $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA requires any business receiving one or more related cash payments totaling more than $10,000 to file IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

The minimum penalty for failing to file EACH Form 8300 is $25,000 if the failure is due to an intentional or willful disregard of the cash reporting requirements. Penalties may also be imposed for causing, or attempting to cause, a trade or business to fail to file a required report; for causing, or attempting to cause, a trade or business to file a required report containing a material omission or misstatement of fact; or for structuring, or attempting to structure, transactions to avoid the reporting requirements. These violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.

Marijuana-related businesses operate in an environment of cash transactions as many banks remain reluctant to do business with many in the marijuana industry. Like any cash-based business the IRS scrutinizes the amount of gross receipts to report and it is harder to prove to the IRS expenses paid in cash. So it is of most importance that the proper facilities and procedures be set up to maintain an adequate system of books and records. However, with this new reclassification cannabis companies’ margins will be larger and major institutional investors will be encouraged to enter the cannabis space, banks may be less reluctant to do business with cannabis-based businesses, and this may convince major exchanges like the NASDAQ to list publicly traded cannabis companies.

Also, the Executive Order, DOES NOT Legalize Recreational Cannabis.

President Trump stated that he is against legalizing recreational cannabis but classifying it as a Schedule III narcotic would allow expanded research to be conducted into its potential benefits. The Executive Order also fails to address access of cannabis businesses to banking and financial markets even if such businesses exclusively deal with medical cannabis.

The most certain way that cannabis can be legalized and thus be treated like any other lawful business is by Congress enacting legislation.

Tax Saving Opportunities For Cannabis Businesses –

Keep in mind that the Executive Order directs the Attorney General to officially remove cannabis from Schedule I so until this is accomplished the IRS could continue to enforce IRC Section 280E as it has historically done.  The issuance of this Executive Order could be construed as an affirmation that cannabis does not “fit the meaning” of a Schedule I substance.  If the premise is that cannabis is no longer considered a Schedule I substance, then one could interpret that it should never have been treated as such under the Controlled Substances Act to begin with.  Given that this new reclassification opens many questions and possibilities into the new tax regime and possibilities for cannabis businesses, tax counsel should be sought on how best to bypass IRC Section 280E for the 2025 tax year and whether it is advisable to amend prior years’ tax returns to reduce outstanding liabilities or seek potential refunds.  Likewise, if IRC Section 280E is no longer to apply under the Executive Order, cannabis businesses should now be able to reduce their future income by operating expenses that are now deductible for tax purposes.

How Do You Know Which Cannabis Tax Attorney Is Best For You?

Given that cannabis still remains illegal at a federal level but has been reclassified from a Schedule I substance to a Schedule III substance you need to protect yourself and your marijuana business from all challenges and uncertainty created by the U.S. government so it is best to be proactive and engage an experienced cannabis tax attorney in your area who is highly skilled in the different legal and tax issues that cannabis businesses face.  Let the cannabis tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (Ontario and Palm Springs) and other California locations protect you and maximize your net profits including the pursuit of filing amended income tax returns which could result in smaller liabilities or produce refunds or even pursuing an offer in compromise.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.