RAAM Construction Inc v. United States of America, Case No. 2:25-cv-04681-SPG-AJR, 2026 WL 18391 (C.D. Cal. June 23, 2026).

The Employee Retention Credit (ERC) codified under Internal Revenue Code Section 3134 remains a significant source of controversy, audits, and high-stakes federal litigation. While taxpayers often focus on demonstrating that they experienced pandemic-related disruptions, a recent summary judgment ruling from the United States District Court for the Central District of California underscores a more formidable evidentiary hurdle: causation. In RAAM Construction Inc. v. United States of America, Case No. 2:25-cv-04681-SPG-AJR (C.D. Cal. June 23, 2026), the court granted the government's motion for summary judgment on both the taxpayer’s refund claim and the government's substantial clawback counterclaim. This decision provides critical guidance for tax practitioners (CPAs and EAs) on the strict "but-for" causation standard required to establish ERC eligibility under the partial suspension pathway.

Factual Background and the Clawback Litigation

RAAM Construction Inc. (RAAM) is a California corporation specializing in constructing multi-family housing projects, with its principal place of business in Los Angeles County. During the pandemic, RAAM was designated as an "essential business" under local health orders and was permitted to continue its operations.

Despite this essential designation, RAAM faced significant project delays. For instance, RAAM was contractually bound to complete the "Lincoln Project" in Pasadena by April 29, 2020, but did not complete it until May 27, 2022. While its contract required it to install at least five units of drywall per day, RAAM was only able to install two units per day because it operated with "skeleton crews" due to staff and subcontractors contracting COVID-19 or quarantining. Furthermore, RAAM experienced extensive building material and supply shortages, delayed deliveries of appliances and hardware, and was ultimately ordered by the developer to temporarily shut down the Lincoln Project due to COVID-19 outbreaks on-site.

On September 16, 2022, RAAM filed Forms 941-X seeking ERC refunds for four calendar quarters (the Tax Periods):

Q4 2020: claimed refund of $366,438.00;
Q1 2021: claimed refund of $234,571.00;
Q2 2021: claimed refund of $285,899.00; and
Q3 2021: claimed refund of $396,885.00.

The IRS initially issued refund checks of $245,696.72 for Q1 2021 (received on July 3, 2023) and $328,336.12 for Q2 2021 (received on April 14, 2025), totaling $574,032.84. However, on January 25, 2024, the IRS disallowed the remaining refund claims. Following an unsuccessful administrative appeal, RAAM filed a tax refund suit on May 22, 2025, under 26 U.S.C. § 7422.

The United States responded on July 2, 2025, with an Answer and a Counterclaim under 26 U.S.C. §§ 7401 and 7405, seeking to claw back the $574,032.84 in refunds previously paid to RAAM, alleging they were erroneously issued. The government subsequently moved for summary judgment under Federal Rule of Civil Procedure 56(a).

The Statutory Framework and the Presumption-Out Standard

To analyze the court’s decision, tax professionals must understand how Section 3134 is structured. The ERC is a refundable tax credit equal to 70 percent of qualified wages (up to $10,000 per employee per quarter) paid to employees by an "eligible employer." Under Section 3134(c)(2)(A)(ii), an employer qualifies as eligible if its operations were "fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings... due to the coronavirus disease 2019 (COVID-19)" or if it met the quantitative gross receipts decline test.

Because RAAM’s gross receipts did not decline below the statutory 80 percent threshold relative to 2019 and it was not a recovery startup business, its sole pathway to eligibility was proving a partial suspension "due to" governmental orders.

In evaluating RAAM's claims, the court noted that the ERC is a "presumption-out" statute. Citing In re JSmith Civil, LLC, 674 B.R. 207, 213 (Bankr. E.D.N.C. 2025), the court observed that "everyone starts outside of eligibility for the stated relief, and claimants must show why they fit within and satisfy applicable statutory definitions to get 'in' and qualify for the relief."

Furthermore, because Section 3134 does not define terms like "orders," "partially suspended," or "due to," the court turned to their ordinary meanings. While IRS Notice 2021-20 provides administrative interpretations, the court emphasized its independent role under Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), stating that courts may exercise "independent judgment" and consider agency guidance based on the persuasive factors outlined in Skidmore v. Swift & Co., 323 U.S. 134 (1944).

Defining a Qualifying Governmental Order

RAAM argued that its operations were partially suspended due to three authorities:

California Governor Gavin Newsom’s Executive Order N-33-20 (the "Safer at Home" mandate);
The County of Los Angeles Department of Public Health’s "Safer at Home Order for Control of COVID-19"; and
The County’s "Responding to COVID-19 in the Workplace" Guidelines.

The court analyzed whether these authorities constituted "orders" by looking to Black's Law Dictionary, which defines an order as a "command, direction, or instruction." The court recognized that "command, direction, and instruction hold different connotations, each signaling a decreasing level of compliance." Drawing on JSmith Civil and Lawrence General Hospital v. Continental Casualty Co., 90 F.4th 593, 604 (1st Cir. 2024), the court concluded that "an 'order' must be compulsory." Consequently, under Section 3134, "a qualifying order is a compulsory directive issued by a government department that has responsibilities to limit commerce, travel, or group meetings due to COVID-19."

Applying this standard, the court reached a split decision:

Executive Order N-33-20 and the County Safer at Home Order qualified as "orders from an appropriate governmental authority" because they were compulsory mandates that placed legal limitations on commerce, travel, and gatherings.
The County’s COVID-19 Workplace Guidelines did not qualify as governmental orders. The court observed that these Guidelines merely described procedures for responding to positive cases and required the exclusion of infected individuals. They "did not mandate closure of the workplace... nor did they limit commerce, travel or group meetings." Even under the broader definitions of Notice 2021-20, such advisory workplace procedures do not rise to the level of a compulsory directive limiting commerce.

Interpreting the "Partially Suspended" Standard

The government argued that RAAM did not experience a "partial suspension" because its projects continued, it completed work during the Tax Periods, and its net income nearly doubled between 2019 and 2021.

The court rejected the government's arguments on this point, turning to the ordinary meanings of the terms:

"Suspend" means "to interrupt; postpone; defer" (citing Black's Law Dictionary).
"Partial" means "of or relating to a part rather than the whole" or "not general or total" (citing Merriam-Webster).

Combining these, the court held that "business operations are 'partially suspended' when a portion of the operations are temporarily interrupted or prevented from complete performance."

RAAM’s evidence of running skeleton crews, staggering shifts to maintain social distancing, experiencing severe supply delays, and having the Lincoln Project delayed by over two years was sufficient to show a genuine dispute of material fact. Importantly, the court strongly rebuked the government's attempt to use RAAM’s financial success and gross receipts to disprove a partial suspension. The court ruled that referencing gross receipts to defeat a suspension claim "collapses the distinctions" between the separate eligibility pathways under Section 3134(c)(2)(A)(ii)(I) and (II), which "contravenes a plain language reading of the statute."

Thus, RAAM successfully established that it experienced a factual "partial suspension" of its construction activities.

The Fatal Defect: "But-For" Causation

Despite establishing a partial suspension and identifying two qualifying orders, RAAM’s refund claim failed entirely on the statutory causation element. To prevail, RAAM was required to prove that its partial suspension was "due to" Executive Order N-33-20 or the Los Angeles County Safer at Home Order.

Because the Ninth Circuit had not yet addressed the level of causation required under Section 3134, the court performed a rigorous plain-language analysis. It adopted the reasoning of the Eastern District of Tennessee in JPM Restaurant, LLC v. United States, 2026 WL 561147, at *5, which held that the phrase "due to" requires "both factual and proximate causation."

The court explained that because the ERC is a "presumption-out" statute, Congress intended to restrict relief to those directly affected by government mandates. Allowing "lengthy causal chains that could arise from a but-for test without a proximate causation requirement would risk turning the ERC into a 'presumption-in' statute." Furthermore, the court pointed to other broad relief provisions in the CARES Act (such as stimulus checks), suggesting that "Congress did not intend the ERC to provide the same expansive relief that could arise from a mere factual causation requirement."

To support its holding that "due to" mandates strict "but-for" causation, the court cited extensive Supreme Court jurisprudence interpreting similar statutory phrases (e.g., "because of," "based on," and "by reason of"):

Safeco Insurance Co. of America v. Burr, 551 U.S. 47, 63 (2007) ("In common talk, the phrase 'based on' indicates a but-for causal relationship and thus a necessary logical condition");
Bostock v. Clayton County, 590 U.S. 644, 655-56 (2020) (interpreting "because of" as incorporating but-for causation under Title VII); and
Burrage v. United States, 571 U.S. 204, 213-14 (2014) (holding "results from" imposes a requirement of but-for causation).

Applying this strict "but-for" standard to RAAM's facts, the court ruled that RAAM "submitted no evidence of a causal chain between Executive Order N-33-20 and Safer at Home Order and any partial disruption of Plaintiff’s operations."

While RAAM faced severe labor shortages and material delays, it failed to connect these facts to the qualifying orders rather than general pandemic conditions or independent decisions:

The Lincoln Project Shutdown: Although the developer ordered RAAM to shut down the project, this was due to active "COVID-19 outbreaks at the worksite." It was not mandated by Executive Order N-33-20 or the County Safer at Home Order.
Supply and Material Shortages: RAAM provided no evidence, such as the specific duration of supply delays, to prove that the state or county stay-at-home orders were the "but-for" cause of the delivery disruptions, as opposed to global supply chain conditions.
Workplace Distancing: RAAM's implementation of skeleton crews and social distancing was treated as a self-imposed or voluntary measure, or a response to the non-binding Workplace Guidelines, rather than a direct compliance reaction to the compulsory terms of the two qualifying orders.

Citing Stenson Tamaddon LLC v. United States, 2025 WL 1725942, at *9, the court noted that "a business voluntarily suspending its own operations has not been suspended due to orders from an appropriate governmental authority but rather has suspended operations of its own volition." Because RAAM did not provide specific facts proving that it would not have experienced these disruptions "absent issuance of Executive Order N-33-20 and Safer at Home Order," the government was entitled to summary judgment.

Rejection of the "Essential Business" Categorical Exclusion

Although the court ruled in favor of the government on causation, it explicitly rejected the government’s argument that RAAM was ineligible simply because it was an "essential business" exempt from full closure.

The court emphasized that "the statute does not limit 'eligible employer[s]' to 'non-essential business[es].'" Citing the Supreme Court’s decision in Bates v. United States, 522 U.S. 23, 29 (1997), the court noted that judges "ordinarily resist reading words or elements into a statute that do not appear on its face."

Furthermore, the court noted that the IRS's own administrative guidelines in Notice 2021-20 explicitly contemplate that an essential business may qualify for the ERC if "more than a nominal portion of its business operations are suspended by a governmental order." This serves as an important statutory victory for taxpayers, confirming that essential status is not a automatic bar to claiming the ERC.

Clawback of the Erroneous Refunds

Because RAAM was determined to be ineligible for the ERC, the court addressed the government’s counterclaim under 26 U.S.C. § 7405 to recover the $574,032.84 previously refunded for Q1 and Q2 2021.

To recover an erroneous refund under Section 7405(b), the government must satisfy the four-part test set forth in United States v. Dean, 945 F. Supp. 2d 1110, 1114 (C.D. Cal. 2013):

A refund was paid to the taxpayers;
The government specifies the exact amount of the refund;
The government’s recovery action was timely filed; and
The taxpayers were not entitled to the refund which the government seeks to recover.

The court systematically applied this test to RAAM:

Refund Paid and Amount: It was undisputed that the IRS sent RAAM refund checks of $245,696.72 for Q1 2021 and $328,336.12 for Q2 2021, totaling $574,032.84.
Timeliness: Under 26 U.S.C. § 7405, clawback suits must be initiated within two years after the refund was made, and "the refund is considered to have been made on the date the taxpayer received the refund check," per United States v. Carter, 906 F.2d 1375, 1377 (9th Cir. 1990). RAAM received the Q1 2021 refund check on July 3, 2023. The government filed its counterclaim on July 2, 2025. Because the filing occurred within the two-year window, the action was timely.
Lack of Entitlement: Because RAAM failed to establish "but-for" causation to support its eligibility for the ERC, it was legally unentitled to the refunds.

Consequently, the court granted summary judgment in favor of the United States on the counterclaim, ordering RAAM to repay the $574,032.84 plus interest.

Core Takeaways for Tax Professionals

The RAAM Construction decision is a stark warning to CPAs and EAs defending ERC positions. Practitioners should incorporate the following principles into their advisory and audit defense workflows:

Causation is the Primary Battleground: Proving a physical disruption or showing that a local order existed is no longer sufficient. Taxpayers must build an airtight "but-for" causal chain. Practitioners must document that the suspension or nominal modification was the direct, mandatory result of a specific order, and would not have occurred but for that order.
Segregate Advisory Guidelines from Compulsory Orders: Advisory documents—such as CDC recommendations, OSHA guidelines, or local public health workplace "guidelines"—do not constitute "orders" under Section 3134. If a client modified operations in response to non-binding recommendations, the position will not survive judicial scrutiny.
Essential Businesses Can Qualify, But Face High Evidentiary Standards: While being an essential business is not an automatic bar, essential employers must meticulously document which specific "nominal portion" (representing 10 percent or more of gross receipts or employee service hours in 2019) was suspended directly by a binding order.
Voluntary and Outbreak-Related Closures Do Not Count: If a facility closed because of active COVID-19 infections among staff, or because a third-party developer/customer directed a closure due to outbreaks, this is treated as a response to general pandemic conditions or contract dynamics—not a direct suspension "due to" a governmental order.
Be Mindful of the Clawback Clock: The two-year statute of limitations for the government to recover erroneous refunds under Section 7405 runs from the date the taxpayer receives the refund check. Practitioners must understand that receiving an ERC refund check does not represent final IRS approval, and clients remain exposed to clawbacks plus interest during this window.

Prepared with assistance from NotebookLM.