Case: Stenson Tamaddon LLC v. IRS, No. CV-24-01123-PHX-SPL, 2025 WL 1725942 (D. Ariz. June 20, 2025)

On June 20, 2025, the US District Court for the District of Arizona denied a motion for summary judgment that was filed by Stenson Tamaddon LLC (StenTam). The tax advisory firm argued that IRS Notice 2021-20, which provided informal guidance on claiming the Employee Retention Credit (ERC), was invalid because it was a “legislative rule” that was not promulgated through notice and comment rulemaking as required by the Administrative Procedure Act (APA). The court ruled that while StenTam had standing to challenge the validity of the notice, the notice was an “interpretive rule” and its issuance as such did not violate the APA. The court also addressed StenTam’s arguments that the Internal Revenue Service (IRS) exceeded its statutory authority in issuing the notice and that it acted in an arbitrary or capricious manner.

Background on the Employee Retention Credit

The ERC was enacted in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial relief to businesses affected by the COVID-19 pandemic. Congress’s goal was to incentivize businesses experiencing significant disruptions because of COVID-19-related government orders or a substantial decline in gross receipts to retain employees on payroll and rehire displaced workers. The ERC is calculated as a percentage of qualified wages paid to employees during periods in 2020 and 2021.

Millions of employers have filed refund claims seeking ERC. Since the enactment of the CARES Act, the IRS has issued roughly $269 billion in ERC. However, more than 200,000 claims have been disallowed, reversed, or recaptured, and another 592,000 remain pending as of late April 2025. To the frustration of many, taxpayers whose claims have been processed in 2025 waited an average of more than 18 months before the IRS took action. According to a recent report from the Taxpayer Advocate Service, the IRS will need until at least the end of 2025 to process all remaining ERC claims. However, the IRS may still seek to recapture refunds relating to ERC claims well into the future.

IRS Notice 2021-20

A 102-page document presented in “question-and-answer” format, the IRS published Notice 2021-20 in March 2021 with the intention to “provide[ ] guidance on the [ERC] . . . .” In its suit, StenTam alleged that the notice “defined various terms in Section 3134 [providing for the ERC], identified factors or elements necessary to claim the credit, set minimum thresholds for recovery of ERC, and imposed new, related record-keeping requirements—all of which resulted in the ERC being restricted to a lesser number of businesses than originally contemplated by Congress.” The parties disputed whether the notice created substantive duties and restrictions that carry the force of law. Under the APA, agencies are generally required to follow notice and comment rulemaking procedures before issuing guidance that creates such duties or restrictions.

StenTam’s challenge to Notice 2021-20

StenTam is a tax services firm that advises clients claiming ERC. The firm contended that its business [...]

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