Gravenstein 116: Refundable ERC Remained a Credit Subject to Section 280E

Keeping employees paid during the pandemic required real resources. A business seeking repayment through a refundable tax credit still has to satisfy the legal rules governing that credit, however, including restrictions based on the business activity.

In Gravenstein 116, LLC v. United States, the Court of Federal Claims dismissed a California cannabis business’s claim for the refundable portion of Employee Retention Credits for the first two quarters of 2021. The business conceded that section 280E applied to it but argued that a cash refund was a wage subsidy outside the restriction. The court held that refundability did not stop the ERC from being a tax credit. Gravenstein 116 frames the legal question.

The business claimed more than $322,000 for two quarters

Gravenstein alleged that it operated three California cannabis dispensaries under the name Solful and that pandemic orders restricted operations, leading largely to curbside service and additional safety costs. The court accepted the complaint’s factual allegations for the motion to dismiss.

The company claimed $150,786.19 for the first quarter of 2021. It alleged that it had filed its original payroll return in May 2021 and an amended return seeking the credit in August 2024. Gravenstein 116 gives the first-quarter claim history.

The second-quarter claim sought $171,230.06, bringing the total to $322,016.25 plus interest. The company alleged that the IRS had not adjudicated the claims within six months. These were allegations supporting its refund suit, not findings that the wages or refunds otherwise qualified. Gravenstein 116 sets out the second-quarter amount and the total.

The court read the refundable excess as part of the credit

Section 280E denies deductions and credits for covered controlled-substance trafficking businesses. Gravenstein acknowledged that restriction applied to its business. Its theory instead depended on treating the refundable portion of the ERC differently from a credit used to reduce employment taxes.

The court examined the credit and refund provisions together. The statutory framework described the excess as the amount of the credit exceeding the relevant tax limitation and treated that excess as an overpayment to be refunded. The same credit did not acquire a different character simply because it produced cash rather than only reducing tax. Gravenstein 116 explains that textual reasoning.

Overpayment treatment did not create an exception

The court relied on Sorenson v. Secretary of Treasury, 475 U.S. 851 (1986), which addressed refundable earned-income credit and interception of refunds for child-support obligations. The statutory treatment of an amount as an overpayment did not depend on the recipient actually having paid that amount in tax.

The court also discussed Israel v. United States, 356 F.3d 221, 223–224 (2d Cir. 2004), which rejected an effort to avoid tax-code timing rules by characterizing refundable earned-income credit as an antipoverty subsidy. Those decisions supported reading the ERC’s refund mechanism within the tax code rather than outside its restrictions. Gravenstein 116 develops the refundable-credit comparison.

Employment policy did not override the statutory restriction

Gravenstein argued that it had fulfilled the ERC’s purpose by keeping employees paid and supporting the economy. The court concluded that the program’s policy purpose did not permit a judicial exception to section 280E’s text. The company’s argument for special treatment failed along with its structural argument. Gravenstein 116 explains the policy reasoning.

The opinion also addressed the rescheduling process as it stood when the court ruled in January 2026. Its footnote referred to an executive direction to accelerate that process and the absence of a final rule as of the court’s review. That is a dated explanation of the decision’s legal setting, not a statement about the status of later developments. Gravenstein 116 contains that discussion.

The complaint failed as a matter of law

Judge Eleni M. Roumel granted the government’s Rule 12(b)(6) motion, dismissed the complaint and directed entry of judgment. The legal restriction defeated the claim even with the pleaded operational facts taken as true. Gravenstein 116 gives the order.

The decision concerns the disputed 2021 credits and the business’s conceded section 280E status. Our guide to reviewing a cannabis ERC refund claim separates a promised cash refund from the eligibility and statutory-bar questions. Current scheduling developments, effective dates and filing options need their own official-source review before advice about a particular claim.