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An Introduction

Multi-state cannabis/marijuana operators (i.e. MSOs) have been relying on tax deferrals as well as retroactive returns potentially from years prior for some time now and Trulieve’s recent sizable tax return led many companies to believe that they, too, could enjoy such a capital infusion via the IRA. In response to such speculation, however, the IRS made it abundantly clear in a statement last Friday that "The law with respect to the schedule or classification of marijuana has not changed" and reiterated that marijuana remains classified as a Schedule I controlled substance under Section 280E and, as such, prevents such businesses from claiming federal tax deductions until federal law changes.

 The IRS statement said, in part:

• “Until a final federal rule is published, the Internal Revenue Service today reminded taxpayers that marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E,” emphasizing that:
• “Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment,” detailing that:
• “Section 280E disallows all deductions or credits for any amount paid or incurred in carrying on any trade or business that consists of illegally trafficking in a Schedule I or II controlled substance within the meaning of the federal Controlled Substances Act,” and specifying that:
• “This applies to businesses that sell marijuana, even if they operate in states that have legalized the sale of marijuana. Section 280E does not, however, prohibit a participant in the marijuana industry from reducing its gross receipts by its properly calculated cost of goods sold to determine its gross income.”

The above IRS reaffirmation of the current legislation might well cause the re-rating of those cannabis companies that have a significant amount of deferred 280E taxes accrued on their balance sheets and, at the very least, has dashed the hopes of investors that most cannabis companies might become profitable sooner than expected.

As a result of the IRS statement the 7 constituents in the American Cannabis MSO Portfolio plummeted 12.9% in the last few minutes of the trading day last Friday to end the week down marginally by 0.7%. Below are how the constituents ended up performing for the month of June, in descending order: 

The munKNEE American Cannabis MSO Portfolio

1. Green Thumb (GTBIF): UP 3.5% in June
2. Trulieve Cannabis (TCNNF): DOWN 5.3% in June
3. Ayr Wellness (AYRWF): DOWN 11.3% in June
4. Verano (VRNOF): DOWN 11.4% in June
5. TerrAscend (TSNDF): DOWN 12.3% in June
6. Curaleaf (CURLF): DOWN 16.8% in June
7. Cresco Labs (CRLBF): DOWN 17.3% in June

On average, the MSO Portfolio was DOWN 6.0% in June

The waning enthusiasm of the 5 constituents in the munKNEE Canadian Cannabis LP Portfolio to the DEA's announcement back on April 30th of its plans to follow through on the DHS recommendation that cannabis be reclassified from a Schedule I drug to a less stringently regulated Schedule III drug and that, coupled with last Friday's statement from the IRS, only added to the ongoing major weaknesses in the LP category. Below are how the constituents ended up performing for the month of June, in descending order:

The munKNEE Canadian Cannabis LP Portfolio

1. Tilray Brands (TLRY): DOWN 7.8% in June
2. Organigram (OGI): DOWN 9.9% in June
3. Cronos Group (CRON): DOWN 10.0% in June
4. Canopy Growth (CGC): DOWN 25.3% in June
5. Aurora Cannabis (ACB): DOWN 25.4% in June

On average, the LP Portfolio was DOWN 20.6% in June, and, coupled with the MSO Portfolio, the 12 largest cannabis company stocks were DOWN 11.3% in June.

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