The ERC Partial Suspension Test Just Got a Harder Pleading Standard
What the Court of Federal Claims decided in I Health
The case is I Health and Life Insurance Services v. United States, No. 25-1315T, decided July 23, 2026 by Judge Bonilla. I Health is a life and health insurance sales agency out of California, with call centers in Fresno and San Diego counties. It filed five amended payroll returns claiming the ERC across 2020 and 2021. The government moved for judgment on the pleadings on one slice of that: the $50,000 refund claim for the third quarter of 2020.
A motion for judgment on the pleadings is the government saying, even if everything you wrote in your complaint is true, you still lose. It uses the same test as a motion to dismiss. So the fight wasn’t about evidence. It was about whether the words in the complaint, taken as true, described a business that had actually suspended operations under a government order. The court decided they didn’t, but it stopped short of ending the case.
Instead of granting the motion, Judge Bonilla deferred ruling and gave I Health leave to file a second amended complaint by August 6, 2026. Read that as a warning shot with a deadline attached. The company gets one more chance to plead facts that clear the bar, and the opinion spells out exactly where its first attempt fell short.
Why cutting back is not the same as partially suspending
This is the part worth reading twice. The ERC’s suspension route requires that a governmental order caused a full or partial suspension of your trade or business. I Health argued that county health orders capping occupancy and excluding sick workers did exactly that. The court agreed those were qualifying orders. It agreed causation was pleaded. Then it looked at what actually happened to the business and found the pleading came up empty on the one thing that matters.
The court adopted the standard a sister case laid down a month earlier: a partial suspension is a temporary interruption or cessation of a more than nominal portion of a business’s operations. To survive the motion, the taxpayer has to plead that a discrete, more than nominal portion of the business ceased. Not slowed. Not shrank. Ceased. I Health’s own complaint said the call centers kept running through the third quarter of 2020, with unspecified reductions in the number of onsite representatives. That sank it.
The court also folded in the “nominal effect” language from IRS Notice 2021-20, the guidance that says an operational change only counts if it has more than a nominal effect on the business. Put the two together and the pleading burden is concrete. You have to name a distinct part of the operation, show a government order shut it down, and show that part was more than a rounding error. I Health kept its core function, telephone sales and service, running the whole time through a mix of onsite and remote staff. It never identified a segment that went dark.
Three cases now define the standard in this court
I Health doesn’t stand alone. It’s the third Court of Federal Claims ERC decision in two months, and the three of them together are building the rulebook for how these refund suits get pleaded. Northeast Health Services came first, on May 28, 2026, and set out the cumulative requirements: a qualifying government order, causation, and an actual full or partial suspension. Sundancer Pools followed on June 23, 2026, and supplied the “more than nominal portion must cease” language that I Health then applied.
What makes this matter beyond the three taxpayers involved is the pattern. Two of the three, Sundancer and now I Health, got the same treatment: pleading found deficient, case not dismissed, leave to amend granted. The court is signaling that it will hold ERC suspension claims to a real standard at the pleading stage, before anyone spends a dollar on discovery. For the thousands of businesses whose claims the IRS denied or is sitting on, that is the terrain a refund suit now has to cross.
Who this actually reaches
Businesses with a pending ERC refund suit or one they’re weighing
If you claimed the credit on the suspension theory and the IRS said no, the complaint you file is where the case is won or lost. A pleading that says you “operated at reduced capacity” or “faced significant restrictions” is now a template for dismissal. The one that survives names the specific part of the business a government order forced to stop, for a defined stretch, and explains why that part was more than nominal. Most of the professional services and closely held businesses we work with have exactly this decision in front of them, and the drafting is not something to hand to a credit shop.
Businesses that stayed open and claimed anyway
This is the uncomfortable group. A lot of companies took the credit because a vendor told them lockdown orders qualified them, while the business itself never closed anything. It ran at a smaller scale. I Health is the warning that a smaller scale, standing alone, is not a suspension. If your claim is still pending, model the possibility that the suspension theory fails and the money has to come back with interest. We wrote about the interest side of that in a recent Tax Court case where the interest ran from 2021 and could not be abated.
Anyone still deciding whether to sue
The deadline math still favors acting, but the calculus has shifted. Before you file, the honest question is whether your facts describe a distinct operation that stopped. If they don’t, a suit invites an early motion you’re now more likely to lose, and it may be smarter to reassess the claim than to litigate a weak version of it.
What is still open
The case isn’t over. I Health gets to amend, and if its second complaint identifies a service line or function that a Fresno or San Diego order actually shut down, it may well survive the next round. The court practically invited it to try. There’s also a separate government counterclaw hanging over the company: the IRS is trying to recover a $392,010 refund it already paid for a 2021 quarter, which is a reminder that suing for one quarter can put an already-paid quarter back in play.
One technical wrinkle for the practitioners reading this. The quarter on the motion is the third quarter of 2020, which is a CARES Act credit, but the opinion cites the 2021 codification of the suspension prong. The standard reads the same either way, so nothing turns on it here, though it’s the kind of detail worth pinning down before you rely on the citation in your own brief. Watch the other district and claims courts too. Once one circuit’s court settles on “a discrete portion must cease,” the reasoning tends to travel.
How The Reed Corporation works with clients on this
Most of the ERC work reaching us now is cleanup and defense, not fresh claims. When a client is holding a denial and thinking about a refund suit, the first job is unglamorous: read what actually happened to the business, quarter by quarter, and decide whether any part of it truly stopped under an order. That assessment runs through notice and refund dispute work, where the point is to test the claim before a court does.
If a suspension theory holds up, the supporting numbers have to be right, which means the payroll figures and the entity return tie out through corporate and partnership return preparation. If the theory doesn’t hold up, the work turns to planning the unwind and the interest exposure through tax strategy before a notice sets the number for you. We would rather tell a client their claim is weak now than watch them plead it and find out from a judge.
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Frequently Asked Questions
What is the partial suspension test for the Employee Retention Credit?
It is one of the two main ways to qualify for the ERC. A business is eligible for a quarter if a governmental order related to COVID-19 caused a full or partial suspension of its trade or business, or if it had a large enough drop in gross receipts. The partial suspension route is the one at issue in I Health. After the July 23, 2026 decision, the Court of Federal Claims reads “partial suspension” to require that a discrete, more than nominal portion of the business actually ceased operating because of the order. IRS Notice 2021-20 adds that an operational change only counts if it had more than a nominal effect on the business. A general reduction in capacity, where the same work keeps happening at a smaller scale, does not meet the test on its own.
My business stayed open during the pandemic. Can I still qualify on the suspension theory?
Sometimes, but the facts have to be specific. Staying open overall does not disqualify you if a government order forced a distinct part of the operation to stop. A restaurant that kept its takeout window but was ordered to close its dining room has a real partial suspension of a discrete segment. A business that simply spaced out its workers, cut its onsite headcount, or served fewer customers usually does not, because nothing actually ceased. That was the problem in I Health: its call centers ran the entire quarter, just with fewer people onsite. If you stayed fully operational at a reduced volume, the suspension theory is weak, and you should look hard at whether the gross receipts test is a better fit before relying on suspension.
What does “judgment on the pleadings” mean, and why did the case survive it?
A motion for judgment on the pleadings asks the court to rule that, even accepting everything in the complaint as true, one side wins as a matter of law. It uses the same standard as a motion to dismiss and happens before any evidence is exchanged. In I Health the government argued the complaint failed to describe a real suspension. The court agreed the pleading was deficient but did not grant the motion. Instead it deferred and gave the company until August 6, 2026 to file a second amended complaint. Courts freely allow amendment when justice requires it, so a first deficient pleading is often a chance to fix the facts rather than the end of the case. The lesson is that the complaint itself, not just the underlying facts, decides whether an ERC suit lives past the first motion.
How should an ERC refund complaint be written after this decision?
Name the specific part of the business that stopped, identify the government order that stopped it, and give the dates. Then show why that part was more than nominal, ideally with figures: the share of revenue, headcount, or square footage tied to the segment that ceased. Avoid the language that lost in I Health, phrases like “operated at reduced capacity” or “faced significant restrictions,” because they describe a smaller business rather than a suspended function. Tie the claim to the three Court of Federal Claims cases now setting the standard, Northeast Health, Sundancer Pools, and I Health, and plead to their framework. This is drafting that rewards precision, which is why we would not leave it to a promoter who prepared the original claim.
Is this decision binding on my case in another court?
Not directly. I Health is a Court of Federal Claims decision, and a refund suit can also be brought in federal district court, where a different judge is not bound by it. That said, the reasoning is persuasive and it lines up with two earlier decisions from the same court, so it carries weight. When several courts converge on the same reading of a statute, that reading tends to spread even without a binding appellate ruling. Treat I Health as a strong signal of how a court will scrutinize a suspension claim at the pleading stage, and assume the government will cite it against you regardless of where you file.
What happens to my ERC claim if the suspension theory fails?
If the credit is disallowed after you already claimed it, the money comes back, and it comes back with interest running from the original due date of the return. If a wage deduction was reduced to claim the credit, that reduction may need to be reversed on an amended return, which changes the income that flows to the owners. The interest is not something reasonable cause or a good faith belief will remove, as a recent Tax Court case made clear. The practical move is to run both outcomes now: what the credit is worth if the suspension theory holds, and what the repayment plus interest looks like if it does not. Planning for a number you have calculated beats waiting for the IRS to set one in a notice.