South Delta Planning & Development District v. United States, Cause No. 4:25-cv-197-JDM-RP (N.D. Miss. July 15, 2026)

The plaintiff, South Delta Planning & Development District ("South Delta"), is a planning and development organization that sought refunds for payroll taxes by claiming eligibility for the Employee Retention Credit ("ERC"). In early 2023, South Delta submitted amended Form 941 payroll tax returns for five calendar quarters: the second and third quarters of 2020, and the first, second, and third quarters of 2021.

Initially, the Internal Revenue Service ("IRS") processed these amended returns and issued refund checks for four of the five quarters—specifically, both quarters in 2020 and the first two quarters of 2021. The IRS issued no refund for the third quarter of 2021.

In late 2023, the IRS made an administrative about-face. The Service disallowed the previously issued ERC refunds and assessed South Delta for the full amount of the refunds issued for the second and third quarters of 2020, plus interest and late penalties. While the IRS announced that similar assessments were forthcoming for the first and second quarters of 2021, no such assessments were ever issued. The IRS remained silent regarding the third quarter of 2021, for which it had never issued a refund.

To challenge these assessments in federal court, South Delta utilized the divisible tax rule. Rather than paying the entire assessment, which is the general rule for federal tax litigation under the Flora full-payment rule, South Delta paid the payroll taxes assessed for one employee in both of the disputed 2020 quarters. Following this payment, South Delta filed a refund complaint in the U.S. District Court for the Northern District of Mississippi.

The Taxpayer's Request for Relief

In its federal tax-refund complaint, South Delta requested multiple forms of relief:

Tax refunds representing the ERC for all five of the quarters claimed on its 2023 amended payroll tax returns (the second and third quarters of 2020, and the first, second, and third quarters of 2021).
A declaratory judgment from the court stating that South Delta was legally entitled to retain the refund amounts previously issued by the IRS.
Injunctive or other alternative equitable relief to prevent the IRS from clawing back or reassessing taxes for the quarters where refunds had been issued but not formally reassessed.

The United States responded by filing a Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction, and Rule 12(b)(6) for failure to state a claim.

The Court's Analysis of the Law

The court's jurisdictional analysis divided the disputed quarters into distinct categories, applying long-standing procedural tax law and statutory standards to each.

Jurisdictional Prerequisites and Sovereign Immunity

Taxpayer suits against the federal government are strictly governed by sovereign immunity. As the Fifth Circuit held in Mallette Bros. Const. Co. v. United States, 695 F.2d 145, 155 (5th Cir. 1983), a taxpayer may only sue the United States "where Congress has expressly provided its statutory consent." Congress provided this limited statutory waiver in 26 U.S.C. § 7422. However, this waiver is strictly conditioned on the taxpayer satisfying three core jurisdictional prerequisites:

The tax at issue must be paid;
The taxpayer must have properly filed an administrative claim for refund with the IRS; and
The administrative claim must have either been disallowed or not acted upon by the IRS within six months of filing (citing Roberts v. U.S., 242 F.3d 1065, 1067 (Fed. Cir. 2001)).

The Divisible Tax Exception

The court validated South Delta's payment methodology under the divisible tax rule. Generally, a taxpayer must pay the full amount of an assessment to challenge it in federal court. However, the court recognized that "the divisible tax rule allows a taxpayer—when the tax is divisible by nature—to 'pay a divisible portion of the tax . . . and then test the validity of the entire assessment in a suit for refund brought . . . in the District Court'" (quoting Bruecher Found. Servs., Inc. v. United States, 383 F. App’x 381, 384 n.2 (5th Cir. 2010); Lucia v. United States, 474 F.2d 565, 576 (5th Cir. 1973)). Because payroll taxes are divisible by nature, the payment of the assessment for a single employee satisfied the payment prerequisite for the entire assessed period.

The Post-Refund Assessment Exhaustion Paradox

The primary battleground of the Rule 12(b)(1) motion focused on the second and third quarters of 2020. The government asserted that the court lacked subject matter jurisdiction because South Delta failed to file a new administrative refund claim after the IRS issued its post-refund assessment. The government's position was that the issuance of a refund "makes the taxpayer and the government all square," meaning any subsequent demand for taxes constitutes a brand-new assessment requiring a separate, newly filed administrative refund claim.

The court rejected this formalistic loop, relying heavily on a parallel decision in Region IV Mental Health Servs. v. U.S., No. 3:26-CV-12-RPC-JMV, 2026 WL 1897120 (N.D. Miss. July 1, 2026). The court noted that the so-called "new" assessment was not new at all because "the taxpayer and the United States are arguing over the same amount of money that the taxpayer claimed in the original refund claim filed" in early 2023. Requiring the taxpayer to file another Form 941-X for the exact same quarter and the exact same credit "simply because a new assessment was issued for the very money at issue" would be "ineffective, a waste of time and, most importantly, not required by law."

Declaratory and Injunctive Relief in Tax Controversies

While South Delta succeeded on the administrative exhaustion issue, the court agreed with the government that federal courts lack the power to grant declaratory or injunctive relief in a tax dispute. The Declaratory Judgment Act, 28 U.S.C. § 2201(a), contains an explicit exception "with respect to Federal taxes." Furthermore, the Anti-Injunction Act, 28 U.S.C. § 7241(a), prohibits any "suit for the purpose of restraining the assessment or collection of any tax." Consequently, South Delta's equitable and declaratory claims were legally barred.

Article III Case or Controversy Requirements

The court dismissed South Delta's claims regarding the first and second quarters of 2021. Because South Delta had received the claimed ERC refunds for those quarters, and the government had not actually issued assessments to claw those funds back, there was no active Article III "case or controversy" for the court to resolve. The court noted it lacked jurisdiction to issue "comfort" rulings declaring that South Delta was entitled to keep those refunds or enjoining the United States from making future assessments.

Pleading Standards for Government Suspension Orders

Under Rule 12(b)(6), the government argued that South Delta’s complaint was an impermissible "shotgun" pleading because it referenced a broad collection of federal, state, and local COVID-19 shutdown orders without pinpointing which specific order proximately caused the partial suspension of business operations for each specific tax quarter.

The court rejected this argument, adopting the pleading standards set forth in Plastic Film, LLC v. United States, No. 5:25-CV-30-DCB-LGI, 2026 WL 144343 (S.D. Miss. Jan. 20, 2026). Under the Twombly and Iqbal standards, a taxpayer is not required to match specific government orders to specific quarters at the pleading stage. Instead, it is sufficient to "allege that its business operations were suspended in response to governmental orders issued during the COVID-19 pandemic."

Application of the Law to the Facts

The court applied these legal principles to South Delta's five-quarter refund claim as follows:

Second and Third Quarters of 2020: South Delta met all jurisdictional prerequisites. The original 2023 administrative claims remained valid, the divisible tax was paid for one employee, and no new administrative claim was required to challenge the post-refund assessment. The motion to dismiss under Rule 12(b)(1) was denied.
First and Second Quarters of 2021: Because the refunds were paid and no formal reassessment had occurred, there was no justiciable controversy. The claims for these quarters were dismissed.
Third Quarter of 2021: The IRS had disallowed the refund and remained silent. South Delta's claim was fully ripe, and the complaint sufficiently pled a plausible ERC claim under 26 U.S.C. § 3134.
Pleading Sufficiency: The court held that the complaint sufficiently alleged that "various local, state, and federal COVID-19 shutdown orders caused a partial suspension of South Delta’s business operations, making South Delta ERC eligible." The court emphasized that "whether the referenced orders ultimately substantiate the taxpayer's eligibility for the credit presents a fact-intensive issue appropriately addressed through discovery or at summary judgment"—not at the motion to dismiss stage.

Conclusions

The court granted in part and denied in part the United States' Motion to Dismiss. Specifically, the court:

Dismissed all claims for declaratory and injunctive relief under 28 U.S.C. § 2201(a) and 28 U.S.C. § 7241(a).
Dismissed the refund claims for the first and second quarters of 2021 due to a lack of an Article III case or controversy.
Denied the motion to dismiss with respect to the second and third quarters of 2020, confirming that no new administrative claim is required to challenge a post-refund assessment of the same funds.
Denied the motion to dismiss with respect to the third quarter of 2021, holding that the pleadings sufficiently stated a plausible ERC claim.
Lifted the litigation stay to allow the remaining claims (Q2 2020, Q3 2020, and Q3 2021) to proceed to discovery.

Prepared with assistance from NotebookLM.

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