Northeast Health Services, LLC v. United States, No. 24-2096T (Fed. Cl. May 28, 2026)

In a significant case for tax professionals advising clients on COVID-19 Employee Retention Credit (ERC) eligibility, the United States Court of Federal Claims has provided a rigorous analysis of the "suspension-of-business" prong. The taxpayer, Northeast Health Services, LLC (NEHS), is a Massachusetts healthcare provider offering mental health care services—including counseling, psychotherapy, and psychiatric medication management—via outpatient clinics. Regulated by the Massachusetts Department of Public Health (DPH), NEHS exclusively provided in-person services at its clinics prior to March 2020.

On March 23, 2020, the Governor of Massachusetts issued COVID-19 Order No. 13, which closed certain physical workplaces but expressly designated "physicians, . . . psychologists, . . . nurses and assistants, . . . [and] . . . other providers of mental and behavioral health care" as "COVID-19 Essential Services". The order "urged [COVID-19 Essential Services] to continue operations during the state of emergency, but to do so with allowance for social distancing protocols".

Despite this designation, NEHS interpreted the order’s mental health carveout to apply only to hospital and inpatient services, and thus voluntarily closed its outpatient clinics for roughly three weeks. NEHS subsequently rolled out telehealth operations, which allegedly resulted in shorter therapy sessions, increased administrative burdens, and decreased expected reimbursement amounts. Furthermore, NEHS argued that the pandemic restrictions disrupted its ability to maintain its workforce due to school closures, delayed the onboarding of supervised non-licensed practitioners, and delayed the regulatory inspections necessary to open several new planned clinics. Despite these challenges, NEHS managed to increase its workforce by a net of 74 employees and maintained a gross profit of over $5 million per quarter during the first three quarters of 2021.

Taxpayer Request for Relief

Seeking relief under the CARES Act, NEHS filed three Forms 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) on January 19, 2024. The taxpayer sought a tax refund of nearly $5 million for the employment tax quarters ending March 31, 2021, June 30, 2021, and September 30, 2021, claiming eligible employer status under the ERC provisions of 26 U.S.C. § 3134. After the IRS failed to process the requested refunds within six months, NEHS initiated a refund suit in the Court of Federal Claims, leading to cross-motions for summary judgment from both the taxpayer and the government.

Court Analysis of the Law

The court's analysis centers heavily on whether NEHS qualified as an "eligible employer" under the suspension-of-business prong of 26 U.S.C. § 3134(c)(2)(A)(ii)(I). The court broke this down into three discrete statutory requirements: (1) the business must be "fully or partially suspended"; (2) there must be "orders from an appropriate governmental authority"; and (3) the suspension must be "due to" the qualifying order.

First, the court defined a qualifying governmental "order." Breaking with the IRS's interpretation in Internal Revenue Bulletin 2021-11, which suggested an order must explicitly relate to the suspension of a trade or business, the court held that an order simply must be a "command, direction, or instruction". Relying on the plain and ordinary meaning of the text, the court observed, "Both an 'order' and a 'recommendation' endorse a specific course of conduct; the difference lies in whether the endorsement is enforceable". Consequently, an order must compel conduct through the imposition of "binding requirements or repercussions for noncompliance".

Most crucially for practitioners, the court analyzed the required causal relationship denoted by the phrase "due to." NEHS argued that "due to" requires only but-for causation. The court vehemently rejected this, determining that "context requires proximate causation". The court noted that interpreting the statute using a mere but-for test would result in "[l]engthy causal chains" that "would risk turning the ERC into a presumption-in statute".

The court harmonized the suspension-of-business prong with the alternative decline-in-receipts prong (26 U.S.C. § 3134(c)(2)(A)(ii)(II)), pointing out that Congress explicitly designed the decline-in-receipts test to provide relief for broad, general economic loss. A pure but-for interpretation of "due to" under the suspension prong would effectively render the objective decline-in-receipts test superfluous. As the judge ruled, "Interpreting 'due to' in the suspension-of-business prong to merely require but-for causation would allow businesses to point to a qualifying government order, list operational difficulties incidentally related to the qualifying government order (but more directly attributable to the pandemic as a whole), and collect the ERC on that basis—effectively rendering the decline-in-receipts prong superfluous". Therefore, a taxpayer must prove the qualifying order was both the factual and proximate cause of the suspension.

Application of the Law to the Facts

Applying the proximate cause standard, the court evaluated the three categories of disruptions alleged by NEHS: modifications to mental health service delivery, inability to expand via new clinics, and telehealth/staffing operational difficulties.

Regarding the delivery of services, the court found that the government orders completely exempted NEHS from compliance. Order No. 13 expressly categorized mental health care providers as "COVID-19 Essential Services". While the order "urged" essential services to implement social distancing, the court concluded that the word urge implies "an effort at persuasion" rather than compulsion. The court firmly noted, "In sum and substance, none of the qualifying orders cited by NEHS as causing the first category of disruptions required NEHS to do anything, as they expressly exempted NEHS from compliance or otherwise gave NEHS permission not to follow them". The court ruled that any operational modifications NEHS made were taken voluntarily, and therefore, "no reasonable factfinder could conclude that the resulting suspensions were 'due to' the qualifying government orders".

Addressing NEHS's claim that DPH suspensions of in-person inspections delayed the opening of new clinics, the court found that NEHS failed to link this delay to any specific mandate within a qualifying order. In fact, construction inspectors were deemed essential under Order No. 13. Addressing the drop-off in clinic openings, the court ruled that correlation does not equal causation, stating, "while there is no doubt various delays, quarantines, sicknesses, and other disruptions occurred, general pandemic conditions caused those closures, not shut down orders".

Finally, the court dismissed NEHS's assertions that school closures, childcare issues, and credentialing delays caused a qualifying suspension. Applying the proximate cause framework, the court found that "[t]he causal chain between the orders and the reason for the [delays] is too attenuated to meet the definition of 'due to'". Increased illness, the need to quarantine, and general uncertainty were external factors that interrupted operations, not government mandates.

Conclusions

The Court of Federal Claims arrived at a decisive victory for the government. While acknowledging that "the COVID-19 pandemic presented difficult decisions" and that NEHS's decision to act cautiously was "commendable," the court emphasized that it must adhere strictly to the limits Congress placed on ERC relief.

Because the government orders exempted NEHS, and because the operational disruptions NEHS experienced were either voluntary, too attenuated, or proximately caused by general pandemic conditions rather than specific government mandates, NEHS failed to meet the statutory definition of an eligible employer under the suspension-of-business prong. The court denied the plaintiff’s motion for partial summary judgment and granted the government’s cross-motion for summary judgment, concluding that "NEHS is not entitled to the tax credit".

Prepared with assistance from NotebookLM.