The recent decision in JPM Restaurant, LLC v. United States, case No. 1:24-cv-00357, from the United States District Court for the Eastern District of Tennessee, offers important insights for tax professionals navigating Employee Retention Credit (ERC) claims that evolve into litigation. This case highlights critical jurisdictional boundaries regarding tax liability compromises once a matter is referred to the Department of Justice (DOJ).

Factual Background

JPM Restaurant, LLC, a company operating in the restaurant industry, initiated a lawsuit seeking a tax refund related to the Employee Retention Credit (ERC), established under 26 U.S.C. §§3134 et seq.. The ERC program was part of the government’s efforts to mitigate the economic repercussions of the COVID-19 pandemic. JPM Restaurant asserted its eligibility for the ERC for the second, third, and fourth quarters of 2020, as well as the first, second, and third quarters of 2021. The company claimed that during the pandemic, it was compelled to suspend or significantly modify its business operations due to compliance with state, local, or federal government orders, which included increased processing and check-in times for employees due to social distancing, temperature checks, and sanitation, as well as limitations on customer capacity and restrictions on meeting prospective employees. These conditions, the plaintiff argued, led to a reduction in gross receipts that the ERC program aimed to alleviate.

On May 19, 2023, JPM Restaurant filed an ERC refund claim with the Internal Revenue Service (IRS) for a total of $338,132.56. This amount included specific claims for each quarter: $30,885.31 for Q2 2020, $48,511.35 for Q3 2020, $32,092.37 for Q4 2020, $102,004.00 for Q1 2021, $58,538.45 for Q2 2021, and $66,100.09 for Q3 2021. After the United States failed to issue any refunds within six months of the claim, JPM Restaurant filed a refund lawsuit in the District Court on November 11, 2024.

A pivotal development occurred on January 7, 2025, when the IRS Office of Chief Counsel referred the case to the Department of Justice for defense. Subsequently, on February 18, 2025—over a month after the referral—the IRS reviewed and approved JPM Restaurant’s ERC requests for five of the six quarters at issue: the third and fourth quarters of 2020 and the first, second, and third quarters of 2021. However, the United States contended that the IRS’s approval was erroneous and that the resulting refunds were appropriately halted. As of the court’s memorandum, no refunds had been issued to the plaintiff.

The Taxpayer’s Request for Relief

In response to the withheld payments despite IRS approval, JPM Restaurant filed a motion for partial summary judgment. The core of the plaintiff’s argument was that the IRS’s unambiguous approval of its ERC requests created an "unequivocal obligation" on the part of the United States to issue payment for the approved quarters. JPM Restaurant asserted that the defendant’s refusal to disburse the approved ERC payments, solely because the lawsuit was pending, was "arbitrary, capricious, and without any legal justification". The plaintiff contended that it was entitled to the approved ERC payments as a matter of law, given the absence of any factual dispute regarding the IRS’s approval of these requests.

Legal Standards Applied by the Court

The Court’s review began by outlining the standard for summary judgment under Rule 56(a) of the Federal Rules of Civil Procedure. Summary judgment is proper only when the movant demonstrates there is "no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law". The moving party bears the burden of establishing the absence of a genuine issue of material fact, with the court viewing all evidence and reasonable inferences in the light most favorable to the nonmoving party. To survive such a motion, the non-moving party must present specific facts, not mere allegations, that demonstrate a genuine issue for trial. The court’s role is limited to determining if sufficient evidence exists for a jury to reasonably find for the non-movant, without making credibility determinations or weighing evidence. Summary judgment should be granted if a fair-minded jury could not return a verdict for the non-movant based on the record.

Crucially for tax professionals, the Court reiterated the burden of proof in tax-refund cases: the plaintiff bears the burden of proving by a preponderance of the evidence that they are entitled to a refund. This principle was supported by precedent, including Dargie v. United States, 742 F.3d 243, 245 (6th Cir. 2014) and Sherwin—Williams Co. v. United States, 403 F.3d 793, 796 (6th Cir. 2005).

The United States presented two primary arguments against the plaintiff’s motion: first, that the IRS lacked authority to approve the claims after the case was referred to the DOJ, and second, that the plaintiff had not met its burden of proving entitlement to a refund. The Court’s analysis focused initially on the question of IRS authority.

The Core Legal Dispute: IRS Authority Post-Referral

The central legal issue revolved around the IRS’s authority to approve tax claims after a case has been referred to the Department of Justice for litigation. The United States argued that the IRS’s approval of JPM Restaurant’s claims was void because the IRS lost its authority to do so once the case was referred to the DOJ. This position was bolstered by case law, such as Int’l Paper Co. v. United States, 36 Fed. Cl. 313, 321 (1996), which states it is "beyond the scope of the IRS’s authority to settle unilaterally a factual issue in a case pending in this court, after . . . the case has been referred to the Department of Justice".

The legal basis for this jurisdictional shift is codified in 26 U.S.C. § 7122, which stipulates that the Attorney General or their delegate holds the exclusive authority to compromise any civil or criminal case arising under the internal revenue laws after the case has been referred to the DOJ for prosecution or defense. Once such a referral occurs, the IRS’s ability to compromise tax liabilities ceases, and "only the Attorney General or a person to whom authority has been delegated by the Attorney General may settle the matter". This principle is firmly established in case law, including United States v. Hurley, No. 3:18-CV-485, 2020 WL 4677428, at *2 (E.D. Tenn. June 8, 2020) and United States v. Jackson, 511 F. App’x 200, 202 (3d Cir. 2013).

Furthermore, the IRS’s own Internal Revenue Manual (IRM) reinforces this policy, explaining that once a case is referred to the DOJ, "Justice has the exclusive authority to make and approve adjustments to the referred tax liabilities". This consistent directive across statute, case law, and internal IRS guidance underscores the jurisdictional transfer.

Application to JPM Restaurant, LLC

Applying these established legal principles to the facts, the Court noted that the IRS Office of Chief Counsel referred JPM Restaurant’s case to the DOJ for defense on January 7, 2025. The DOJ formally responded to the complaint a week later, on January 14, 2025. However, the IRS subsequently approved JPM Restaurant’s refund claims on February 18, 2025.

The Court concluded that the United States’ position was correct. Given the referral date of January 7, 2025, the power to compromise tax liabilities and concede the claims had already shifted exclusively to the Attorney General and their agents. Citing Hurley, the Court affirmed that without explicit authorization from the Attorney General or an authorized delegate, the IRS’s approval, which the United States correctly characterized as "erroneous," lacked any legal force. The record provided no evidence to suggest that the Attorney General or any authorized delegate had, in fact, compromised JPM Restaurant’s tax liabilities.

Court’s Determination and Conclusion

Based on this analysis, the Court determined that because the IRS’s approval was without legal force, JPM Restaurant, LLC had not met its burden of proving by a preponderance of the evidence that it was entitled to a refund. This failure to meet the burden of proof, combined with the lack of valid approval from the legally authorized entity (the DOJ), led the Court to deny JPM Restaurant, LLC’s motion for partial summary judgment.

This ruling serves as a crucial reminder for tax professionals that while an IRS approval of a refund claim may seem definitive, its legal validity can be challenged, particularly when the matter has already entered the litigation phase and jurisdiction has transferred to the Department of Justice. The case underscores the importance of understanding the precise procedural status of a tax dispute and the respective authorities of different government agencies in its resolution.

Prepared with assistance from NotebookLM.