First Source Employee Management, Inc. v. United States of America, Case No. 1:24-cv-02209-CEF, 2026 WL 3589421 (N.D. Ohio June 11, 2026).

The litigation originated from the Plaintiff’s operations as a professional employer organization under Chapter 4125 of the Ohio Revised Code and as a non-certified PEO and third-party payor under federal tax law. The Plaintiff files aggregate Form 941 and Schedule R submissions with the Internal Revenue Service to report quarterly payroll tax liabilities for its client base, which primarily comprises entities providing skilled nursing, assisted living, hospice, and related patient care services. The substantive dispute centers on the Employee Retention Credit program established by the Internal Revenue Service pursuant to the Coronavirus Aid, Relief, and Economic Security Act. The CARES Act created a refundable credit mechanism designed to deliver financial assistance to businesses throughout four calendar quarters of 2020 and the first three calendar quarters of 2021. To operationalize the statute, the IRS issued IRS Notice 2021-20, which consolidated prior frequently asked questions and addressed supplementary interpretive issues regarding credit eligibility and calculation.

The Plaintiff initiated this federal action on December 19, 2024, asserting four distinct claims against the United States and the Internal Revenue Service. The IRS processed and remitted ERC refunds for all quarters claimed in 2020. However, the Service declined to issue payments for the Plaintiff’s ERC claims corresponding to the first and second quarters of 2021, which collectively represent approximately $20.2 million in disputed refunds. Following the filing of the complaint, the Defendants filed a motion to dismiss counts two, three, and four under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) on May 5, 2025. The Defendants subsequently answered count one on May 27, 2025. The Plaintiff opposed the motion on June 4, 2025, and the Defendants filed a reply on June 18, 2025. The Court issued its Memorandum Opinion and Order on June 11, 2026.

Requests for Judicial Relief

The Plaintiff structured its complaint across four counts, each seeking distinct forms of equitable and monetary relief. Count one invokes 26 U.S.C. § 7422(a) to demand a refund of the payroll taxes corresponding to the first and second quarters of 2021, together with applicable statutory interest. The remaining counts pivot exclusively toward administrative law challenges. Counts two, three, and four request both a nationwide injunction prohibiting the IRS from enforcing Notice 2021-20 and a judicial order vacating the Notice entirely. The Plaintiff grounds these equitable requests in the Administrative Procedure Act, alleging that the Notice violated the notice-and-comment rulemaking mandates of 5 U.S.C. § 553, constitutes arbitrary and capricious agency action under 5 U.S.C. § 706(2)(A), and represents unlawful agency action under 5 U.S.C. § 706(2)(A) and (C). The Plaintiff characterizes these equitable requests as necessary to halt the IRS’s reliance on the Notice to delay claim processing and to prevent ongoing economic harm.

Article III Standing and the Requirement of Future Injury

Federal adjudication of the APA claims requires strict compliance with Article III standing doctrines. The Court emphasized that federal courts possess limited jurisdiction to resolve actual cases or controversies under Article III, Section 2, Clause 1 of the Constitution. The Plaintiff bears the burden of demonstrating standing, which necessitates satisfying a tripartite framework: the plaintiff must have suffered an injury in fact, the injury must be fairly traceable to the defendant’s conduct, and a favorable judicial decision must likely redress the injury. CHKRS, LLC v. City of Dublin, 984 F.3d 483, 488 (6th Cir. 2021) (citing Spokeo, Inc. v. Robins, 578 U.S. 330 (2016)).

The Plaintiff alleged that the IRS’s reliance on Notice 2021-20 generated extended processing delays, resulting in a temporary loss of the use of funds that should have been remitted. While the Court acknowledged that a temporary loss of use of money can satisfy the injury in fact requirement, the analysis diverged sharply when evaluating prospective equitable relief. The Court noted that when a plaintiff seeks injunctive relief, the injury inquiry becomes twofold, requiring the plaintiff to demonstrate both past injury and a real and immediate threat of future injury. Mosley v. Kohl’s Dep’t Stores, Inc., 942 F.3d 752, 756 (6th Cir. 2019) (citing Houston v. Marod Supermarkets, Inc., 733 F.3d 1323 (11th Cir. 2013)). The Plaintiff failed to allege a sufficient likelihood of future injury necessary to sustain a nationwide injunction. The Court drew direct parallels to Mann v. Constr., Inc. v. United States, 86 F.4th 1159 (6th Cir. 2023), where the Sixth Circuit held that taxpayers lacked standing to seek prospective relief once the IRS refunded the challenged penalties and voluntarily agreed not to apply the contested notice to them. Because the ERC program is statutorily confined to the 2020 and 2021 tax years, and because the Plaintiff possesses no pending ERC claims outside of this litigation, the IRS cannot subject the Plaintiff to Notice 2021-20 in the future. The Court concluded that this absence of prospective harm defeats standing, observing that the Plaintiff fails to allege sufficient facts to demonstrate that it has a personal stake in the prospective application of Notice 2021-20.

The Court further determined that the redressability prong remained unsatisfied. The Plaintiff argued that vacatur or injunctive relief would expedite refund processing and mitigate the time-value loss of withheld funds. The Court rejected this contention, finding it unlikely that enjoining or vacating the Notice would redress the Plaintiff’s alleged injuries. The Court reasoned that entitlement to the ERC derives directly from the CARES Act, not from the administrative notice. 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 CARES Act. Vacatur would not require the agency to approve Plaintiff’s claim, reconsider it, or alter its interpretation of the statute. Plastic Film, LLC v. United States, Case No. 5:25-cv-30, 2026 WL 144343, at *4 (S.D. Miss. Jan. 20, 2026). Consequently, the Court found no substantial probability that the claimed injuries would be redressed by the equitable relief sought. Jaimes v. Toledo Metro. Hous. Auth., 758 F.2d 1086, 1093 (6th Cir. 1985).

The Administrative Procedure Act and Adequate Alternative Remedies

Even assuming arguendo that the Plaintiff satisfied Article III standing, the Court determined that the APA claims are statutorily barred by 5 U.S.C. § 704. The statute provides that agency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court are subject to judicial review. The Sixth Circuit has consistently interpreted this provision to preclude APA review when a separate, specific statutory scheme offers a complete avenue for redress. Haines v. Fed. Motor Carrier Safety Admin., 814 F.3d 417, 427 (6th Cir. 2016) (quoting Bangura v. Hansen, 434 F.3d 487, 501 (6th Cir. 2006)). The judicial inquiry focuses on whether another statutory scheme of judicial review exists so as to preclude review under the more general provisions of the APA. Bangura, 434 F.3d at 501.

The Court identified the Plaintiff’s refund claim under 26 U.S.C. § 7422(a) as the adequate alternative remedy. Under the Sixth Circuit’s framework, a statute provides an adequate remedy if it can furnish relief of the same genre to the party seeking redress, even if the relief is not identical to that available under the APA. Rimmer v. Holder, 700 F.3d 246, 262 (6th Cir. 2012) (quoting Garcia v. Vilsack, 563 F.3d 519, 522 (D.C. Cir. 2009)). The Court explained that in the Plaintiff’s refund action, the judiciary is tasked with determining whether the IRS erroneously or illegally assessed or collected the taxes at issue. Within that refund proceeding, the Plaintiff retains the full capacity to challenge the validity of the IRS’s administrative position, including the legal effect of Notice 2021-20. The Court cited Maze v. Internal Revenue Serv., 862 F.3d 1087, 1093 (D.C. Cir. 2017), to confirm that plaintiffs in refund suits may indeed challenge transitional rules and administrative notices that underpin the agency’s denial of claims. Congress did not intend the general grant of review in the APA to duplicate existing procedures for review of agency action. Bowen v. Massachusetts, 487 U.S. 879, 903 (1988).

Application of Legal Standards to the Plaintiff’s Claims

The Plaintiff attempted to distinguish the Sixth Circuit’s precedent in Haines by arguing that the refund remedy differs in genre from the injunctive and vacatur relief sought under the APA. The Court found this distinction unavailing, particularly given the temporal limitations of the ERC program. The Court noted a critical divergence from cases like Oom, Inc. v. United States, 2023 WL 5337150 (D.N.J. Aug. 18, 2023), where courts permitted parallel APA challenges because plaintiffs faced ongoing regulatory exposure. Here, the IRS can no longer subject Plaintiff to Notice 2021-20 because the Plaintiff alleges that all ERC claims for the relevant tax years have either been satisfied or are currently pending before the Court. The Court emphasized that the injunction and vacatur claims are mooted by the fact that Plaintiff faces no possibility of future injury by operation of Notice 2021-20. The refund claim provides the mechanism for adjudicating the legality and propriety of the IRS’s position, Notice 2021-20, and Plaintiff’s potential entitlement to monetary relief. The Court concluded that allowing the APA claims to proceed would improperly duplicate the comprehensive judicial review already available through the tax refund statute, violating the foundational purpose of 5 U.S.C. § 704.

Judicial Conclusions and Implications for Tax Practitioners

The Court granted the Defendants’ motion to dismiss, concluding that counts two, three, and four must be dismissed for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The Court further held that, in the alternative, the same counts fail to state claims upon which relief can be granted and would be subject to dismissal under Federal Rule of Civil Procedure 12(b)(6). The refund claim asserted in count one remains active and will proceed through the standard tax refund litigation framework. This decision reinforces critical procedural boundaries for tax practitioners advising clients on ERC disputes. Taxpayers seeking to challenge IRS administrative notices that directly impact refund eligibility must channel their APA objections through the statutory refund remedy. Prospective equitable relief, including nationwide injunctions and vacatur, remains unavailable when the challenged administrative action cannot cause future harm to the specific plaintiff and when a comprehensive refund statute provides relief of the same genre. Practitioners must carefully structure complaints to avoid duplicative APA claims that invite jurisdictional dismissal, ensuring that all statutory and constitutional standing requirements are satisfied before pursuing equitable remedies against federal tax guidance.

Prepared with assistance from LM Studio qwen/qwen3.6-27b.