Order Denying IRS’s Motion to Dismiss ERC Claims

Date: May 28, 2026 Source: Tri-State Memorial Hospital vs. United States of America

Background: What Is the Employee Retention Credit?

The Employee Retention Credit (ERC) was a pandemic-era tax benefit created to support businesses that kept employees on payroll while COVID-19 disrupted their operations. Many businesses filed for these credits, but the IRS has denied a large number of claims and left companies waiting for answers. Furthermore, there has been inconsistency in the application of the statute and guidance to Taxpayers’ claims by the IRS and the Courts. For instance, courts have been applying a proximate cause to the application of the suspension of operations due to a government order. (See recent case Northeast Health Services, LLC v. United States, No. 24-2096T (Fed. Cl. May 28, 2026) However, the Tri-State opinion has applied a different standard demonstrating the inconsistency and uncertainty for Taxpayers as claims are reviewed and audited by the IRS.

What Happened in This Case

Tri-State Memorial Hospital filed for ERC credits for several quarters in 2021, arguing that government COVID orders forced it to partially suspend normal operations. The IRS denied the claims and asked the court to throw the case out entirely. The court refused, meaning the hospital gets its day in court. (Tri-State Memorial Hospital v. United States, filed May 28, 2026)

 Why This Ruling Matters

The court pushed back on several arguments the IRS has been using to deny ERC claims.

1. “Partial suspension” doesn’t require a dramatic shutdown. The IRS argued the hospital hadn’t shown enough disruption to qualify. The court disagreed. A “partial suspension” simply means that some portion of normal business operations was temporarily delayed, interrupted, or stopped. The hospital pointed to concrete examples like canceling non-urgent procedures, monitoring capacity, diverting resources, and implementing new protocols that slowed down day-to-day operations. The court found that was enough to move forward.
2. The IRS’s 10% rule isn’t actually law. The IRS has been requiring businesses to prove that more than 10% of their operations were affected, and rejecting claims that fall short of that threshold. The court said that number does not appear in the actual statute, so the IRS cannot treat it as a hard requirement.
3. Government orders don’t have to be the only cause of disruption. The IRS argued that sick patients and employees, not government orders, were what truly disrupted the hospital’s operations. The court rejected that reasoning. The relevant question is whether the business would have faced those disruptions without the government orders in place. The orders required new protocols and operational changes. That connection is sufficient.

The Bottom Line for Your Business

Courts are starting to push back on how the IRS has been handling ERC denials, and this ruling is a meaningful development for businesses still fighting those decisions. It confirms that you do not need a full shutdown to qualify, that the 10% threshold is a guideline rather than a legal requirement, and that indirect impacts tied to government orders can still count in your favor.

If you received a denial or have a claim still pending, this is worth a closer look. Let CTI walk you through what it could mean for your situation.