A New Mexico business seeking federal tax refunds for its medical cannabis operations from previous years is leaning on the Trump administration’s recent rescheduling order to strengthen its case in the U.S. Tax Court.
Ultra Health, which is challenging the Internal Revenue Service’s (IRS) application of Section 280E of the Internal Revenue Code, filed a seriatim reply brief on May 18, asking the court to consider that state-licensed medical cannabis now falls under Schedule III.
The company also used Acting Attorney General Todd Blanche’s Schedule III order from April 22 to firm up its argument that medical cannabis hasn’t fallen “within the meaning of” Schedule I for quite some time.
The lawsuit, New Mexico Top Organics Inc. (d/b/a Ultra Health) v. Commissioner of Internal Revenue, goes back to Ultra Health’s petition in December 2024, when cannabis remained in Schedule I, but after the U.S. Department of Health and Human Services (HHS) had determined in August 2023 that cannabis does have currently accepted medical use in the U.S., and its potential for abuse is less than substances in Schedules I and II of the CSA.
“This court’s recognition that marijuana does not fall ‘within the meaning of Schedule I,’ as that phrase is used in Section 280E, would just say what HHS and the president and the acting attorney general have already said,” Nathaniel Pollock, Ultra Health’s counsel in the case, wrote in the May 18 brief.
Ultra Health specifically asked the court to recognize that it’s entitled to Section 280E relief for tax years 2017, 2018 and 2019 – allowing the company to deduct ordinary and necessary business expenses for those years – because medical cannabis did not meet the definition of a Schedule I or II substance in those years.
Recognized as the largest cannabis operator in New Mexico, Ultra Health argued that, regardless of cannabis’s actual CSA listing during those tax years, Congress intentionally included the phrase “within the meaning of Schedule I and II” in Section 280E’s disallowance of deducting ordinary business expenses.
Pointing out that a 12-year-old federal appropriations rider has prevented the Department of Justice from interfering with state-sanctioned medical cannabis operations since before the tax years at issue, Ultra Health also argued that the HHS determination and the recent Schedule III actions by President Donald Trump’s administration further strengthen its case that medical cannabis hasn’t fit within the meaning of Schedule I for quite some time.
“The rescheduling does recognize a fact about medical marijuana that is relevant to Section 280E’s application to the years at issue,” Pollock wrote. “By relying on and implementing the HHS recommendation, the rescheduling order recognizes – as does Executive Order 14370 – that medical marijuana is not (and has not been) ‘within the meaning of’ Schedule I, where it was previously listed. Rather, it is (and has long been) within the meaning of Schedule III, where it is now listed. Because Section 280E ties coverage to the ‘meaning’ of the ‘traffick[ed]’ controlled substance, the federal government’s current determination of medical marijuana’s true meaning is relevant to Section 280E’s application in prior years.”
Ultra Health further contended that the IRS can no longer “dispute” that medical cannabis’s previous listing under the CSA properly fit the no currently accepted medical use meaning of Schedule I substances, without “contradicting the president, the acting attorney general and HHS.”
The May 18 filing followed a March 2026 answering brief from the IRS, in which IRS Acting Chief Counsel Kenneth Kies argued that Ultra Health was trying to force the U.S. Tax Court to perform an “imaginary” cannabis rescheduling process for the purpose of allowing one company to receive tax refunds for deductions – such as payroll, rent and utilities – that the company never took for the three tax years at hand.
“The primary thrust of petitioner’s argument is that because Section 280E involves a ‘controlled substance (within the meaning of [S]chedule I and II of the Controlled Substances Act)’ (emphasis added), rather than a substance that is listed in Schedule I and II of the CSA, that this court should itself perform a de novo scheduling inquiry for marijuana,” Kies wrote. “This would create a seismic rift between how substances are controlled and identified under the CSA and how they are applied under tax law, and plainly Congress did not intend to hide this elephant in the mousehole of the ‘within the meaning of’ verbiage.”
The seismic rift accusation is “false,” according to Ultra Health, which argued on May 18 that it is asking the court to interpret Section 280E, not to “usurp” rescheduling.
And now that Blanche’s April 22 rescheduling order has officially reclassified state-licensed medical cannabis under Schedule III, Ultra Health is calling the IRS’s argument “outdated.”
“This case is about state-law-compliant medical marijuana,” Pollock wrote. “And now medical marijuana is listed on Schedule III of the CSA. So, the current listing of the marijuana at issue reflects its true meaning under the CSA’s listing criteria.”
While Blanche encouraged the secretary of the U.S. Department of the Treasury in his rescheduling order to consider providing “retrospective” relief from Section 280E liability for taxable years in which a state licensee operated under a state medical cannabis program, the treasury and the IRS have yet to provide full guidance for an expected transition rule.
However, a taxpayer must file a refund request within three years of the filing of a return, or two years from the date the tax was paid, whichever expires later, to fall within the statute of limitations for the refund request.
In Ultra Health’s case, if the company filed a protective claim with the IRS before the expiration date, then it could still receive its potential refunds for tax years 2017, 2018 and 2019.
Should the company receive a favorable decision on Section 280E’s application from the U.S. Tax Court, it would have ripple effects on other medical cannabis companies seeking relief from overpayments from previous tax years.
“The question here is limited to whether marijuana falls within the meaning of Schedule I,” Pollack wrote this week. “And this court need look no further than the federal government’s own conclusions – and now final determination – to answer that question.”
