The burgeoning cannabis sector can reap significant tax advantages by using the qualified small business stock rules in Section 1202 of the tax code, which allows investors to exclude the greater of $10 million or 10 times their basis in the stock. But cannabis investors must navigate several uncertainties if they want to pursue them.
The first uncertainty is Section 280E, which denies any “deduction or credit” for cannabis businesses. Considering Section 1202 provides an exclusion, which is neither a deduction nor a credit, Section 280E shouldn’t affect a cannabis company’s ability to claim an exclusion under Section 1202 based on a plain reading of the statute. This position isn’t free from doubt, however, as there is no guidance on this issue.
Another hurdle lies in Section 1202(e)(3)(C), which denies a QSBS exclusion for any farming business. Unfortunately, the tax code doesn’t provide a comprehensive definition of farming in a single section. Further, it doesn’t provide any definition for farming under Section 1202(e)(3)(C), nor does Congress clarify its meaning in any of Section 1202’s legislative history.
Private Letter Ruling 202114002 establishes that undefined terms in Section 1202 are assumed to carry their “ordinary and common” meanings, and courts may rely on popular dictionary definitions to determine the plain meaning of such terms. Merriam-Webster defines farming as the practice of agriculture or aquaculture, with agriculture referring to the cultivation of the soil, crop production, and “in varying degrees, the preparation and marketing of such resulting products.”
Read more at bloombergtax.com