In the recent decision of Plastic Film, LLC v. United States, Civil No. 5:25-cv-30-DCB-LGI (S.D. Miss. Jan. 20, 2026), the United States District Court for the Southern District of Mississippi issued an order granting in part and denying in part the government’s motion to dismiss. This case provides insight for tax professionals regarding the pleading requirements for Employee Retention Credit (ERC) refund suits and the viability of Administrative Procedure Act (APA) challenges against IRS guidance, specifically Notice 2021-20.

Factual Background and Taxpayer’s Request for Relief

Plastic Film, LLC (the Plaintiff) filed a complaint on April 1, 2025, asserting four causes of action against the United States and the IRS. Count I sought a refund of payroll taxes pursuant to 26 U.S.C. § 7422(a) for the second, third, and fourth quarters of 2020, as well as the second quarter of 2021. Counts II through IV alleged violations of the APA, specifically claiming that the IRS violated notice-and-comment rulemaking requirements under 5 U.S.C. § 553, engaged in arbitrary and capricious agency action under 5 U.S.C. § 706(2)(A), and committed unlawful agency action.

The Plaintiff had previously filed Forms 941-X regarding these periods on or about November 6, 2023. The complaint alleged that the taxpayer’s business operations were suspended due to governmental orders issued during the COVID-19 pandemic, resulting in severe decreases in gross receipts for the taxpayer’s Food and Industrial divisions.

Following the filing of the complaint, the government moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Notably, prior to the court’s ruling, the Plaintiff conceded that it had received the requested ERC refunds for the second and fourth quarters of 2020 and the second quarter of 2021, leaving only the claim for the third quarter of 2020 in dispute regarding the refund count.

Judicial Analysis of Mootness regarding Paid Claims

The court first addressed the refund claims for the quarters where checks had already been issued. Citing Article III principles, the court noted that a claim is moot when the issues are no longer live. Because the Plaintiff acknowledged receipt of the refunds for three of the four quarters at issue, the court held that "there is no longer a live controversy as to the refund claims for quarters two 2020, four 2020, and two 2021, these claims are moot and will be dismissed".

Application of Pleading Standards to ERC Refund Claims

A significant portion of the opinion focused on the government’s argument that the remaining refund claim for Q3 2020 should be dismissed for failure to state a claim. The government contended that the complaint was insufficient because it failed to "identify at least one governmental order on which it relies" to demonstrate a full or partial suspension of business.

The court rejected the government’s attempt to impose a heightened pleading standard. The court observed that 26 U.S.C. § 7422(a) requires a taxpayer to file a valid administrative claim and generally wait six months before filing suit, requirements the Plaintiff satisfied. The judge explicitly ruled that specific identification of governmental orders is not required at the initial pleading stage:

"Although the Complaint does not identify a specific governmental order, there is no statutory, regulatory, or binding precedent requiring such specificity at the pleading stage. Whether the referenced orders ultimately substantiate Plaintiff’s eligibility for the credit presents a fact-intensive issue appropriately addressed through discovery or at summary judgment."

The court found persuasive the argument that, given the volume of state, local, and federal orders issued during the pandemic, "a claimant should not be required to identify a particular order at this stage". Consequently, the court held that the Plaintiff’s allegations were "sufficient to plausibly state a claim for refund and to raise a reasonable expectation that discovery may yield evidence supporting its entitlement to the ERC".

Standing and Redressability of APA Claims

Regarding the Plaintiff’s challenges to the validity of IRS Notice 2021-20 under the APA, the court dismissed Counts II through IV for lack of standing. The court noted that to establish standing, a plaintiff must demonstrate an injury that is likely to be redressed by a favorable decision.

The court determined that the Plaintiff failed to allege prospective injury because it had only one pending past claim. Furthermore, the court found that vacating Notice 2021-20 would not redress the Plaintiff’s injury. The court reasoned:

"Even if the Court were to vacate Notice 2021-20, the IRS would remain free to deny Plaintiff’s ERC claim based on the statutory requirements of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Act. Vacatur would not require the agency to approve Plaintiff’s claim, reconsider it, or alter its interpretation of the statute."

Because the IRS could reach the exact same conclusion regarding the refund denial without the Notice, the APA claims lacked the necessary element of redressability.

Sovereign Immunity and the Adequate Remedy Doctrine

Independent of standing, the court ruled that the APA claims were barred by sovereign immunity. The APA waives sovereign immunity only where there is "no other adequate remedy available". The court cited U.S. Army Corps of Engineers v. Hawkes Co. for the proposition that APA review is precluded if adequate alternatives exist.

The court concluded that a tax refund suit under 26 U.S.C. § 7422 constitutes such an adequate remedy:

"Upon review, the Court finds that Plaintiff’s refund action under § 7422 provides an adequate legal remedy for the relief sought. Consequently, sovereign immunity is not waived for Plaintiff’s APA claims, and such claims are barred."

Merits of the APA Challenges regarding Notice 2021-20

Although the APA claims were dismissed on jurisdictional grounds, the court addressed the merits "in the interest of completeness". The Plaintiff had argued that the issuance of Notice 2021-20 was arbitrary and capricious and violated notice-and-comment requirements.

The court found these arguments meritless, classifying Notice 2021-20 as an interpretive rule. Interpretive rules are exempt from the notice-and-comment requirements of the APA. The court acknowledged the exigencies of the pandemic as a factor in its analysis:

"Given the pressure the IRS was under to issue guidance to the general public regarding the ERC program—a program that was swiftly passed in response to the COVID-19 pandemic—it is understandable why the agency exercised its discretion to issue that guidance in the form of an interpretive FAQ, rather than undergoing the months-long notice-and-comment process."

Therefore, the court concluded that the claims regarding arbitrary and capricious action and notice-and-comment violations failed as a matter of law.

Conclusions Arrived at by the Court

The court’s final order disposed of the motions as follows:

Dismissed as Moot: The refund claims for Q2 2020, Q4 2020, and Q2 2021 were dismissed because the IRS had already issued the refunds.
Survived Dismissal: The refund claim for Q3 2020 was found to be "sufficiently pleaded" despite not citing specific government orders, and thus survived the motion to dismiss.
Dismissed with Prejudice: The APA claims (Counts II–IV) were dismissed due to lack of standing, lack of waiver of sovereign immunity (due to the adequate remedy at law under § 7422), and failure to state a claim regarding the nature of Notice 2021-20.

Prepared with assistance from NotebookLM.