Tapestry Senior Housing Management, LLC v. United States, Case No. 25-cv-3419 (LMP/EMB), 2026 WL 18388 (D. Minn. June 25, 2026).

The Employee Retention Credit (ERC) under Internal Revenue Code Section 3134 has been one of the most widely claimed and heavily contested tax relief provisions arising from the COVID-19 pandemic. While much of the professional discussion has centered on the substantive eligibility rules—such as the gross receipts test and the partial suspension of operations test—a recent order from the United States District Court for the District of Minnesota highlights a critical procedural hurdle: federal pleading standards. In Tapestry Senior Housing Management, LLC v. United States, Case No. 25-cv-3419 (LMP/EMB) (D. Minn. June 25, 2026), the court granted the government’s motion to dismiss a taxpayer’s $3 million refund suit, providing essential guidance for tax professionals on how ERC eligibility must be pleaded in federal court.

Factual Background and the Taxpayer's Refund Claim

Tapestry Senior Housing Management, LLC (Tapestry), is a Minnesota company providing senior living, assisted living, and memory care services, operating facilities in Ohio, Pennsylvania, and Florida. For the first two quarters of 2021, Tapestry applied for the ERC. Tapestry claimed eligibility based on the "partial suspension" pathway, asserting that governmental orders issued in Pennsylvania and Ohio forced it to make significant operational modifications.

Specifically, Tapestry’s complaint alleged that "orders" from the "Governor of Pennsylvania mandating social distancing and enhanced cleaning procedures, and orders from the Ohio Department of Health that required social distancing measures and enhanced sanitization" caused the company to implement three operational changes:

Block visitors and potential new tenants from entering its facilities for tours;
Suspend normal residential services, including "community dining, group activities, and social outings"; and
Impose strict isolation, quarantine, and COVID-19 testing protocols.

To establish that these suspensions affected "more than a nominal portion" of its operations under IRS guidelines, Tapestry claimed that the "gross receipts attributable to prospective resident visits (and employee hours spent on such visits), together with suspended services for existing residents" exceeded 10 percent of its total gross receipts or employee service hours relative to the corresponding quarters in 2019.

When the IRS did not grant the credits, Tapestry filed a refund lawsuit on August 29, 2025, under 26 U.S.C. § 7422, seeking $3,046,106 in erroneously withheld ERC refunds. The United States moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that the taxpayer failed to state a plausible claim for relief because it did not identify the specific governmental orders that supposedly mandated these suspensions.

The Statutory and Regulatory ERC Framework

To appreciate the court’s procedural analysis, one must first view the ERC through its substantive statutory lens. Codified at 26 U.S.C. § 3134, the ERC was designed as a "specific and limited financial aid" mechanism for businesses affected by the pandemic. It allows an eligible employer to claim a credit equal to 70 percent of qualified wages (up to $10,000 per employee per quarter). Under 26 U.S.C. § 3134(c)(2)(A)(ii), an employer is eligible if:

The operation of its trade or business was "fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to" COVID-19; or
The employer’s gross receipts for the calendar quarter were less than 80 percent of its gross receipts for the same quarter in 2019.

As the court noted, the ERC is fundamentally 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".

Because Congress left key terms such as "partial," "suspension," and "orders" undefined, the IRS issued Notice 2021-20 to supply regulatory boundaries. Under Notice 2021-20, qualifying governmental orders must be compulsory decrees from a federal, state, or local government with jurisdiction over the employer. Crucially, the IRS made clear that "Statements from a governmental official, including comments made during press conferences or in interviews with the media, do not rise to the level of a governmental order for purposes of the employee retention credit".

Furthermore, under the IRS guidance:

Essential Businesses: An essential business (such as a senior housing facility) may be considered partially suspended only if "more than a nominal portion of its business operations are suspended by a governmental order". This is defined as a portion representing at least 10 percent of gross receipts or employee service hours in 2019.
Operational Modifications: "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 the employer’s business operations". Notice 2021-20 defines a "more than nominal effect" as a modification that reduces the employer’s ability to provide goods or services in the normal course of business by at least 10 percent.
Voluntary Actions vs. Mandates: Voluntary suspensions or reductions of hours do not qualify. A reduction in demand caused by governmental stay-at-home orders does not constitute a partial suspension; instead, such employers must qualify via the gross receipts test.

To bridge the statutory text and federal pleading requirements, the court utilized the three-part framework established in JSmith Civil:

The taxpayer must have been subject to a "compulsory governmental mandate limiting commerce, travel, or group meetings";
The taxpayer must have "stopped a meaningful portion of its operations" during the relevant quarter; and
The stoppage must have been "directly required" by the governmental mandate.

The Pleading Standard: Twombly, Iqbal, and Rule 8 Notice

Under Federal Rule of Civil Procedure 12(b)(6), a complaint must "state a claim to relief that is plausible on its face," as established in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Facially plausible claims must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged," per Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

The court held that Tapestry’s complaint failed this standard because its allegations were split between inadmissible legal conclusions and highly generalized factual assertions. Tapestry’s first three allegations—asserting that its business was partially suspended due to qualifying government orders—were dismissed by the court as "nothing more than legal conclusions entitled to no presumption of truth at this stage". The court noted that these assertions were merely a "formulaic recitation of the elements of a cause of action".

While Tapestry’s remaining two allegations (detailing its visitor bans, activity suspensions, and sanitization measures) were factual, the court held they failed to establish plausibility. To meet the statutory "due to" requirement, a taxpayer must establish "both factual and proximate causation—meaning that the order must have been the 'but-for' cause and a foreseeable cause of the full or partial shutdown," as ruled in JPM Rest., LLC v. United States, No. 1:24-cv-357, 2026 WL 561147, at *5 (E.D. Tenn. Feb. 27, 2026).

Tapestry’s failure to name or specify the orders left a fatal gap in causation. The court ruled:

"Tapestry vaguely gestures toward governmental orders from Ohio and Pennsylvania. But it does not identify them with any specificity. Then Tapestry suggests that those orders caused it to block prospective tenants. But it provides no factual basis from which the Court can connect those dots."

Without this information, the court had "no way of knowing, for instance, whether the purported orders were legally binding orders at all... when the orders were effective, and what they required". This lack of detail deprived the United States of its right under Rule 8 to "fair notice of what the claim is and the grounds upon which it rests".

Rejection of the Taxpayer’s Defense of Unnamed Orders

Tapestry vigorously defended its decision not to name the specific orders, raising three arguments that the court systematically dismantled:

The "Public Record" and "By Inference" Defenses: Tapestry argued that because COVID-19 orders issued by Ohio and Pennsylvania are public records, the government could "look them up" and identify them "by inference". The court roundly rejected this "figure-it-out" defense. Citing Conner v. Marriott Hotel Servs., Inc., 559 F. Supp. 3d 1305, 1310 (M.D. Fla. 2021), the court emphasized that Twombly and Iqbal "rejected such we'll-figure-it-out-in-discovery arguments". Given the "numerous" and varied orders issued during the pandemic, expecting the court or the defendant to guess which specific orders, dates, or provisions applied was "nonsensical". Furthermore, Tapestry’s responsive brief claimed it did "not rely exclusively on Ohio and Pennsylvania governmental orders," despite its complaint mentioning only those two states. The court noted that "Fostering guesswork is not a goal of pleading," quoting Tran v. City of Holmes Beach, 817 F. App'x 911, 914 (11th Cir. 2020).
The Safe Harbor Pleading Standard of Plastic Film: Tapestry submitted Plastic Film, LLC v. United States, No. 5:25-cv-30-DCB-LGI, 2026 WL 144343 (S.D. Miss. Jan. 20, 2026) as supplemental authority. In Plastic Film, the court held that a claimant "should not be required to identify a particular order at this stage" because eligibility was a "fact-intensive issue appropriately addressed through discovery". Judge Laura M. Provinzino rejected this reasoning, stating that it "puts the cart before the horse". Under Iqbal, a plaintiff "is not entitled to discovery, cabined or otherwise" without first pleading a plausible claim. To hold otherwise would allow plaintiffs to "plead first and discover later," which "ultimately encourage[s] meritless suits in terrorem," citing In re Medtronic, Inc. Sprint Fidelis Leads Prods. Liab. Litig., 2009 WL 294353, at *2 (D. Minn. Feb. 5, 2009). Additionally, the court distinguished Plastic Film factually because in that case, the IRS had already approved ERC refunds for multiple quarters, leaving only a single quarter in dispute.
The Discovery Defense: The court also pointed out that discovery could not cure Tapestry's lack of specificity. While a plaintiff may occasionally be spared from pleading details that lie within a defendant's "exclusive control" (such as in Merchant & Gould, PC v. Premiere Glob. Servs., Inc., 749 F. Supp. 2d 923, 938 (D. Minn. 2010)), the government orders at issue were issued by state, not federal, authorities. Therefore, the United States was "the only party who is in the dark, at this stage, as to the actual basis for Tapestry’s claim".

Rule 12(e) Definite Statement vs. Rule 12(b)(6) Dismissal

Finally, Tapestry argued that even if its complaint was too vague, the government should have filed a Rule 12(e) motion for a more definite statement rather than a Rule 12(b)(6) motion to dismiss.

The court disagreed, clarifying the distinct roles of these procedural mechanisms. Rule 12(e) is a narrow remedy reserved for "unintelligible pleadings; it is not intended to correct a claimed lack of detail," citing Ransom v. VFS, Inc., 918 F. Supp. 2d 888, 901 (D. Minn. 2013). Because Tapestry’s complaint was perfectly intelligible but simply lacked the requisite factual detail to state a claim, a Rule 12(b)(6) motion was the appropriate vehicle.

Furthermore, the court noted that Tapestry had ample opportunity to freely amend its complaint under Rule 15(a)(1) after the government filed its motion to dismiss, but chose instead to "respond to the United States’ motion and risk this Court’s decision". Consequently, the court granted the government’s motion and dismissed the complaint without prejudice.

Critical CPA and EA Takeaways

For tax professionals representing clients in ERC audits, appeals, or litigation, Tapestry provides several indispensable warnings:

Specific Order Identification is Non-Negotiable: You cannot plead general operational impacts (e.g., visitor bans, cleaning protocols) and expect the court to infer eligibility. The specific governmental order, including the issuing authority, the date of issuance, and the exact section or language mandating the suspension or modification, must be explicitly named in the complaint.
The "Due To" Standard Requires Binding Mandates: Ensure that the relied-upon guidance is a binding "governmental order" rather than an official statement or advisory recommendation. Under Notice 2021-20, press conferences and official recommendations do not support ERC eligibility.
Quantify the Nominal Impact Upfront: To survive a motion to dismiss, essential businesses must plead specific facts demonstrating how the governmental orders directly caused a suspension representing more than 10 percent of gross receipts or employee service hours relative to 2019.
Litigate Defensively: If a client's ERC refund complaint is met with a Rule 12(b)(6) motion to dismiss for lack of detail, practitioners should immediately utilize Rule 15(a)(1) to amend the complaint with specific order details, rather than resisting the motion and risking a fatal dismissal order.

Prepared with assistance from NotebookLM.