Category: Banking & Financial Institutions

DEA Recommends Cannabis Rescheduling: Developments and Implications for the Industry

The state-licensed cannabis industry has been operating under significant constraints due to cannabis’s classification as a Schedule I substance under the federal Controlled Substances Act of 1970. This categorization, which groups cannabis with drugs like heroin and LSD, has faced growing criticism as an increasing number of states legalize cannabis for medical and recreational purposes. However, the industry may soon experience a major shift, as the Drug Enforcement Administration (DEA) moves to reschedule cannabis to Schedule III. This decision follows a recommendation from the Department of Health & Human Services (HHS), which is supported by scientific evidence reviewed by the FDA.

It’s important to note that the rescheduling process will take time before it officially takes effect. After the White House reviews the DEA proposal, a proposed rule will be published in the Federal Register. A public-comment period will follow before the proposed rule can become final. The process will almost certainly give rise to litigation and it remains unclear how long the process will take.

Impact on Taxation: Removal from Section 280E

One of the most significant effects of this rescheduling would be the removal of cannabis from the purview of I.R.C. Section 280E. This tax code provision has been a substantial obstacle for state-licensed cannabis businesses, preventing them from deducting many ordinary business expenses when calculating their taxable income. Under 280E, cannabis companies can only deduct the Cost of Goods Sold, leading to considerably higher tax burdens compared to businesses in other industries. With the rescheduling, state-licensed cannabis businesses would be able to deduct ordinary business expenses, creating a more equitable playing field and enabling them to allocate more of their revenues toward growth and expansion.

Challenges in Banking Access

Access to banking services has been another long-standing challenge for the state-licensed cannabis industry due to the federal prohibition on cannabis. Many banks have avoided working with cannabis businesses, concerned about potential legal and regulatory consequences. While the rescheduling to Schedule III might encourage more risk-tolerant banks to engage with the industry, many will likely remain hesitant as long as cannabis remains federally illegal. To comprehensively address these banking hurdles, federal legislation like the SAFER Banking Act is necessary. This act would provide protections for federally-regulated financial institutions such as banks that serve the cannabis industry in states where it is legal. The rescheduling could potentially increase legislative support for such measures, which would support the cannabis industry’s long-term financial stability and growth.

Limitations on Legal Rights and Remedies

Even with the anticipated rescheduling, state-licensed cannabis businesses will continue to encounter restrictions on their federal legal rights and remedies. Due to the ongoing federal prohibition on cannabis, state-sanctioned businesses in the industry will still face difficulties in establishing and protecting intellectual property rights, such as trademarks. Furthermore, access to bankruptcy courts will likely remain restricted, although some courts have recently demonstrated a willingness to allow cannabis-related businesses that are not directly involved in cannabis operations to utilize bankruptcy proceedings.

Conclusion

The expected rescheduling of cannabis to Schedule III will have notable implications for state-sanctioned cannabis businesses. The removal of cannabis from I.R.C. Section 280E will provide significant tax relief for state-licensed cannabis operators, and the possibility of increased banking access could enhance the industry’s financial stability and growth potential. Nevertheless, cannabis companies will continue to face certain limitations stemming from the persistent federal prohibition of cannabis. As the legal landscape evolves, it is essential for cannabis businesses to remain informed about industry developments and to collaborate with legal professionals who can offer guidance and support in navigating the shifting regulatory environment.

If you have any questions or require assistance, please contact Sean P. Gallagher.

This alert serves as a general summary and does not constitute legal guidance. Please contact us with any specific questions.

Fraser Trebilcock attorney Sean P. GallagherSean P. Gallagher is an attorney at Fraser Trebilcock with experience in the highly regulated cannabis industry, working with local and state officials to advance client interests and to help mitigate risks involved and increase opportunities. You can reach him at 517.377.0820 or at sgallagher@fraserlawfirm.com.

MEDC to Make $237 Million Available to Help Michigan Small Businesses

The Michigan Economic Development Corporation (MEDC), joined by Governor Whitmer, announced that the U.S. Department of Treasury has approved up to $237 million in State Small Business Credit Initiative (SSBCI) funding for businesses in the State of Michigan. The SSBCI is designed to promote entrepreneurship and increase access to capital that would otherwise not be available in the market through conventional terms.

Michigan is one of only five states that will receive funding in the SSBCI’s first round, which is expected within the next two months. Michigan’s share of the first round will be roughly $72 million. Those interested are encouraged to visit MEDC’s website here for more information. The funding is expected to catalyze up to $10 of private investment for every $1 of SSBCI capital funding.

In January, the Michigan Strategic Fund Board adopted the Michigan Business Growth Fund 2.0 to provide programs and guidelines for the access to that funding for small businesses through loans and equity investments. These programs include new requirements to enhance support and ensure equity in access to capital for small businesses owned by socially and economically disadvantaged individuals (SEDI), and businesses who have less than 10 employees.

Fraser Trebilcock attorneys specialize in assisting small to medium sized businesses throughout every stage of the business life cycle. If you have any questions, please contact your Fraser Trebilcock attorney.

Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients in business transactions, civil matters, regulatory compliance, and employee matters. Robert also has a background in employee benefits, having been a licensed agent since 2014. You can reach him at 517.377.0848 or at bburgee@fraserlawfirm.com.

Filing a Proof of Claim in Bankruptcy: What You Need to Know

When a company files for bankruptcy and it owes you money, it means you have a “claim” in the debtor’s bankruptcy proceedings. A claim, in short, is a right to payment. A creditor with a claim must often take affirmative action by filing a “proof of claim” form in order to preserve and protect its rights to payment.

Filing a proof of claim can be a relatively simple process involving the submission of a short form. But it’s often not that easy, and the negative consequences of doing it wrong can be severe.

Experienced legal counsel can help you to avoid the common pitfalls inherent in filing a claim. While the information below provides a general overview of many of the most salient issues, there are many nuances and considerations that should be taken into account with all of these issues, and an attorney can help you to identify and weigh them.

Do You Have to File a Claim?

If you’re owed money by a bankrupt debtor, you likely have to file a claim. The technical definition of a “claim” under Section 101(5) of the Bankruptcy Code is: “(A) a right to payment, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (B) a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”

The only instance when you would not have to file a claim for money you are owed is if your claim is accurately reflected on the debtor’s schedules (which must be filed shortly after a case is filed) and is not listed as disputed, contingent or unliquidated. A creditor must take care to ensure that the claim amount listed on the debtor’s schedules is accurate and the claim is scheduled against the right debtor (in cases involving more than one debtor entity). Even when a claim is scheduled, and assuming there are no reasons not to (see below), a creditor may choose to file a claim to guard against a debtor modifying or removing its scheduled claim.

By When Must You File a Claim?

The bankruptcy court will establish a deadline, or “bar date,” by which claims must be filed. That said, a claim can be filed well in advance of the bar date. Often, it’s best to strike the right balance when it comes to timing—not so early that all information related to your claim isn’t captured, but not so late that you’re bumping up against the deadline. It’s important to follow all procedures set forth in the Federal Rules of Bankruptcy Procedure, local rules, and orders issued in the case when it comes to the timing of the submission of your claim form. Don’t put yourself in a position of having to petition the court to late-file a claim due to an avoidable mistake or misunderstanding regarding the applicable rules.

What Supporting Documentation is Required to Assert a Claim?

Federal Rule of Bankruptcy Procedure 3001 provides that proofs of claim must conform to the applicable proof of claim form. Rule 3001 states that when a claim is based on a writing, “a copy of the writing shall be filed with the proof of claim.” In the event the writing has been lost or destroyed, “a statement of the circumstances of the loss or destruction shall be filed with the claim.”

In practical terms, this means that a proof of claim form should include supporting documentation such as relevant contracts, invoices, and correspondence sufficient to support the claim. While the supporting documentation need not be exhaustive, it should be inclusive of all pertinent information necessary to demonstrate the basis of the claim.

In some cases, a creditor will need to file a “contingent” or “unliquidated” claim—meaning a claim is open-ended or the claim amount has yet to be determined—and explain the basis for doing so. The filing of contingent and unliquidated claims is permitted, but it’s a good idea to discuss the risks (and potential benefits) with legal counsel before doing so.

What Happens if the Debtor Objects to My Claim?

The debtor has the opportunity to object to claims filed in the case. The bases for claim objections vary, from disputes as to the amount asserted to arguments that the claim was filed against the wrong entity. A creditor must be served with an objection and has an opportunity to respond.

Often, claim objections are resolved without the parties having to resort to extensive litigation in the bankruptcy court. The lawyers for a creditor and the debtor will typically attempt to reach a resolution of the objection through negotiation and additional information sharing.

Depending on the dollar amount at stake, and the differing viewpoints of the parties as to the merits, some claim objections will not be capable of resolving and it will be necessary to litigate to a resolution. In such instances, additional discovery and a trial before the bankruptcy court may be necessary.

Are There Risks to Filing a Claim?

One of the primary risks that must be considered before filing a claim is that the act of filing a claim constitutes a creditor’s consent to the jurisdiction of the bankruptcy court. The consent is not only to jurisdiction to adjudicate the claim, but also extends to related matters including claims that the debtor may have against the creditor. Accordingly, before filing a claim, a creditor should consult with legal counsel to determine whether there is any risk that, by filing a claim, the creditor will put itself at risk of being sued in the bankruptcy court.

Protect and Preserve Your Rights With a Proof of Claim

Increasing numbers of businesses being affected by the economic fallout from COVID-19 are filing for bankruptcy protection, which means that an increasing number of businesses will be forced to pursue claims for prepetition debts through bankruptcy court. The consequences of not properly preparing and filing a proof of claim can be severe, so it’s important to consult with legal counsel to ensure that your rights are protected. For questions or assistance, please contact Fraser Trebilcock attorney Jonathan T. Walton, Jr.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.

Up in Smoke – Section 280E’s Buzz not Harsh by Excessive Fines Clause: Northern California Small Business Assistants, Inc. v Commissioner

A tax provision that blocks marijuana companies from claiming federal business tax deductions is constitutional ruled the U.S. Tax Court on October 23rd. Northerner California Small Business Assistants, Inc. v Commissioner, 153 TC No. 4 (No. 26889-16, October 23, 2019).

Northern California Small Business Assistants, Inc., a California medical marijuana business, claimed $1.5 million in ordinary and necessary business expenses for its 2012 tax year. The IRS disallowed the company’s tax deductions under Section 280E of the Internal Revenue Code. That provision blocks companies that are involved in drug trafficking from claiming business deductions and credit that are available to businesses not engaged in trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act).

Cannabis companies that are organized and operated legally under state law, face what amounts to a federal income tax on their gross receipts – with effective tax rates as high as 70% because for federal purposes, those companies are considered to be trafficking in the illegal drug trade. Some types of marijuana businesses are able to reduce the amount of their income subject to tax based on their inventory costs.

The Company claimed that Section 280E violated the prohibition on excessive fines contained in the Eighth Amendment. The Excessive Fines Clause guards against abuses of the government’s ability to punish civil or criminal infractions. Specifically the company argued that:

  • The Eighth Amendment applied to corporations,
  • That Section 280E operates as a penalty through the tax laws on the company’s gross receipts, and
  • That this “penalty” is excessive.

The Tax Court held, however, that Section 280E does not violate the Constitution because it is not a penalty provision. “Despite efforts by several States to legalize marijuana use to varying degrees, it remains a Schedule 1 controlled substance within the meaning of the Controlled Substance Act,” wrote Judge Joseph Goeke. “Unlike in other context where the Supreme Court has found a financial burden to be a penalty, disallowing a deduction from gross income is not a punishment,” said the Court. The court noted its holding was consistent with the only Circuit Court of Appeals decision on this point.

The company also argued that, assuming Section 280E is constitutional, that it should be applied more narrowly than as interpreted by the IRS.  According to the taxpayer, while Section 280E may be appropriately applied to limit ordinary and necessary business expenses, other provisions, such as depreciation deductions, and the deductions for state and local taxes should be excluded from Section 280E’s reach. The Tax Court declined this invitation, stating, “Congress could not have been clearer in drafting this section [280E] of the Code.”

Perhaps most interesting, is that there were two dissenting opinions. Judge Gustason, dissenting in part, wrote that he believed Section 280E unconstitutionally exceeded Congress’ power to impose an income tax under the Sixteenth Amendment. “I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than the taxpayer’s ‘income’.”

Judge Copeland, agreeing with Judge Gustafson’s dissent, also wrote a partial dissent of her own, insisting that Section 280E is a penalty and urging further analysis of whether it violates the Eighth Amendment.

Read full opinion here.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Are your U.S. Savings Bonds Still Earning Interest?

Bonds increasing in value

Many U.S. Saving Bonds no longer earn interest. It may be time to cash them in and start making money again. It’s important to find out how much your bonds are worth, and when they will stop earning interest. In addition to checking a bond’s maturity date, it is also very important to carefully review the designated owner of your bonds. Has the owner died? Is the owner a trustee of a trust that was terminated? Should you name a beneficiary on your bonds to avoid probate? Information and many of these questions are answered at www.savingsbonds.gov; or, call us for help with the trickier aspects of managing your U.S. Savings Bonds.

 

For further information on this and related matters, contact attorney Marlaine C. Teahan, chair of Fraser Trebilcock’s Trusts and Estates Department. Marlaine can be reached at 517.377.0869 or mteahan@fraserlawfirm.com.

“We’re Outta Here…”: The Michigan Court of Appeals Recently Reaffirmed that Foreclosure May Extinguish Leases Covering the Foreclosed Property. Lenders, Owners and Tenants Should be Mindful of the Consequences.

When a lender forecloses a mortgage on commercial property that its borrower has leased to one or more tenants, the process may result in unexpected consequences. Continue reading “We’re Outta Here…”: The Michigan Court of Appeals Recently Reaffirmed that Foreclosure May Extinguish Leases Covering the Foreclosed Property. Lenders, Owners and Tenants Should be Mindful of the Consequences.