Sundancer Pools, Inc. v. United States, No. 25-1291T (Fed. Cl. June 23, 2026).

The Employee Retention Credit (ERC) has been one of the most heavily litigated and audited tax provisions in recent history. Originally enacted under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020), and later codified as amended at I.R.C. § 3134, the ERC was designed to provide a refundable tax credit against employment taxes for employers facing severe economic hardships during the COVID-19 pandemic. While the statutory framework provides multiple pathways to eligibility, the most contentious has been the "full or partial suspension" prong under I.R.C. § 3134(c)(2)(A)(ii)(I).

In Sundancer Pools, Inc. v. United States, No. 25-1291T, the United States Court of Federal Claims addressed critical threshold issues regarding what constitutes a "full or partial suspension" and the standard of causation required to prove that such a suspension was "due to orders from an appropriate governmental authority." For CPAs and Enrolled Agents (EAs) advising clients, this case serves as an essential case study on the pleading standards necessary to survive government motions and the rigorous legal thresholds that courts are applying to ERC refund suits.

Facts and Procedural Background

The taxpayer, Sundancer Pools, Inc. (Sundancer), is a Southern California corporation incorporated in California with business operations conducted primarily in San Diego County. Sundancer's trade or business consists of building residential and commercial swimming pools and spas.

During the pandemic, Sundancer filed Forms 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) claiming entitlement to the ERC for six quarters: those ending June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021. The Internal Revenue Service (IRS) initially recognized Sundancer’s entitlement to the ERC for the first four of these quarters and issued refunds of employment taxes. However, the IRS subsequently disallowed Sundancer’s claims for the second and third quarters of 2021 (the tax quarters ending June 30, 2021, and September 30, 2021).

Following the disallowance of these claims, Sundancer filed a tax refund action in the U.S. Court of Federal Claims, seeking a refund of $660,292.61 plus interest. In response to the complaint, the government filed an answer asserting counterclaims to recover "erroneously refunded" money the IRS paid to Sundancer for the first four quarters (the last three quarters of 2020 and the first quarter of 2021).

The case came before Judge Elaine D. Kaplan on the government’s Motion for Judgment on the Pleadings pursuant to Rules of the Court of Federal Claims (RCFC) 12(c). The government contended that, even accepting all of Sundancer’s factual allegations as true, the complaint failed to "allege facts demonstrating that it experienced a full or partial suspension of its business operations" during the second and third quarters of 2021, or that any alleged suspension was the result of a qualifying governmental order.

Taxpayer's Argument and Request for Relief

Sundancer petitioned the court to deny the government’s Motion for Judgment on the Pleadings, asserting that "there are genuine issues of fact regarding Sundancer’s entitlement to the Employee Retention Credit for all quarters" which precluded judgment on the pleadings and required discovery. Sundancer also challenged the government's reliance on IRS Notice 2021-20, "Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act." Sundancer argued that the government was improperly treating subregulatory guidance as binding law, asserting that "subregulatory agency guidance" cannot entitle the government to "judgment as a matter of law."

Alternatively, if the court found the complaint’s allegations insufficient, Sundancer requested an opportunity to file an amended complaint to cure any pleading defects.

The Court's Legal Analysis and Standards

Judge Kaplan's opinion provides a robust, technical analysis of the standard of review under RCFC 12(c), the weight of subregulatory guidance post-Loper Bright, the definition of "suspension," and the causation standard of "due to."

Standards for Judgment on the Pleadings

The court first corrected Sundancer’s misconception regarding the standard of review for a defendant's motion for judgment on the pleadings. Sundancer had argued that the existence of factual disputes in the pleadings (raised by the government’s answer and counterclaims) precluded judgment on the pleadings under RCFC 12(c).

Judge Kaplan clarified that "Where a defendant moves for judgment on the pleadings, a court applies the same standard to that motion as it would to a motion to dismiss under RCFC 12(b)(6)." Under this standard, "each of the well-pled allegations in the complaints is assumed to be correct, and the court must indulge all reasonable inferences in favor of the plaintiffs" (quoting Atamirzayeva v. United States, 524 F.3d 1320, 1321 (Fed. Cir. 2008)).

Thus, the court is not looking for a lack of factual dispute (which is the standard when a plaintiff moves for judgment on the pleadings). Instead, a defendant's motion is granted when "the facts asserted by the claimant do not entitle him to a legal remedy" (quoting Lindsay v. United States, 295 F.3d 1252, 1257 (Fed. Cir. 2002)). To survive, the plaintiff's complaint must "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face'" (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Therefore, the existence of factual disputes in the answer is irrelevant; the sole question is whether the complaint itself pleads a plausible claim for relief.

The Weight of Subregulatory Guidance Under Loper Bright

Sundancer’s challenge to the government’s reliance on IRS Notice 2021-20 prompted the court to outline the role of subregulatory guidance in judicial interpretation. Sundancer argued that the IRS Notice was not binding. The court agreed that Notice 2021-20 is indeed non-binding, but observed that Sundancer had mischaracterized the government’s arguments.

The government did not argue that the Notice set out binding interpretations. Instead, it cited the Notice as "a body of experience and informed judgment to which courts and litigants may properly resort for guidance," a principle reaffirmed in Loper Bright Enterprises v. Raimondo, 603 U.S. 369, 394 (2024) (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)). The court ruled that it could properly look to Notice 2021-20 for guidance in interpreting the statutory text.

Defining Full or Partial Suspension of Operations

Because the CARES Act does not define the phrase "fully or partially suspended," the court was required to interpret it in accordance with its "ordinary, contemporary, common meaning" (quoting New York & Presbyterian Hospital v. United States, 881 F.3d 877, 882 (Fed. Cir. 2018)).

Judge Kaplan examined several standard lexicographical definitions:

Black’s Law Dictionary defines "suspend" as "To interrupt; postpone; [or] defer" and "partial" as "Not complete; of, relating to, or involving only a part rather than the whole."
Merriam-Webster defines "suspend" as "to cause to stop temporarily" or "to defer to a later time on specified conditions" and "partial" as "of or relating to a part rather than the whole: not general or total."

Integrating these definitions, the court concluded:

In short, the ordinary meaning of a “partial suspension” of “the operation of [a] trade or business” is a temporary interruption, postponement, or cessation of a more than nominal portion of a business’s operations. And a “full suspension” is a temporary interruption, postponement, or cessation of all operations.

This definition aligns with the interpretation in In re JSmith Civil, LLC, 674 B.R. 207, 214 (Bankr. E.D.N.C. 2025) ("A 'partial suspension,' then is a temporary stoppage of a portion of operations.").

The court also found support in the provisions of Notice 2021-20:

Under Q/A 17, where a workplace remains open for some purposes but is closed for others, "the employer’s operations would be considered to be partially suspended if, under the facts and circumstances, the operations that are closed are more than a nominal portion of its business operations and cannot be performed remotely in a comparable manner."
Under Q/A 18, "The mere fact that an employer must make a modification to business operations due to a governmental order does not result in a partial suspension unless the modification has more than a nominal effect on . . . an employer’s ability to provide goods or services in the normal course of the employer’s business."

The court noted that because "all businesses were required to modify their workplace practices and working conditions to some extent during the pandemic," Congress must have required that "an employer must demonstrate something more than that its normal operations were disrupted by implementing such modifications." This narrow interpretation is consistent with the characterization of the ERC as a "presumption-out" statute, meaning exclusions or limitations are construed strictly (citing In re JSmith Civil, LLC, 674 B.R. at 213).

Crucially, the court ruled that "an employer cannot establish it experienced a 'suspension' simply by showing that it lost revenue as a consequence of having to comply with the government orders." Lost revenue is not a metric for suspension; rather, it "supplies an independent basis for establishing an employer’s eligibility for the ERC" under the decline-in-gross-receipts test of I.R.C. § 3134(c)(2)(A)(ii)(II).

The Dual Causation Requirement for the "Due To" Prong

The court next tackled the causation standard embedded in the statutory phrase "due to." Like "suspended," "due to" is not defined in the CARES Act. Although its plain meaning is "because of," the phrase is "ambiguous with respect to the precise nature of the causal relationship the Act requires between the government order and the suspension of operations" (citing Easom v. US Well Services Inc., 37 F.4th 238, 245 n.2 (5th Cir. 2022)).

Judge Kaplan adopted the reasoning of Judge Bonilla in Northeast Health Services v. United States, No. 24-2096T, 2026 WL 1530240, at *11 (May 28, 2026), holding that "due to" requires a showing that "a qualifying governmental order was both the factual and proximate cause of a full or partial suspension." This mirrors the holding in JPM Restaurant, LLC v. United States, No. 24-cv-357, 2026 WL 561147, at *5 (E.D. Tenn. Feb. 27, 2026), which held that "due to" requires both factual ("but-for") and proximate (foreseeable) causation.

The court rejected a simple "but-for" causation standard for two primary reasons:

First, "context requires proximate causation" because "Interpreting 'due to' to require only but-for causation would not conform to the broader statutory scheme" (Northeast Health Services, 2026 WL 1530240, at *9).
Second, a mere but-for standard would "risk 'broaden[ing] the suspension-of-business prong such that employers could virtually always rely on it and would almost never have to rely on the decline-in-receipts prong'" (Northeast Health Services, 2026 WL 1530240, at *11). Under established tenets of statutory construction, "An interpretation that permits one qualification requirement to supersede an alternative qualification requirement must be rejected" (Northeast Health Services, 2026 WL 1530240, at *9, citing Yates v. United States, 574 U.S. 528, 543 (2015)).

Consequently, a taxpayer must demonstrate that a specific, qualifying government order was the direct, proximate, and foreseeable cause of an actual temporary stoppage of more than a nominal portion of its business operations.

Application of Law to the Taxpayer's Factual Allegations

Having established these rigorous standards, the court applied them to the specific factual allegations in Sundancer's complaint. The court analyzed five distinct claims of impact, finding each pleading deficient.

Workplace Safety Protocols and Operational Decreases in Efficiency

Sundancer's complaint referenced numerous executive orders and public health directives from California and Southern California municipalities, most of which mandated workplace safety protocols (social distancing, masking, sanitation, testing, and reporting). Sundancer alleged these requirements "more than nominally impacted" its "ability to provide its pool and spa building services." Specifically, Sundancer claimed that social distancing "affected its ability to adequately staff its construction sites" which "decreased the efficiency and timeliness" of its work.

The court flatly rejected this argument, stating:

But Sundancer cannot establish its eligibility for an ERC on the basis of a decrease in efficiency and timeliness that occurred because of COVID-related social distancing requirements. Sundancer must show that the social distancing requirements were the proximate cause of a temporary interruption, postponement, or cessation of a more than nominal portion of its operations. And it must show that the suspension occurred during the second and third quarters of 2021.

Decreases in workplace efficiency or staffing challenges do not constitute a "stoppage" or "suspension" under the law.

Municipal Permitting Delays

Sundancer alleged that it faced significant difficulties in obtaining building permits because government offices operated at reduced capacity due to COVID-19 orders. Pleading that permit processing times surged from two to three weeks to as long as six months, Sundancer argued this "reduced [its] efficiency and operational capacity."

The court found these allegations vague and legally insufficient. Judge Kaplan noted that "even assuming that it took longer for Sundancer to secure building permits because of staffing shortages, its allegations of reduced efficiency and capacity are vague, and Sundancer does not provide facts showing that the delays in securing permits caused it to temporarily cease performing a distinct portion of its business." Furthermore, the taxpayer failed to allege that these specific effects occurred during the second and third quarters of 2021.

Economic Supply Chain Restrictions and Vendor Adjustments

Sundancer pointed to severe supply chain disruptions, claiming that "pool equipment manufacturing ceased," creating equipment shortages that "forced [it] to temporarily switch vendors," "hampered operations[,] and caused project delays."

The court highlighted two major defects in this claim:

Failure to Prove Proximate Causation: Sundancer did not allege "that a government order was the proximate cause of these 'supply chain restrictions,' the resulting cessation of manufacturing, or the tertiary effects on its business." Under a proximate cause standard, general market disruptions are not legally tied to a specific government order.
Failure to Prove Suspension: The project delays did not result in a temporary stoppage of operations. Indeed, the complaint acknowledged that "Sundancer developed workarounds that allowed it to continue to operate, notwithstanding the supply chain issues."

The court noted that under Notice 2021-20, Q/A 12, a supplier's shutdown can only support an ERC claim if the employer’s "operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers." If the employer successfully obtains materials from alternative sources, even at higher costs, "no portion of its business operations would have ceased, and its operations would not have been suspended."

General Economic Material Shortages

Sundancer complained of a "severe shortage of concrete" caused by the "closure of a Southern California concrete plant," which led to weeks-long delays. It also cited sporadic availability and extended delays for PVC piping, steel, lumber, plaster, chlorine, and automation systems, which required "operational adjustments, including changing vendors and revising project timelines."

The court held that Sundancer failed to establish causation or suspension on this front:

But again, Sundancer does not assert that the closure of the concrete plant and the shortage of needed materials were caused by any particular government order as opposed to the effects of the pandemic on the world and national economies. And Sundancer makes no allegation that these shortages caused it to temporarily cease any part of its business operations during the relevant time period.

Broad macroeconomic supply and demand imbalances, even when resulting in severe shortages and delay, cannot be attributed to a specific local government order for ERC purposes.

Job Site Closures and Resource Reallocation

In its briefing, Sundancer tried to argue that governmental orders "shut down its job sites" and that jobsites "often were closed, delayed, or heavily restricted during its working hours."

However, the court exposed a fatal pleading error: the actual complaint "contains no mention of any of Sundancer’s job sites that were 'shut down' or 'closed.'" Because the standard of review under RCFC 12(c) limits the court's review to the well-pled facts in the complaint, Sundancer could not rescue a deficient complaint by introducing new factual assertions in its response brief. Moreover, Sundancer failed to plead that any such shutdowns occurred during the second and third quarters of 2021 or affected a more than nominal portion of operations.

Finally, Sundancer’s claim that it "was also forced to reallocate its resources... to comply with heightened cleaning and other COVID-19 protocols," which "cut into its profits," was rejected. The court held that Sundancer "fails to link the increased costs it incurred to any suspension of its business."

The Court's Final Holding and Conclusions

Based on its application of the law, the Court of Federal Claims agreed with the government that the factual allegations in Sundancer's complaint, taken as true, did not establish that its trade or business was fully or partially suspended during the second and third quarters of 2021 due to a qualifying governmental order.

However, rather than dismissing the case with prejudice or immediately entering judgment for the government, the court exercised its discretion to provide the taxpayer an opportunity to cure its pleading deficiencies. The court deferred ruling on the government's Motion for Judgment on the Pleadings and granted Sundancer's request to move to amend its complaint. The court ordered Sundancer to file its motion to amend, along with a proposed amended complaint, no later than July 23, 2026.

Practitioner Implications and Key Takeaways

For tax professionals representing clients in ERC controversies, Sundancer Pools is a stark warning. The IRS and the courts are enforcing a strict, double-pronged substantiation standard:

Plead Specific Stoppages, Not Decreased Efficiency: To establish a "partial suspension," practitioners must be able to point to a distinct, temporary cessation of a more than nominal portion of the business's operations (i.e., at least 10% of gross receipts or employee service hours). Allegations of "project delays," "decreased efficiency," "reduced capacity," "workarounds," or "increased costs" are legally insufficient if the business continued to operate.
Establish Both Factual and Proximate Causation: It is not enough to show that a business suffered supply disruptions or municipal delays during the pandemic. Taxpayers must plead and prove that a specific governmental order was both the "but-for" and proximate cause of the stoppage. General market shortages, inflationary concrete plant closures, or broad pandemic-driven delays do not meet this standard.
Match Claims to the Precise Quarters: Compliance and litigation files must tie the suspension and the causative government orders to the specific quarters for which the ERC is claimed. Broadly referencing 2020 and 2021 orders without showing active restrictions in the specific quarter of the claim (e.g., Q2 or Q3 2021) will result in dismissal.
Complaint Pleadings Must Be Complete: In litigation, a tax professional cannot salvage a deficient complaint by adding new factual assertions in subsequent briefs. All factual claims—such as specific job site shutdowns—must be meticulously pled in the initial complaint or a formally amended complaint.

As the IRS continues its enforcement campaign, the Court of Federal Claims' adoption of a dual "factual and proximate cause" standard in Sundancer Pools will likely serve as a powerful weapon for the government in disposing of weak ERC cases at the pleadings stage. CPAs and EAs must ensure that any client ERC positions relying on the partial suspension test are backed by concrete records documenting actual operational stoppages directly forced by a qualifying government order in each specific quarter.

Prepared with assistance from NotebookLM.