Welcome back to Higher Law, our weekly briefing on all things cannabis. I'm Cheryl Miller, reporting for Law.com from Sacramento.

This week we're looking at: The arrival of Harborside's tax case at the Ninth Circuit • A fire insurance dispute involving a marijuana grow • A legal win for CBD manufacturer Elixinol • Headlines: The rise and fall of MedMen

Thanks as always for reading. Send your tips, thoughts and story ideas to me at [email protected]. You can call me, too ,at 916.448.2935. Follow me on Twitter @capitalaccounts.

Harborside Files 9th Circuit Appeal in Tax Case

The venerable California dispensary Harborside filed its opening brief in the appeal of the much-watched tax case Patients Mutual Assistance Collective Corp. v. Commissioner. And Harborside's first argument hits with a bang: Section 280E, the tax code provision that bars state-licensed marijuana operators from deducting the same business expenses as other companies, violates the Sixteenth Amendment.

When we spoke last year, Harborside's lead counsel, Greenspoon Marder partner James Mann, told me not to expect a full-out assault on 280E in an appeal. That strategy appears to have evolved, as they say, because the dispensary is now arguing that 280E is unconstitutional on the grounds that it taxes dispensary revenue that isn't income.

"While Congress certainly has the power to limit deductions in various ways, § 280E exceeds such power as it disallows all deductions," Mann and Greenspoon Marder colleagues Eric Saar and Allen Paxton wrote. "As a result, the only allowed reduction to income is from the costs of goods sold. Since the deductions for rent, labor, and utilities (for example) are disallowed, § 280E fabricates gain where there was none and imposes a tax based on artificial income.

"Therefore, § 280E should not be applied to Harborside, as it unconstitutionally results in the taxation of amounts that are not 'income' under the Sixteenth Amendment," the lawyers conclude.

Harborside also argues that the tax court erred in finding that the dispensary miscalculated its costs of goods sold, leaving it with a multi-million-dollar bill for underpayments between 2007 and 2012.

"There is no suggestion anywhere in the record of this case that Harborside's cost of goods sold accounting either is an improper method of accounting or fails to clearly reflect income—not in the notices of deficiency, not in the Commissioner's briefs in the trial, and not in the Tax Court's opinion," the Greenspoon Marder lawyers wrote. "The significance of that absence cannot be overstated—this is a dispute about the federal income tax, after all, and the reality that there is nothing that Harborside has done that unfairly deprives the Treasury of revenue makes this case remarkable."

The IRS is due to file its answer by June 24.

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What Did the Landlords Know? California Appellate Court Reverses Marijuana Insurance Ruling

California residents James and Maria Mosley got a double-dose of bad news in 2016.

First, their relatively new tenant damaged their rental property when, unbeknownst to them, he bootlegged a main power line into the attic to light up his marijuana grow and started a fire. Then their insurer, Pacific Specialty Insurance Co., refused to pay out because their policy excluded coverage for losses caused by "the growing of plants."

This week, a California state appellate court breathed new life into the Mosley's lawsuit against Pacific Specialty, reversing a trial court's order granting the insurer summary judgement on the property owners' breach of contract claim.

"Because there is no evidence the Mosleys were aware of their tenant's marijuana growing operation, and because the record is silent as to what the Mosleys could or should have done to discover it, we reverse the judgment," the majority of a three-justice panel of the Fourth District Court of Appeal wrote.

The case and subsequent opinion may reverberate more in California's insurance world than in the marijuana real estate industry. In a dissent, Associate Justice Frank Menetrez wrote "the majority opinion alters the coverage of every fire insurance policy in California." Still, the majority's thinking raises some interesting questions about what landlords are responsible for knowing about their tenants' marijuana grows.

Michael Garnett of the Law Office of Michael Garnett represented the Mosleys. Pacific Specialty Insurance was represented by Michelle Burton and Rachael Kelly of Shoecraft Burton.

Who Got the Work

Frost Brown Todd attorneys secured the dismissal of a class action complaint against Colorado CBD manufacturer Elixinol. On May 8, plaintiff Michelle McCarthy, represented by a team of firms that includes Bursor & Fisher, dismissed without prejudice all claims filed against Elixinol in the U.S. District Court for California's northern district. McCarthy alleged that Elixinol sells CBD capsules, tinctures and dog treats in violation of federal law. Frost Brown attorneys Martin Rose, Sean Whyte, and Ben West argued the 2018 Farm Bill allows Elixinol to legally transport and ship hemp.

In the Weeds…

Inside the rise, and fall, of the cannabis company MedMen. "The company's fall reverberates far beyond its stakeholders, because its glitzy rise was propelled by the promise of an entire industry. Its woes reflect the precarious status of the cannabis business: legalized by states but still criminalized by the federal government, its position makes traditional bank financing impossible and puts companies at the mercy of a patchwork of regulators." [Politico]

California bar greenlights counseling clients about cannabis. "The state bar, with 260,000 licensed attorneys, said that it's O.K. for California lawyers to counsel clients on how to comply with state cannabis laws that may violate federal law as long as they explain the state-federal law conflict, and don't help the client break U.S. law." [Bloomberg Law] Read the opinion here.

Inside the "wild ride" of a startup. "Eaze's 2020 pitch deck, which Business Insiderhas published in full, reveals a very different company than what Eaze envisioned in 2017. In the 2020 deck, Eaze says it hopes to sell $190 million worth of cannabis by the end of this year, generating $125 million in revenue." [Business Insider]

CBD's history: From 'international underground to cultural ubiquity.' Before CBD products hit every drug store shelf and celebrity swag bag, veteran cannabis growers tried to figure out how to make the compound's health benefits more widely available. Then politics, money and a little media hype got involved. "In the absence of oversight, the push to get more patients access to cannabis medicine—and bona fide CBD—has been co-opted by a push to make as much money as possible off the next big wellness fad."' [NYT]

Will this new era of unpredictability help promote cannabis legalization? "COVID-19 has caused 'predictable' policyholders and clients to experience unpredictable results," Saul Ewing Arnstein & Lehr partner Robin Dusek writes. "What was thought to be known is now unknown. Given this reality, the lack of data about and experience with cannabis businesses is no longer the outlier. Indeed, we may emerge from the pandemic with cannabis businesses experiencing a more predictable income stream and risk profile than many other types of businesses." [The Legal Intelligencer]

COVID-19 may be the push Pennsylvania lawmakers need to legalize pot. With tax revenues down $ billion already due to the pandemic, "some Republican lawmakers in Pennsylvania are coming around—if slowly—to the idea of legalizing marijuana for adult recreational use." Republican State Senator Dan Laughlin said he fully believes recreational marijuana will be "one of the pieces of revenue" discussed in the budget cycle as lawmakers look for new ways to pay bills. [The Philadelphia Inquirer]

The Calendar Things

June 1 - The Benzinga Cannabis Capital Conference takes place online. Participants include Alexander Leonowicz, general counsel at Redbud Roots and Tom Zuber, managing partner of Zuber Lawler.

June 2 - The International Cannabis Bar Association presents "The Cannabis Law Sessions," streamed online. The six hours of CLE include sessions on cannabis taxation, social equity and racial justice; and regulation of non-THC cannabinoids.

June 2 - Farella Braun + Martel present the webinar ""Cannabis Disputes: How to Minimize Your Litigation Risks." Speakers are partner Tony Schoenberg and senior associate Cynthia Castillo.