The U.S. Court of Federal Claims ruled against Southern Arizona Health Services Phoenix, LLC (SAzHS) in a tax refund case involving a claim for the Employee Retention Credit (ERC). The court denied SAzHS's request for a refund of $202,925.80 for the employment tax quarter ending September 30, 2021, stating that the company did not meet the criteria for being an eligible employer under the CARES Act. This ruling affects SAzHS and potentially sets a precedent for similar claims by other businesses.

SAzHS, a healthcare staffing agency founded during the COVID-19 pandemic, sought the refund based on claims that its operations were partially suspended due to government orders related to COVID-19. However, the court found that the company thrived during the pandemic and did not demonstrate a suspension of its operations as required to qualify for the ERC.

Background

Southern Arizona Health Services Phoenix, LLC, was established by spouses Matthew S. and Andrea A. Kolder in October 2020. The company provided healthcare staffing services, including nurses and other professionals, to various facilities in the Phoenix area. During the pandemic, SAzHS experienced significant demand for its services, leading to business growth rather than a decline.

In June 2021, the Occupational Safety and Health Administration (OSHA) issued an emergency temporary standard (Healthcare ETS) aimed at protecting healthcare workers from COVID-19. This standard required healthcare employers to implement various safety measures. SAzHS claimed that these requirements limited its operations and thus made it eligible for the ERC under the CARES Act.

SAzHS filed an IRS Form 941 for the third quarter of 2021 without claiming the ERC. Later, in November 2022, the company filed an IRS Form 941-X to claim a refund for the ERC, stating it had not computed the amount of the credit until that time. After not receiving a response from the IRS, SAzHS filed a tax refund action in court on January 14, 2025.

The Ruling

Judge Armando O. Bonilla presided over the case and ruled against SAzHS. The court determined that SAzHS did not qualify as an eligible employer for the ERC because it failed to demonstrate that its operations were fully or partially suspended due to a qualifying government order. The court stated, "Even assuming the Healthcare ETS was a qualifying COVID-19-based government order, SAzHS fails to demonstrate the existence of a full or partial suspension of its business operations."

The court emphasized that while SAzHS was engaged in a trade or business during the relevant quarter, it did not experience a suspension of operations. The ruling noted that SAzHS's business actually thrived during the pandemic, with the company having all the clients it could handle and even expanding its services.

Impact

This ruling has significant implications for SAzHS and other businesses seeking similar tax relief under the CARES Act. The decision clarifies that businesses must demonstrate a clear suspension of operations due to government orders to qualify for the ERC. This may deter other companies from pursuing similar claims unless they can provide substantial evidence of operational disruptions.

The court's ruling reinforces the need for businesses to understand the specific criteria set forth in the CARES Act and the importance of documenting any disruptions to their operations. Companies that thrived during the pandemic, like SAzHS, may find it challenging to claim ERC benefits if they cannot prove a direct impact on their business operations.

What's Next

SAzHS may consider appealing the ruling, although the court's decision is based on a thorough analysis of the eligibility criteria under the CARES Act. Details regarding any potential appeal or related cases were not available in the court filing.