The federal government has filed suit against cannabis multi-state operator TerrAscend in the US District Court of New Jersey, seeking to recover an $8.3 million tax refund the IRS now says it issued in error. The case turns on a deceptively simple question: did TerrAscend qualify for an exemption from Section 280E of the Internal Revenue Code - the provision that bars companies selling federally controlled substances from deducting ordinary business expenses? The IRS, apparently, has decided the answer is no.
How the Dispute Unfolded
In April 2024, TerrAscend filed an amended tax return for the 2020 fiscal year seeking a refund of $64,622,286 - a figure large enough to signal this was not a routine accounting adjustment. The company's position was that it was exempt from 280E. The IRS processed the claim and, in June 2024, sent TerrAscend $8.3 million. TerrAscend deposited those funds the same month.
Then the IRS changed course. Court documents describe the disbursement as an "erroneous refund," and the government is now pursuing recovery through federal litigation. Here's the catch that makes the case more complicated than a standard tax dispute: federal law prohibits any refund exceeding $5 million to a C-Corporation from being disbursed until at least 30 days after a report describing that refund has been submitted to the Joint Committee on Taxation - the bicameral congressional body that provides tax oversight. Court filings note TerrAscend is structured as a C-Corporation. Whether that procedural requirement was satisfied before the funds were released has not been publicly clarified, but its inclusion in the complaint suggests it is material to the government's argument.
The 280E Problem Has Not Gone Away
Section 280E has been the defining tax burden for licensed cannabis operators since courts first confirmed its application to state-legal cannabis businesses. Because cannabis remains a Schedule I controlled substance under the Controlled Substances Act, companies in the space cannot deduct standard business expenses - cost of goods sold excepted - from their federal taxable income. The effective tax rate that produces is punishing. Dispensary operators frequently pay federal taxes on gross margin rather than net income, a structural disadvantage that distorts everything from payroll decisions to wholesale pricing strategy.
Some MSOs and their counsel have been positioning aggressively around the ongoing federal rescheduling process, which, if completed, would move cannabis from Schedule I to Schedule III. The logic: a Schedule III classification might eliminate the 280E problem, potentially retroactively. TerrAscend's amended 2020 return appears consistent with that line of reasoning. The problem is that the federal government has not validated it. A recent federal rescheduling notice explicitly stated that nothing in the proposed rule constitutes a determination regarding federal tax liability, and directed state-licensed cannabis businesses to consult tax counsel on 280E applicability. That is not ambiguous language. It is a direct signal that rescheduling and 280E relief are not the same thing - and that operators moving ahead as if they are do so at their own risk.
To put it plainly: the rescheduling process, however it proceeds under the current administration, has not unlocked retroactive tax deductions. The IRS is making that point through litigation.
What This Means for MSOs and Their Finance Teams
TerrAscend is not a small operator. The company holds vertical integration rights in New Jersey - cultivation, manufacturing, wholesale distribution, and retail - operates the Apothecarium dispensary chain across multiple New Jersey counties, and has expanded through acquisitions including the purchase of Union Chill in Lambertville in May 2025. It has production arrangements tied to recognized cannabis brands and runs a large cultivation facility in Boonton. It is publicly traded in Canada, where adult-use cannabis is federally legal, though its share price has fallen well below a dollar.
The scale of TerrAscend's operation makes the litigation financially significant - but it is the precedent that should concern finance and compliance teams across the industry. Any MSO or single-state operator that filed amended returns premised on a 280E exemption, received a refund, and spent those funds is now looking at a version of the same exposure TerrAscend faces. The IRS does not appear to be treating the rescheduling process as a green light for retroactive relief, and this lawsuit is a concrete demonstration of that posture.
There is also the C-Corporation procedural issue. For cannabis companies structured that way - and many MSOs are - the Joint Committee on Taxation reporting requirement adds a layer of compliance that can delay or complicate large refund disbursements. Whether the IRS failed to follow its own procedure before sending TerrAscend the $8.3 million, or whether TerrAscend's attorneys intend to raise that as a defense, is a detail the litigation will eventually surface.
A Broader Compliance Warning for the Industry
The TerrAscend case arrives at a moment when the Trump administration, through acting Attorney General Todd Blanche, has reportedly accelerated the rescheduling review process. Faster movement on Schedule III does not change what the federal government has said about tax treatment: the rescheduling rule and 280E are separate statutory questions, and operators should not conflate them.
For dispensary owners and multi-state operators managing tight margins under 280E, the temptation to file aggressively is understandable. The tax burden is real and substantial. But the distance between filing an amended return and banking a refund as resolved income is considerable - and this case illustrates what fills that gap. Any cannabis company that has pursued or is considering a similar 280E exemption claim should treat the TerrAscend litigation as a material compliance signal, not a peripheral legal story. Tax counsel familiar with both cannabis-specific IRS enforcement and federal refund procedures is not optional here. It is the cost of operating in a federally illegal market while running a professionally managed business.
