Background
I Health and Life Insurance Services, a California-based insurance sales agency, filed a suit seeking a $50,000 tax refund for the third quarter of 2020. The claim was based on the Employee Retention Credit (ERC) under the CARES Act. I Health argued that its business operations were partially suspended due to various state and local government directives related to the COVID-19 pandemic. These directives, issued by the State of California and Fresno and San Diego counties, required modifications such as social distancing, installing physical barriers, transitioning some employees to remote work, and implementing health screenings.
The U.S. government moved for judgment on the pleadings, seeking to dismiss I Health’s claim. The government argued that I Health was not an “eligible employer” because its business was not suspended by a qualifying government order. In a related matter, the government also filed a counterclaim to recover a separate, nearly $400,000 ERC refund that had already been paid to I Health for a different tax period. The court’s decision focuses only on the government’s motion to dismiss the Q3 2020 claim.
The Court’s Holding
The U.S. Court of Federal Claims deferred its ruling on the government’s motion. Instead of dismissing the case, the court granted I Health an opportunity to amend its complaint to correct several deficiencies. The court’s decision did not determine whether I Health was ultimately eligible for the ERC, but rather addressed the adequacy of its initial legal claims.
The court’s analysis centered on the statutory requirement that a business suspension must be “due to orders from an appropriate governmental authority.” It clarified that not all government communications qualify as “orders.” To be considered an “order” for ERC purposes, a directive must have enforcement authority and impose binding requirements with repercussions for non-compliance. Mere guidance, recommendations, or press releases are insufficient. The court found that while some of the executive and county-level directives cited by I Health appeared to be qualifying “orders” with the force of law, others were not. Because the complaint was not precise enough in linking the business disruptions to specific, enforceable orders, the court allowed I Health to refile its complaint to address these issues.
Key Takeaways
- To be eligible for the ERC based on a business suspension, a taxpayer must prove the suspension was caused by a government “order,” not just general guidance, recommendations, or press releases.
- A government directive qualifies as an “order” under the CARES Act only if it carries enforcement authority or imposes binding requirements with penalties for non-compliance.
- Courts may allow taxpayers to amend deficient ERC complaints to more precisely allege which specific, qualifying government orders caused a partial or full suspension of their business operations.
Why It Matters
This case illustrates the detailed scrutiny that courts are applying to Employee Retention Credit claims as litigation in this area increases. It serves as a warning to businesses that simply pointing to the general landscape of COVID-19 restrictions is not enough to establish ERC eligibility. Taxpayers must specifically identify a government “order” with the force of law and demonstrate that this order—not voluntary actions or responses to mere guidance—was the direct cause of their business suspension. The court’s decision to permit an amendment rather than an outright dismissal suggests that plaintiffs with potentially valid claims may have a chance to fix pleading errors, but it signals that a high level of factual and legal specificity is required to survive early challenges from the government.