Tentative Ruling: East West Bank vs HERBL Inc
Case Number
23CV02629
Case Type
Hearing Date / Time
Mon, 05/04/2026 - 10:00
Nature of Proceedings
CMC; Motion re Adjudication of Claim filed by IRS; Motion: Order Authorizing Receiver to Distribute Funds
Tentative Ruling
East West Bank v. HERBL, Inc., et al.
Case No. 23CV02629
Hearing Date: May 4, 2026
HEARING:
- Receiver’s Motion for Adjudication of IRS Claim
- Receiver’s Motion Authorizing Receiver to Distribute Funds
ATTORNEYS: For Receiver Kevin Singer: Blake C. Alsbrook, Danielle Gabai, Ervin Cohen & Jessup LLP; Nathanial S. Pollock, Southbank Legal
For Claimant United States of America: Todd Blanche, United States Department of Justice; Bilal A. Essayli, David M. Harris, Jolene Tanner, Gavin L. Green, Office of the United States Attorney
TENTATIVE RULING:
- As to the motion of Receiver Kevin Singer to adjudicate the claim of the United States Internal Revenue Service, the court adjudicates the claim in favor of the United States for the reasons stated herein.
- The Receiver shall appear at the hearing of this motion and confirm that the court’s adjudication of the IRS claim does not affect the motion to authorize distribution of funds to East West Bank as requested. With that confirmation and in the absence of objection, the court will grant the motion to authorize distribution of $1,391,932.20 to first-priority secured creditor East West Bank.
Background:
(1) Tax Claim
On June 28, 2023, the court entered its order appointing Kevin Singer (Receiver) as receiver of defendant HERBL, Inc. (HERBL).
The United States Internal Revenue Service (IRS) makes a claim against HERBL for taxes due in the total amount of $9,053,181.15, consisting of taxes, penalties, and interest. (Singer decl., ¶ 6 & exhibit E.) This amount is for tax liability in 2019, 2020, 2021, and 2022. (Ibid.)
On April 18, 2025, the Receiver filed a first motion to adjudicate the claim asserted by the IRS. The Receiver disputes the legal basis for the asserted tax liability, the resolution of which in favor of HERBL would also result in a significant tax refund to the receivership estate.
On May 27, 2025, claimant United States of America (US), on behalf of the IRS, filed its notice of removal to federal court.
At subsequent hearings, the court questioned its jurisdiction to resolve the motion to adjudicate the IRS claim.
On October 21, 2025, the federal court issued its order of remand, filed in this court on October 31.
On December 23, 2025, the Receiver filed the current motion to adjudicate the IRS claim. The motion is opposed by the US.
(2) Receiver’s Motion to Disburse Funds
On January 26, 2026, the Receiver filed its motion for an order to distribute $1,391,932.20 to first-priority secured creditor East West Bank. No opposition or other response has been filed to this motion.
Analysis:
(1) Tax Claim
As prefatory matter, both the Receiver and the US agree that this court has jurisdiction to determine the IRS claim. (26 U.S.C. § 6871; Motion, at pp. 4-5; Opposition, at p. 2.)
HERBL was, at the times relevant to the IRS claim, California’s larges cannabis distributor. The core of the dispute over the IRS claim is the legal basis for the disallowance of deductions under title 26 United States Code section 280E, which provides:
“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” (26 U.S.C. § 280E.) (Note: All further references to section 280E (§ 280E) are to title 26 United States Code section 280E.)
The Receiver argues that the IRS disallowance of deductions was improper because cannabis (also known as marijuana or marihuana) is not a “controlled substance[ ] (within the meaning of schedule I and II of the Controlled Substances Act)” based upon its construction of the phrase “within the meaning of.” The US argues that marijuana is a “controlled substance” under section 280E and therefore the disallowance of deductions was proper. (Note: As quoted below, the federal statute uses the spelling “marihuana.” Cannabis, marijuana, and marihuana are used herein interchangeably, with the term used depending on context.)
The Controlled Substances Act (CSA, 21 U.S.C. § 801 et seq.) defines its schedules as follows:
“There are established five schedules of controlled substances, to be known as schedules I, II, III, IV, and V. Such schedules shall initially consist of the substances listed in this section. The schedules established by this section shall be updated and republished on a semiannual basis during the two-year period beginning one year after October 27, 1970, and shall be updated and republished on an annual basis thereafter.” (21 U.S.C. § 812(a).) (Note: All further references to section 812 (§ 812) are to title 21 United States Code section 812.)
“Except where control is required by United States obligations under an international treaty, convention, or protocol, in effect on October 27, 1970, and except in the case of an immediate precursor, a drug or other substance may not be placed in any schedule unless the findings required for such schedule are made with respect to such drug or other substance. The findings required for each of the schedules are as follows:
“(1) Schedule I--
“(A) The drug or other substance has a high potential for abuse.
“(B) The drug or other substance has no currently accepted medical use in treatment in the United States.
“(C) There is a lack of accepted safety for use of the drug or other substance under medical supervision.
“(2) Schedule II--
“(A) The drug or other substance has a high potential for abuse.
“(B) The drug or other substance has a currently accepted medical use in treatment in the United States or a currently accepted medical use with severe restrictions.
“(C) Abuse of the drug or other substances may lead to severe psychological or physical dependence.
“(3) Schedule III--
“(A) The drug or other substance has a potential for abuse less than the drugs or other substances in schedules I and II.
“(B) The drug or other substance has a currently accepted medical use in treatment in the United States.
“(C) Abuse of the drug or other substance may lead to moderate or low physical dependence or high psychological dependence.”
(21 U.S.C. § 812(b)(1)-(3).)
“Marihuana” is listed on the initial statutory schedule I of the CSA. (21 U.S.C. § 812(c), Schedule I(c)(10).) Marihuana remains on schedule I at this time. (21 C.F.R. § 1308.11(d)(23) (2026).)
There is no factual dispute presented that HERBL’s business was trafficking in cannabis, i.e., marihuana. (See Northern California Small Business Assistants Inc. v. Commissioner of Internal Revenue (2019) 153 T.C. 65, 74 [“the use of the word ‘trafficking’ in section 280E encompasses petitioner’s medical marijuana dispensary legally operated under California State law”].) The US thus argues that section 280E clearly applies to disallow the deductions at issue.
The Receiver, on the other hand, argues that section 280E does not apply to HERBL’s business expenses because marijuana is not a controlled substance “within the meaning of” schedule I of the CSA. The Receiver argues that “within the meaning of” is not synonymous with “listed in” and requires an analysis of whether marijuana meets the criteria for inclusion on schedule I as set forth in section 812(b)(1). The Receiver also provides evidence that marijuana does not meet those criteria and is in the process of being rescheduled to schedule III. (See, e.g., Exec. Order No. 14370, § 2, 90 Fed.Reg. 60541 (Dec. 18, 2025) [“The Attorney General shall take all necessary steps to complete the rulemaking process related to rescheduling marijuana to Schedule III of the CSA in the most expeditious manner in accordance with Federal law, including 21 U.S.C. 811.”].)
While not addressing the Receiver’s semantic argument, the federal Tax Court has determined that a business dispensing cannabis lawfully under California law is subject to section 280E. (E.g., Olive v. C.I.R. (2012) 139 T.C. 19, 38 [“We have previously held … that medical marijuana is a controlled substance under section 280E.”].)
The Ninth Circuit Court of Appeals impliedly rejects the Receiver’s construction:
“Application of the statute does not depend on the illegality of marijuana sales under state law; the only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ I.R.C. § 280E. If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.” (Olive v. C.I.R. (9th Cir. 2015) 792 F.3d 1146, 1150.)
The Receiver points out that the phrase “within the meaning of” is a common device used in the Internal Revenue Code to incorporate a substantive definition set out elsewhere. For example, in title 26 United States Code section 24(d)(B)(i) refers to a “taxpayer’s earned income (within the meaning of section 32),” where section 32(c)(2) defines “earned income.” The Receiver asserts that this meaning of “within the meaning of” incorporates the definition of schedule I as the criteria identified in section 812(b)(1) rather than schedule I itself. The Receiver bolsters this argument by noting that section 280E use “within the meaning of” rather than “listed in,” suggesting a rejection of the list and an incorporation of the broader criteria.
The Receiver’s argument, however, is inconsistent with the definition provided in the CSA itself. The term referenced in section 280E is “controlled substances.” That term is defined in the CSA as “a drug or other substance, or immediate precursor, included in schedule I, II, III, IV, or V of part B of this subchapter. The term does not include distilled spirits, wine, malt beverages, or tobacco, as those terms are defined or used in subtitle E of the Internal Revenue Code of 1986.” (21 U.S.C. § 802(6).) Because a substance included in schedule I of the CSA is defined under the CSA as a “controlled substance,” the better reading of “controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law” in section 280E is a reading that includes all substances listed in schedule I.
Because marijuana was on schedule I during the tax years at issue and remains on schedule I as of now, marijuana is a “controlled substance” to which section 280E applies. Thus, as a matter of statutory construction, the legal basis for the disallowance of deductions under section 280E is proper. The IRS claim is therefore adjudicated in favor of the US as presented.
In reaching this conclusion, the court has reviewed all of the arguments and evidence presented by the parties. The court recognizes the difficulties that this construction of section 280E has on cannabis businesses, but, like the courts addressing section 280E before, those difficulties are the consequence of federal tax and policies that are beyond the narrow scope this legal determination.
(2) Motion to Disburse Funds
Assuming the court’s disposition of the IRS claim does not affect payment to the first-priority secured creditor, the court will grant the unopposed motion.