Bankr. E.D.N.C.- JSmith v. IRS- Bankruptcy Court Determination of Eligibility for ERC

Summary:

In JSmith Civil, LLC v. United States (Bankr. E.D.N.C. Aug. 7, 2025), Judge Callaway granted summary judgment for the IRS in an adversary proceeding seeking over $1 million in Employee Retention Credit (ERC) tax refunds. Under the CARES Act, a business qualifies for the ERC only if its operations were “fully or partially suspended” due to a compulsory governmental order tied to COVID-19. JSmith argued that North Carolina’s Executive Orders, OSHA/CDC guidance, and other pandemic disruptions forced it to suspend one-third of its construction operations in Q2 2020 and Q2 2021. The court held that Executive Order 121 explicitly exempted all “construction” from closure, that OSHA/CDC documents were nonbinding guidance (not “orders”), and that general pandemic impacts such as quarantines and supply delays did not meet the statutory standard. Because JSmith could not identify a qualifying governmental order that required it to suspend operations, the court found no material factual dispute and ruled for the United States.

Commentary:
This decision is not just a COVID-era tax case; it is a procedural roadmap for how bankruptcy courts can handle fact-intensive disputes about government benefits or entitlements. The opinion is notable for three reasons. First, it applies the post-Loper Bright directive that courts must independently construe statutory terms, treating agency guidance as persuasive but not controlling. Second, it draws a sharp line between binding “orders” and nonbinding “recommendations,” a distinction that will matter in future disputes over statutory triggers for financial relief. Third, the court’s structured approach—starting with statutory eligibility, then parsing the factual record for qualifying events—offers a clear procedural template for similar determinations.

That structure could be readily adapted in consumer bankruptcy matters far beyond the ERC. For example, in Chapter 13 cases where debtors seek to compel turnover or crediting of federal or state benefits—think student loan payment credits toward Public Service Loan Forgiveness (PSLF), income-driven repayment forgiveness, or tax-based credits like the Child Tax Credit—the same two-step process could apply:

1. Identify the exact statutory eligibility criteria (including whether they are “presumption-in” or “presumption-out” like the ERC), and

2. Determine whether the debtor can prove those criteria with admissible evidence, not just assumptions or guidance.

For PSLF in particular, a debtor might allege that payments made through a confirmed Chapter 13 plan must be counted toward the 120-payment requirement. The PSLF statute and regulations define what counts as a “qualifying payment” and under what “qualifying repayment plan.” Just as in JSmith, the court could resolve the issue by (a) interpreting the statutory and regulatory definitions without deference to agency gloss that contradicts the text, and (b) making factual findings on whether the debtor’s Chapter 13 payments satisfy those definitions—perhaps through stipulated facts or a short evidentiary hearing.

In short, JSmith reinforces that these determinations are ripe for resolution through targeted summary judgment or similar procedural devices. When applied to consumer cases, that efficiency can cut through bureaucratic intransigence, clarify statutory entitlements, and, in PSLF scenarios, potentially unlock years of loan forgiveness credit for debtors before their bankruptcy cases close.

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