Judicial Interpretation of “due to” In the Context of the Employee Retention Credit
As the Internal Revenue Service (IRS) continues to disallow Employee Retention Credit (ERC) claims in whole or in part, taxpayers are increasingly filing tax refund lawsuits against the federal government, asserting eligibility and demanding payment of the claimed credits. Many of these taxpayers face pushback from the government, which argues they are not “eligible employers” as defined by statute. In particular, the government often contends that a taxpayer’s operations were not suspended “due to” a government order, so the taxpayer does not qualify. As a result, courts have had to interpret the phrase in the context of the ERC, and they have divided over the level of causation it requires.
Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Relief Act”) and, for the third and fourth quarters of 2021, as reenacted at IRC Section 3134 by the American Rescue Plan Act, provides that an eligible employer is one that was carrying on a trade or business during the calendar quarter claimed and whose operations were fully or partially suspended during that quarter “due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19).” The statute uses “due to” twice: the suspension must be due to the orders, and the orders must be due to COVID-19. The litigation concerns the first phrase, the link between the governmental order and the suspension.
Some courts hold that the first phrase requires only but-for (factual) causation. In Tri-State Memorial Hospital v. United States, the Eastern District of Washington took this view and rejected an additional proximate-cause requirement as an impermissible addition to the statutory text. In Titan Mutual Lending v. United States, the court reached a similar conclusion, concluding that the phrase requires only but-for causation.
By contrast, courts in other cases, such as I Health & Life Insurance Services v. United States and JPM Restaurant LLC v. United States, required both but-for and proximate causation. The rationale for the proximate-cause approach appears to be that a purely but-for standard could encompass nearly every business indirectly affected by pandemic conditions, and proximate causation therefore limits the suspension test to direct, foreseeable disruptions caused by the order.
As more lawsuits are filed and court decisions are appealed, a more consistent interpretation of “due to” is likely to emerge. Taxpayers who believe they qualify for the ERC and are considering a refund suit over an unresolved claim should act with timing in mind. A refund suit generally requires a disallowed claim or six months of IRS inaction (IRC § 7422), and suit must be brought within two years of a notice of disallowance (IRC § 6532(a)(1)), absent a written extension.
To discuss your unresolved Employee Retention Credit claim, contact Strategic Tax Planning at (202) 455-6010 or schedule a confidential consultation.
