A recent ruling by the United States Court of Federal Claims has denied Sundancer Pools, Inc. the Employee Retention Credit (ERC) it claimed for two quarters in 2021. The court found that Sundancer did not provide enough evidence to show that its business operations were fully or partially suspended due to government orders during the COVID-19 pandemic. This decision affects Sundancer’s claim for a tax refund of over $660,000, which it sought after the IRS disallowed its ERC application for the second and third quarters of 2021.
The case, Sundancer Pools, Inc. v. United States, was filed under docket number 25-1291T and was presided over by Judge Elaine Kaplan. The ruling emphasizes the need for businesses to demonstrate clear evidence of operational suspension linked to government mandates to qualify for the ERC, a tax relief measure established under the CARES Act during the pandemic.
Background
Sundancer Pools, Inc., a California-based company that constructs residential and commercial swimming pools and spas, filed for ERCs for six quarters ending in September 2021. The ERC was designed to assist businesses that faced operational disruptions due to COVID-19. While the IRS approved Sundancer's claims for the first four quarters, it rejected the claims for the latter two quarters of 2021, leading Sundancer to file a lawsuit seeking a refund of $660,292.61 plus interest.
The IRS disallowed Sundancer's claims on the grounds that the company did not demonstrate that it experienced a full or partial suspension of its operations during the relevant quarters. In response, Sundancer argued that its business was indeed affected by various government orders, which limited its ability to operate normally.
The Ruling
The court ruled in favor of the United States government, stating that Sundancer's complaint did not adequately show that its business was fully or partially suspended due to government orders. Judge Kaplan noted, "The factual allegations in Sundancer’s current complaint, taken as true, do not establish that Sundancer’s ‘trade or business ... [was] fully or partially suspended’ during the second and third quarters of 2021." The court highlighted that Sundancer's claims were based on general difficulties faced by many businesses during the pandemic, rather than specific operational suspensions mandated by law.
Furthermore, the court clarified that the government’s reliance on IRS Notice 2021-20, which provided guidance on the ERC, was appropriate. The notice was cited as a resource for understanding the eligibility criteria but was not deemed a binding interpretation of the law. The court stated, "The government has not argued that IRS Notice 2021-20 sets out binding interpretations of the governing statute. Rather, it cites the Notice as ‘a body of experience and informed judgment to which courts and litigants may properly resort for guidance.’"
Impact
This ruling has significant implications for businesses seeking ERCs under the CARES Act. It sets a precedent that businesses must provide concrete evidence of operational suspension due to government orders to qualify for tax credits. Sundancer's case illustrates the challenges many businesses face in proving eligibility for such credits, especially when general economic hardships are involved.
The court's decision also emphasizes the importance of understanding the specific language and requirements of the ERC program. Businesses may need to closely document their operations and any impacts from government orders to ensure they meet the eligibility criteria in future claims.
What's Next
Sundancer has been given the opportunity to amend its complaint to address the court's concerns. The company must file any such motion, along with a proposed amended complaint, by July 23, 2026. Until that time, the court has deferred ruling on the government's motion for judgment on the pleadings.