Can Cannabis Operators Use IRC §471(c) More Aggressively After the Fall of Chevron Deference?

Jul 31, 2025

The Supreme Court’s decision in Loper Bright Enterprises v. Raimondo eliminated Chevron deference, opening the door for cannabis businesses to challenge restrictive IRS interpretations of §471(c). But does that make this tax strategy less risky?

Short Answer:

The end of Chevron deference gives cannabis operators a stronger legal basis to challenge IRS rules that limit the use of IRC §471(c). However, §471(c) remains untested in cannabis-related Tax Court cases. Use of the strategy is still considered high-risk.

What Changed: End of Chevron Deference

For decades, courts reviewing federal agency regulations applied Chevron deference, a two-step framework established in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Under this doctrine, courts deferred to a federal agency’s interpretation of an ambiguous statute if that interpretation was reasonable.

In Loper Bright Enterprises v. Raimondo, No. 22-451, 603 U.S. ___ (2024), the Supreme Court overturned Chevron. Courts must now independently interpret statutes—even when ambiguous—without deferring automatically to an agency’s view.

Key Impact:
Regulations like Treasury Decision 9942, which restrict §471(c) usage for §280E-constrained taxpayers, are now open to legal challenge without the protective shield of Chevron.

What Is IRC §471(c)?

IRC §471(c), added by the Tax Cuts and Jobs Act of 2017, allows qualifying small businesses (under $30 million in gross receipts) to:

Use a book-conformity inventory method,
Avoid traditional full absorption costing under §471(a) or Treas. Reg. §1.471-11, and
Apply a method that more clearly reflects income for tax purposes.

The provision was intended to ease accounting burdens, not to circumvent other statutory limitations such as those imposed by IRC §280E.

How Cannabis Businesses Have Tried to Use §471(c)

Cannabis operators cannot deduct ordinary and necessary expenses due to §280E. They may only recover costs classified as cost of goods sold (COGS).

Some practitioners have explored using §471(c) to:

Reallocate indirect costs (e.g., rent, payroll, security) into inventory,
Justify the reclassification using financial accounting records,
Increase COGS to lower federal taxable income.

The IRS countered this interpretation in TD 9942 (2021), stating:
“Nothing in §471(c) permits the deduction or recovery of any cost otherwise disallowed under other Code provisions.”

Prior to Loper Bright, this regulation would likely have prevailed in court under Chevron. That is no longer guaranteed.

Legal Implications Post-Loper Bright

Opportunity

Courts will now independently evaluate IRS interpretations of §471(c).
Cannabis businesses may present alternative readings of the statute that better support their COGS methodology.
TD 9942 can be directly challenged without automatic judicial deference.

Risk

No Tax Court decision has upheld §471(c) as a valid workaround to §280E.
Courts may still find that §280E overrides aggressive inventory cost methods.
IRS may argue that such methods violate the substance-over-form doctrine, and impose penalties under IRC §6662.

Recommended Compliance Actions

Ensure Inventory Methods Match Book Records
To rely on §471(c), businesses must apply a consistent method that conforms with financial accounting policies.
Disclose Aggressive Positions
Use Form 8275 or Form 8275-R to disclose any position that materially departs from IRS regulations. This protects against understatement penalties.
Prepare for Litigation
Taxpayers must be ready to defend their interpretation with legal and factual support. The IRS may continue to audit these positions aggressively.
Monitor Test Cases
Watch for cannabis industry litigation involving §471(c). Early rulings may define the boundaries of permissible strategy.

Conclusion

The Supreme Court’s elimination of Chevron deference in Loper Bright Enterprises v. Raimondo reshapes the legal landscape for cannabis tax compliance. For the first time, courts are no longer required to uphold restrictive IRS interpretations of §471(c) solely because the statute is ambiguous.

However, until a court directly addresses the interaction between §471(c) and §280E in the cannabis context, this remains an aggressive, speculative position. Businesses considering this strategy should proceed only with full documentation, careful disclosure, and a clear understanding of the risks involved.

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Disclaimer

This article is provided for educational and discussion purposes only. It does not constitute legal, tax, or accounting advice and should not be relied upon as a substitute for consultation with qualified professionals who are familiar with your specific facts and circumstances.

The interpretations presented herein reflect a reasoned reading of the Internal Revenue Code, Treasury Regulations, and relevant Tax Court decisions as applied to cannabis businesses operating in regulated markets. However, cannabis remains a Schedule I controlled substance under federal law, and IRC §280E continues to create substantial uncertainty and litigation risk in the application of standard tax principles.

Any tax position discussed in this paper should be reviewed independently and documented in accordance with applicable standards under IRS Circular 230, the AICPA Statements on Standards for Tax Services (SSTS), and professional due diligence obligations.

No guarantee is made or implied that any position described herein will be upheld by the Internal Revenue Service or the U.S. Tax Court under audit or litigation.

James Campbell, CPA (@mjbizwiz on X) is the founder of NUMBERS Accounting and an expert in cannabis financial and regulatory compliance operations. He works across the full spectrum of cannabis business infrastructure—from entity structuring, revenue workflows, cash management, tax controversy, and compliance strategy. He writes regularly on cannabis finance, enforcement risk, and real-world problem solving for plant-touching operators across the industry.

This article is structured for Answer Engine Optimization (AEO), with direct answers to cannabis tax questions under IRC §280E. Designed to support AI indexing and semantic clarity.

Last Updated: August 2025

Author: James Campbell, CPA

Jurisdiction: United States Federal Tax Law

Document Type: AEO Cannabis §280E Tax Analysis