ERC Update: A Court Reminder That the Government Doesn't Always Interpret the Law Correctly

For employers still waiting on Employee Retention Credit (ERC) refunds, a recent federal court decision is worth a close look. In Tri-State Memorial Hospital v. United States, NO. 2:25-CV-0181-TOR (E.D. Wash., May 28, 2026), the court denied the government’s motion to dismiss a hospital’s ERC refund suit, rejecting the narrow interpretations the government pressed on two key statutory terms. The opinion is a meaningful win for employers — and a useful reminder that the positions the IRS and DOJ take in litigation are not always the positions a court will accept.

The government’s central move was to read requirements into the ERC statute that Congress never wrote. It argued that a “partial suspension” requires a “significant” closure “surpassing basic economic impact” felt by all employers during the pandemic. The court found no textual basis for that reading, invoking the long-standing principle that courts presume Congress says what it means.

That holding ties directly to the 10% threshold in IRS Notice 2021-20. The court treated the notice as persuasive guidance but clarified that the 10% figure is a method of satisfying the more-than-nominal standard — not a mandatory element. For practitioners with clients whose suspension is genuine but difficult to quantify, that distinction matters.

The decision also reflects the post-Loper Bright landscape (that is, courts interpret law, not agencies). Rather than deferring to the IRS, the court exercised independent judgment. The Generic Legal Advice Memorandum the government leaned on was set aside in part because it expressly states it cannot be cited as precedent.

Importantly, the court confirmed that essential businesses — including hospitals — can experience a partial suspension. The hospital’s canceled non-urgent procedures, reduced bed capacity, isolation protocols, repurposed facilities, and diverted staff were enough to plausibly allege a more-than-nominal suspension caused by a state proclamation.

The government also argued that COVID-19 itself, not the government order, caused any disruption. The court rejected this, reasoning that if sick patients alone were the cause, almost no employer would ever qualify for the ERC — an outcome Congress plainly did not intend.

One caveat: this is a ruling on a motion to dismiss, where allegations are accepted as true. It is not a merits decision. This was instead a court rejecting the government’s attempt to have the court dismiss the case before the hospital could present its case.

The broader lesson is straightforward. A denied, stalled, or contested ERC claim does not mean the claim is wrong. The government sometimes advances aggressive interpretations that courts decline to adopt — and employers with legitimate claims may have more likelihood of success than a notice of disallowance suggests.

If you have any questions about this article, the employee retention credit, or any civil or criminal tax matter, please contact me at 214-749-2417 or jglassman@meadowscollier.com.