This is the current federal tax development for the week of August the 5th, 2024. Current federal tax developments are brought to you by Kaplan financial education and by your state society of CPAs. This week, we're going to look at a couple of things. First, we're going to talk about the tax bill that we've been talking about since January. This week face a cloture vote in the Senate that it failed. We'll discuss why this vote is more of a political signal than it is potentially the final death knell for the bill, though it doesn't necessarily indicate a ringing endorsement of it. And we'll also talk about what may happen and what possibilities still exist that might see this bill pass, but as I said, it's probably not good news in any way, shape or form for the bill. Secondly, we're going to talk about a U.S. District Court that declined to issue a preliminary injunction that would have required the IRS to terminate the ERC claim moratorium. They imposed for claims filed after September 14th of last year. But the court did find a lot it liked in the arguments made by the plaintiff. It just didn't quite get to where the court needed to get to to issue a preliminary injunction. So we'll talk about why in the words of the attorneys for the plaintiff. This was kind of a win for both sides that each one could take things away from this that were positive. So we'll have a little bit of talk where we go on that and how we run. But let's start talking about the vote on House Resolution 7024. Its bill entitled the Tax Relief for American Families and Workers Act. This was a Senate vote to invoke cloture. And this vote took place on August 1st of 2024. This bill, just to remind you where we were back at the end of January, this was a bill that passed on January 31st the House on a bipartisan 357 to 70 vote. So overwhelming support from both parties in the House. Now given the nature of how things have gone in recent years, a lot of people thought, well, if it clears the House by that big a margin, the House is where the problems have always been, right? Because the House is run by the majority party. And so we tend to get a lot of party line votes. You don't need any assistance from the other party to bring something to a vote or pass a bill. So the theory is if we could get something in the House where we got not only it through, but it wasn't just picking off a couple of members of the other party was actually picking off, you know, basically having almost all of them come to you and vote in favor along with the majority of your own members voting in favor. So seem like, well, this is a done deal. And certainly at on July on January 31st, I think a lot of people, you know, in a lot of CPA thought, oh, yeah, this is it. It's a done deal. We're going to get this bill, right? And so what we're going to talk about today though is what went wrong. And one of the things that was immediately a cautionary point, when this whole thing got proposed. This proposal came from the chairs of the Ways and Means Committee in the House and the Senate Finance Committee. And it was also signed on by the ranking Democrat member in the House. But the ranking Republican on the Senate Finance Committee, Senator Crapo from Idaho, did not sign off on this bill and, you know, lend his support for it. That was the first sign that there was some issue or some problem that was coming to the fore here. So even though the Republican chair of Ways and Means, who in some ways has been one of the biggest chair leaders for this bill, was on board, it wasn't so crystal clear in the Senate. And while a number of senators expressed support, no Republican senators, expressed support for the bill, they also, you know, didn't really want to go against the chair of the committee that had jurisdiction over this, or not the chair, but their ranking member. So it became clear that, you know, something needed to happen. The problem is, ever since the end of January, nothing has really happened. Now we can discuss who's at fault for this, where the problems are and all of those issues. But in any event, we've clearly gotten to today and there's been no proposal that's been agreed to by the parties that would have allowed this thing to come to the floor. Now, of course, it could just pass on the floor if we can get it to a vote. So this gets us to this thing called the cloture vote, right? So essentially, this is what we're doing because they had no progress. And remember, one of the complications with modifying the bill that might get a bill that could pass the Senate and have Senator crepo's blessing is that bill, if it's modified at all, would have to go back to the House to be passed again, or at least go to a conference committee and then get a conference bill that could be passed by both houses. And that's easier said than done, right? There is a feeling, even though it's overwhelming vote on the House side in favor of the bill, there is a feeling that it could easily collapse. One or the other party could basically pull their support in the House, which could make it very, very difficult to get through, especially if the Republicans could not hold every single vote. Remember, we are still dealing with a razor thin majority in the House. The, you know, if you're going to pass something with Republican votes only in the House, you need every Republican on your side. And that's proven easier said than done on tax bills, though it's become kind of an issue. Remember, they had three bills all keyed up out of Senate, out of the Ways and Means Committee, not Senate Finance, but Ways and Means Committee. And they never got brought to the House floor because they knew they had no Democrat support. That was by design. The point was to get these out there and then have the Senate pass something more bipartisan and then get a negotiation going, but they couldn't even get these bills out of the House. And that was the big problem there. The problem became the certain Republicans from higher income tax states or higher tax states, income and real estate tax, wanted to see something done if not full or appeal of the cap on the state and local tax deduction. That's where all of these fell apart because they were refusing to vote for the bill without some major concessions in that area. And those major concessions would have raised the cost of the bills, which is one of the reasons why there was arguments of we're doing it this way because we can't afford to spend money. And yeah, so in any event, we have a very complicated mess here and something that you were trying to work out. So back into the concept of the closure vote, right? The Senate leadership, in particular, Senate Majority Leader Chuck Schumer, decided to call a vote just before the August recess to invoke cloture on the bill. Now cloture is the process, the Senate goes through to end debate, remember the Senate is quote, you know, the world's most influential debating society would ever want to call it. But you know, they have this unlimited discussion of bills. But obviously at some point, we got to stop talking and vote. There's a process called cloture that would essentially limit the amount of discussion and then would take us straight to a vote. That vote, though, to invoke cloture does require a three-fifths majority vote of the senator's voting. If you don't get that three-fifths majority, then we would not be able to shut off debate. Without it, we could not get to a regular vote. Now while a regular vote on the Senate floor only needs a majority plus one, basically you know, half plus one, and the vice president can vote in the case of a die to break the vote, to break the tie, we can't get to that vote unless we can get past cloture. And the Republicans, you know, in theory, you know, the question was, could you get enough Republicans to break ranks and actually vote to invoke cloture? That was the game they were playing. Now what happened here? Remember, what this bill contains, so let's review what's in the bill. So you remember what we're talking about here. This was a bill back in January that would have retroactively restored the ability to expense research and experimental expenditures, which is probably one of the biggest things in the bill and one of the biggest headaches we've dealt with recently. It would also have put bonus depreciation back at 100%. So it wouldn't be at 80, 60, you know, in dropping continuously until we got to the end of the Tax Cuts and Jobs Act. And then it would go back to the, I believe it'd be 25% for 26 and then go to zero. It would put that back in. It also would change the limitation on deduction for business interest. However, we had our calculation of the income that we'd apply the percentage against. That didn't used to be used to be income essentially before taxes, you know, taxes, depreciation, amortization, right, and depletion. Well now we would get rid of and you would no longer be able to exclude depreciation, amortization, and depletion in computing your business interest deduction. But it also changed recently. So those were the things in there that were going to be business tax breaks that would be in the bill and that were generally supported by the Republicans. And to get Democrats to go along and vote for it, they agreed to impose a partial restoration of what had been the amount of the refundable child tax credit. And we were talking about, you know, immediately following the, let's see, that one was the act that was, you know, the energy, one that did the energy and all the other neat stuff like that. It was a one year, great increase in the refundable child tax credit. It would have brought some of that back. And again, and the reason why some of that and not all of it is, that one is way more expensive. And the idea was that each party would get, I think it was $37 billion of spending and that would be like $74 billion of spending in total. That's how they crafted the perfect compromise in the house. However, Senator Crapo objected to increasing the child tax credit's refundable nature. And you know, we go back and forth. He believed it would discourage work. So he was opposed to that. Well, there were a number of Republicans in the Senate that weren't opposed to it. The reality was that again, this vote was called. Now, the thing to know about this vote is not unexpectedly it failed, 48 to 44 with eight not voting and eight not voting is really interesting. You know, it's basically a reasonably high number for a vote that seems pretty significant. How come eight people were just unavailable on this day? Well, a lot of the eight are people for whom a vote either for or against this bill would be problematic for various reasons. So there are some who it would appear it was kind of convenient to not be there on the vote day. And yes, they all have really good excuses for why they weren't there. And it was called late. I'll give it that too for political reasons. But yeah, I'm also sure they didn't work too hard when I look at some of the people on the list, both on the Democrat side and Republican side. I think there are reasons they didn't work terribly hard to get there. So again, it failed 48 to 44 with eight not voting is how it failed in the catch. Now, the key thing to remember about this. Now, let's talk about what this vote really was and why its failure has more to do with the reason for the vote than necessarily telling you for sure there's not support. Okay, remember, we are getting very, very close to an election where within three months of election day are pretty close to it at this point. So, you know, within the next three months from now, we will be voting in the national elections, which will deal with the House, the Senate, the presidency, you know, and in a number of state significant offices. So that's coming up soon. Whenever you have that, as we get close to that, the parties in control of the calendar in each branch, you know, basically in each house will tend to bring up some show votes. These are votes that are meant to score political points by attempting to put members of the other party in a bad position, you know, to have them be kind of forced to go on the record against something that might very well hurt them badly in their home state when they're running. Now, as I said, there had been Republicans who had backed this and were backing the child tax credit. One of whom is currently the nominee for vice president, which, yeah, you know, and for various reasons that that makes that a little bit more problematical. He was on the campaign trail and again, certain it was arranged ahead of time. I'm also certain he was not really scrambling to get back, right. There are ways that if a vote is really significant, they want to be there for it. They have a tendency to cancel things or reschedule things. So, you know, let this be clear. It's something that, you know, everybody was working and certainly there were members of, you know, John Fetterman was also who was a senator from Pennsylvania that probably has a little more trouble because, yeah, you know, because of his position and running in a very close state, he might prefer not to be forced to vote one way or the other on this bill. And he was missing, you know, various people were missing. So that's kind of the norm we have in the situation. So it was essentially, I'm sure many of the eight, at least it didn't disappoint them not to be there for the vote. I think that that's the best way to phrase it. Now, again, it's strategic. Why was this vote scheduled? Obviously, it is probably more than coincidental that last week the vice presidential nominee was quoted as saying the now apparent Democrat nominee for president this year. He said that she was opposed to the child tax credit, you know, and wanted it repealed and gone. So that appears to have been a driving force in getting this on the agenda because the Democrats felt they could make hay by, you know, saying, well, right, look here, you know, we're voting for it. The Democrats are saying we want to have this. We're trying to get it. And look, we were stopped, okay? The Republicans though realize, frankly, this is a no when vote, right? You know, in essence, they want some modifications made. This would if they cave and give this vote, that would get rid of the modifications. So because of that, right, we have a vote against. So this is more a saying of, you know, this was a politically motivated vote, that tough not to kind of have not come to conclusion. I think even Chuck Schumer would kind of, well, if you're going to be, you know, politicians will deny that all the time show. So would Mitch McConnell in many cases, when he controlled the Senate have denied, it was purely political. Although he might actually have said it wasn't Schumer might actually to know those two do have a knack every so often said, sure, it's political. Why not? You know, it's a political process. But that's the nature of the bill. Now, interestingly enough, the only Democrat to vote no on cloture was of all people, Senator Schumer, the majority leader. Now the reason he votes no is procedural. Remember, if the cloture vote goes down to defeat, then the only way you can bring that same motion up, and it would be the same motion, you'd be going for cloture again, the only way to bring that motion up is if a person that voted on the prevailing side of the, you know, of the vote, in this case, the nose makes a motion to reconsider. So once it became clear that enough Republicans were going to vote no to torpedo a cloture vote, which really took very little time at all. And as I said, was certainly not surprising to anybody there that that would happen. He then changed his tentative vote, which had been yes in favor of it to a no. That way, he can make a motion to reconsider and bring this bill back up if in fact something happens and he wishes to go forward with the bill, right? Now, here we come back to this. Congress is now on a recess for basically the month of August. When they come back in September, they've got to get something done about funding the government, whether it is the actual budgets get passed, which seems unlikely. There's a continuing resolution of some sort that kicks the can down the road or whatever they do, right? They need to get it done in September. And the factor is an election behind this. And we don't know the result of that election yet. It's also going to make this more complicated, right? You know, in essence with a very, very tightly split house and Senate, there is probably the belief at that time by one or more parties that they'd have a better chance of having control of this situation in the next Congress. So, you know, we may see some weird rules about some people wanting to finish up the budget right now because they like to make up this Congress better and some wanting to just do a continuing resolution and actually decide the budget after in January or later when, yeah, we're going to do this. My guess is continuing resolution is probably has the best chance of going because Congress has a devil of a time actually getting down and doing the work of closing off the budget. So we'll see what happens. It could be a continued resolution just into December or it could be one into January which basically would push the budget numbers or push the budget issues into the next Congress where the next Congress would make the determination. So we'll see what happens there. What that probably means is whatever we do there, which will probably begin last minute bringsmanship again because that's what Congress does, it's unlikely there will be time in September to take this bill up even if we had if we have everybody agreed. The only way I see it could happen in September is if everybody agreed, you know, Crapo comes to an agreement with the other, you know, the other chiefs of the tax writing committees and he gets together with all the members of the House and Senate and everybody agrees to suspend the rules so they could have a very quick set of votes on this. Now on the bill that comes in, either just one of the Senate if he would agree to just what the House has passed, which kind of seems unlikely or more likely we either have to have a, you know, House and Senate vote and what we'd like, what I'm sure they'd love to do is have the Senate bill go through and then have the House just pass that bill in essence, work out the conference bill before the Senate is actually passed the bill, get that through a basic read to vote for it. Then that goes back to the Senate, they adopt the House changes, right? The Senate's changes without revision and we could then get it passed very quickly. I don't see that as likely happening, although maybe there'll be some talks during the month. The good news about the Senate is two thirds of them are not running for reelection this year. So there are people who would be available to talk at this point and who are not as concerned about a vote impacting an election, they'll be about, they'll be on in a few weeks. So we might see something, but it seems far more likely that, you know, it'll probably come in the lame duck session. If we get something, my guess is December in the lame duck session is when they would pick this up. However, it's also, you have to recognize very possible. I would say even likely that nothing will pass this session. We will punt these issues on to the next Congress rather than deal with them. So you know, I've been asked by, you know, should, should we go ahead and file it as that's the same question last year, should we go ahead and file tax returns for 2024 for let's say an S corporation, a partnership claiming the research, claiming research and experimental expenditures. And the answer is, yeah, you probably should, because I don't see this getting fixed by September 15th. You need to file by that date. They're not going to fix it by that date. So I think you're going to have to fix it and then amend. And I wouldn't hold out a whole lot more hope in the C corporation or individual return structure that these will all be fixed by October 15th. If this is retroactively fixed, it will be amended returns. And those remitted returns will include at least calendar year 2024 returns. So yeah, we have a little bit of an issue running there. And the other problem we've got though, King into the next Congress, at one point, we'll just be deemed too late to do a retroactive fix. One of the key issues we have in this area is let's face it, we now have lived for a couple of years with, you know, research expenditures having to be amortized. We've lived for, you know, at least one now into our second year of not having full bonus depreciation. We've also had the business introduction and the economy has not totally collapsed. And that's probably good news, right? It hasn't totally collapsed, but it also suggests that it's tough to make the dire case that you could before when these were coming into effect, it was easier to paint a dire picture of what happened if we didn't fix them. Now, even though I guarantee and I know people have clients that are being beat up like mad by especially the research experimental amortization. And they probably are not having a good time and they are probably facing economic consequences. But the problem is it just doesn't seem the economy as a whole is seeing that issue. And like I said, the longer it goes without everything falling apart, the less likely it is we'll get a retroactive fix. So my guess is this may just if it doesn't get fixed this year, I have a feeling at best it will be lumped into the 2025 massive, you know, end of 25 massive, you know, TCJA expiration of a lot of things bill and that bill is going to be a mess to deal with. And you know, we're starting to come up to the point where because again, if it's not retroactive, then it's only one year, 25 and it's only one year, 25. And the world didn't end with having it be that way. The other years, then I can just see Congress punting it to 26 and saying, well, this can clearly wait till 26 and we know the way Congress works, that'll mean they'll actually fix the issue of what they're actually going to extend from TCJA and what they won't sometime in late 26 because that's how our Congress tends to work. So anyway, like I said, this is definitely not good news for that bill. Had it had they been able to invoke cloture before the end of the August before we got the August recess, then it, you know, it would have looked better as it stands right now. I don't see any, but and secondly, I think it's going to be Kryptonite in the sense that nobody's going to want to touch this prior to the election because again, now that you have both sides on on the record as to how they feel about this thing and they made the vote, nobody's probably going to want to be seen as reversing position before the election unless it begins polling really, really badly for one of the other parties. And again, if a poll is really, really badly for the Democrats, then they, that's obviously not going to bring it back up for a vote. But if it would go really badly for the Republicans, then maybe you could panic them into doing it. But I don't see that as likely. I really don't see it's likely it's going to cause, you know, where the whole country gets furious over this thing and suddenly they feel like we have to come back and pass something right away. And by the way, if you remember, the last time we're kind of in that position was back in around 2000, was it four? And when Congress got panicked and both parties panicked because they thought to be blamed for Congress not do anything, that's when we got some of the worst legislation as far as I'm concerned, we have ever gotten with the penalties for a list of transactions with the 409 cap A limitations on basically non qualified deferred cop, those regulations and things. Those are horrid provisions. They all came in 2024, right? After Congress panicked because they thought the public was going to blame every plane. Each party thought they might get blamed for nothing happening. Well, they did something and, right, they want to do something in the worst possible way. My argument is 2004. They did the worst possible way. Okay, let's go to the next thing that happened this week. And this is a case of Stents and Tamident LLC versus United States. It is a case from right here in Phoenix, US District Court of Arizona, docket number two, colon two, four, CV 01123. And the courts ruling its order on the request for preliminary injunction was issued on July 30th. Now, this case was brought by an ERC consultant, right? So this is not a case of an employer who had an ERC claim in process. This is a case of a consultant who had been advising businesses and employers who were filing for the ERC. And what they're asking the court to do is, among other things, required the IRS to end the moratorium on processing ERC refund claims that were received by the service after September 14th of 2023 when they announced the moratorium program. And they claimed, you know, and the plaintiff is claiming that the IRS violated the provisions of the Ministry of Procedures Act in implementing this policy by, you know, essentially declaring the moratorium and actually running a moratorium that they were in violation of the Ministry Procedures Act, that they had in essence made a policy statement or basically they had a ruling on a policy matter and interpretation that required them to comply with the APA. Now the IRS argued primarily that the consultant lacked standing to bring the action. And even if they did have standing that the IRS had not violated the APA requirements and it, or at least certainly they hadn't shown enough evidence, you know, or they had not presented solid enough evidence to justify the extreme step of issuing a nationwide preliminary injunction. And by the way, the court does deal with an issue here and says, look, there's really no way to do this other than nationwide. It's only injunction that could make sense here because there's no easy way to identify for the IRS and all the stack of all that paper to go find only the people who used to use basically this consulting firm to file their ERC claim. So, you know, the court said that there's really no way to craft a remedy that could relieve the situation except have a nationwide bar on the moratorium in order the IRS to stop, you know, to not have this line in the sand after which they would not process claims. Okay, so that's what we end up with. Now, first thing, the court looked at a couple of standings. Did they have standing out of the Constitution to bring the claim given the statement of the claim they had? And then secondly, did they have standing to file a claim under the statute of the Ministry of Procedures Act and the court generally is going to find they have standing, the IRS loses the standing issue entirely, right? No way they lose all. The court found that clearly the consultant was being damaged by the IRS ceasing the process claims because this firm, in its arrangements with its clients, had agreed that it would be paid out of the proceeds the client received. So, you know, the standard sort of, you know, we're not going to charge you anything if you don't get any money from the federal government. But if you do, you're paying us X in that place. So obviously, because the IRS wasn't processing claims after September 14th, certainly they weren't going to get paid for claims that were sent after September 14th until at the earliest, the date the IRS finally announces they are stopping the moratorium. And that's, we're not going to have the moratorium. We're going to start processing these items we received after mid-September of 2023. And the IRS at December 31st, the original date on which this moratorium was, you know, suppose it could end, the IRS announced an indefinite extension of the moratorium. So it didn't end up at December 31st of 2023. And the IRS now is not even stating when it might next end. It's indefinite, they will tell us when they're going to end the moratorium. So the court said, well, obviously they're being damaged by this, right? It hurt your cash flow. It's going to be mildly, right? It's going to hurt your cash flow. And the damages arose out of the IRS's action to impose a processing moratorium. They can directly trace their damages there. Now, there is some argument the IRS tries to make and this actually does come into play a little bit later as well. The wait, wait, wait, they decided rather than charging upfront fee for this. And remember, if you're charging an upfront fee for ERC processing, then it doesn't matter how fast the IRS processes the claim, right? Now your clients may have some concerns with you and the IRS isn't processing claim after many years, but, you know, in one sense doesn't matter. So they made the choice to be paid on the back end. That was a risk. They were taking the risk that the claim either would not be approved or that it might take some time to file the claim or to process the claim. And in fact, the court even mentions eventually that the, you know, the consultants had to know the IRS is not exactly known for speedily processing refund claims. I think all of us who've been in the stream pretty time would certainly say, yeah, that's right. They are not known for being super fast to handle refund claims. So, you know, there is some, but the court said on this issue constitutional standing, no, overwhelmingly the damage was caused by the IRS. The mere fact of tax, but yes, did having a, you know, payment out of the refund, you know, payment mechanism, did that make it worse? Yes, but it wasn't really the principal cause. The principal cause was the moratorium. That's there. And the damages would be at least somewhat addressed by the request of relief. Now the court did note, it's not clear and we don't know how quickly and how much difference it would make except that they could get payments for claims filed after September 14th, you know, if the moratorium was lifted. But obviously the IRS saw us to process all those claims and they have to process everything else they're doing. Now the court notes that the IRS obviously makes decisions to allocate people. But there's also the bottom line that, you know, which I think if this really went down to final trial, would you point out that regardless of that, they don't ultimately determine their total resources, Congress does. And obviously something has to happen. You know, the court determines its resources and when it will hear a case that does not mean that this judge could hear every single case that's scheduled to hear tomorrow, right? That's not going to work, right? We don't have enough resources there. But he is correct that obviously the service could decide to reallocate, deprioritize certain things, et cetera. So that's still on the table and would be discussed. So again, but he said at the very least, we go from no possibility of getting any payment related to post September 14th claims to opening up the doors to that happening. The IRS just starts processing claims in an order that does not automatically say if you filed after 10/14, I don't care how great your claim is, I don't care how much evidence you have to back up your claim, we're not touching it, right? The theory is that at least some claims would be processed for them after that came in after September 14th without the moratorium and they'd be able to get paid on those. Now, they also found that the consulting firm had statutory standing under the Administrative Procedures Act to bring the suit and again, they looked at very similar criteria here. They first said in the court foundation, it could review the action if the IRS could continue to extend, they would be the action because effectively, if the IRS just continues to extend the moratorium as they recently did with absolutely no end in sight, then that would effectively repeal the program. It is very clear the IRS does not have the authority to repeal the program. It's Congress's thing. Oh, by the way, remember the ERC cut off was in that bill that also didn't clear cloture. We also have that part of the game. He said at this point in time with what the IRS has done, he gave kind of the impression that the IRS had actually let the moratorium end at December 31st. There wouldn't really be anything here to talk about. The IRS would process and the mirror, in fact, the IRS makes policy statements that may be outlined in their policy that they're fine to go out and issue FAQs and tell everybody that we think that 95% of the claims are fraudulent. We believe that generally, the whole supply chain theories, the extended supply chain theories are bogus. They're allowed to have opinions. They're allowed to tell the public their opinions. That's not something that's not actionable. Those are not administrative rulings. That's not something actionable. The service is allowed to do that. Now, you didn't deal with whether notices would be allowed to be made that made those statements. My own take is, I believe the notice is given the level of persuasiveness. It should be. The answer is, yeah, that just the IRS, again, stating their opinion and the court can ignore it entirely. Even before we had a Loper Bright case, even under Chevron deference, you've been pretty well established that things like revenue rulings and certainly notices were not due any special deference to the agency's position. They'll listen to them because, yes, they deal with this stuff all the time, but we don't have to actually just totally defer, especially on legal issues. While the case does mention Loper Bright, and I expect a lot of cases will now, I would say, I think, if the courts were working the way that they said they were going after these things previously, that Loper Bright shouldn't impact that either. But the problem is their implementation of the moratorium is the problem. Having decided that most of the claims were fraudulent out there and they were raising issues that were not supportive of under the law per the IRS's view, they decided to solve that problem by issuing a moratorium. But action is an administrative action that the court says, you know, this company had the right to step in and file the claim on, right? And that's because unlike their clients, the consulting firm had no alternative source of redress. They, you know, here's the catch. If I'm an employer and I have filed an ERC claim and IRS has been sitting on it, you know, since September 14th or September 15th of 2023, well, that's more than six months. I have a right today to go down and file suit in the U.S. District Court or in the court of claims. And I have a right to file suit in essence saying, IRS owes me money. We're going to court. The IRS had six months to administratively rule. They haven't done so. That's it. That's the chance we're going to court. Now, I'm not saying that's a practical answer for most people because we're not talking enough money. And I was talking with a couple of attorneys at the, at the Arizona Form for Improvement Taxation Conference last Thursday. And yeah, you know, they were saying, oh, yeah, you're talking about having to have a really big claim, right? If you're just sitting there with a $50,000 or $100,000 refund, your client might think only 50 or a $50,000 is not a small number. But once they see the legal fees, they would incur going to District Court, challenging this if they win, then having to haul into the Circuit Court of Appeals that it may need to go to and going to trial there. They'll quickly discover that $100,000 may not be that much money compared to the expenses they're going to incur to try to get the official answer from the IRA to get the answer from the court about whether or not they qualify. But as I say, in this case, Stents and Tamadam, who probably has enough claims out there that the money would make sense if they could force it, they, however, have no ability to bring the suit only their clients do, right? So they have no alternative source of redress to solve their problem, which is they're not getting paid their fees because the IRS is not issuing these claims, right? That's kind of the big problem, right? Now, the other catch was the firm had to also show they would likely succeed on the merits and would suffer irreparable harm. Now, the court stated they kind of didn't rule directly on this, but effectively did. They stated they found many potentially compelling arguments on the plaintiff's side, both for the action itself and the IRS is being, was a reasonably delaying action in this case. So both the moratorium is just wrong in and of itself. And the fact that it serves to delay action, unreasonably, is also a violation of the APA. They're saying, so they're, they're saying they very well, they very well could win on both of those when we ultimately go to trial. Remember, this is just asking for a preliminary injunction prior to the trial. Not a final decision. The court also agreed that the plaintiff is suffering irreparable harm every day, that that, you know, basically that moratorium stays in place. So absent and injunction or in the IRS to start processing, you know, basically to open up processing to include those claims today, they're going to suffer irreparable harm. You know, this, with this kind of zero cash flow, it's going to be very difficult to keep the lights on, it's going to be very difficult, potentially depending on what else the firm has and how deeply invested they were in ERC, it couldn't even be a problem. And again, this isn't addressed in the case. There's no evidence stating this would happen, there's no evidence stating, you know, what position there in if it doesn't. But if you're really whole hog in the ERC, you know, you might not survive long enough, you know, to have that go to anybody but the bankruptcy trustee at the end of the day because there's no money to pay the bills you need to pay and, you know, deal with that sort of thing because, you know, your, your claims that are good are your claims that are going to be paid out that are just clearly supported aren't being paid and that serves to not give you cash flow to fulfill other obligations like you might have agreed in the case, we don't know if they did, but you might have agreed to offer defense to these employers who have IRS who may disallow their claims and the IRS is beginning to send out dishonest letters. I've heard of a number of people reporting seeing them recently. So you know, we're certainly in that position. So the court says, yeah, it would be irreparable harm. So up to here, you read this case and here's the catch. I was reading the case. I knew because I had seen the headline on tax notes today and quickly read through the article describing the case. I know the answer was that there would be no injunction, but you get the vast majority of the way through this, through this order and reading the logic and the opinion. And you, it seems like go where it's going, it's going to happen. It's going to happen. It's going to happen. But it all died on one issue that, that the judge found, okay? Because the government is a party to the suit, there is an additional requirement to getting a preliminary injunction. And that is that you have to show, you have to balance the hardships and the interests of public policy, the impact on non-parties of the suit. In essence, you don't just consider impact on the parties, the IRS and the, you know, and this case, the ERC consultant. That because it would address a government suit, no government policy, you have to consider the interest of non-parties. After issuing the injunction, the overall, you know, balancing the issues of the hardships that these guys are in, are attaining right now versus potential negative impacts on public policy, you know, is it clear that their harm is, would overwhelm any negative public policy items that might occur? And they argued a few things. They said, you know, they said, you know, the plaintiff tends to bring in a complaint that their clients have been harmed, right? You know, but the court said no, and they brought in exactly what I thought they would on this, which I think is the concern with, you know, if bringing up a case on behalf of a client, which by the way, remember, we talked about the other case that was filed by the law firm representing this firm, that was for one of this firm's clients that was filed in California District Court. And that's where the client is trying to get relief. But the client is not actually asking the court to rule the qualified for relief. They're asking the court to force the IRS to process. I have a feeling the problem with them is going to be this one right here. It's like, you already have a remedy. And in fact, we probably haven't even gotten this far because remember on a couple of occasions, we looked at did Stenson, you know, Tamadine have a remedy available to them. The answer was no, but does let's say ABC body shop, who let's say is a client of this, you know, ERC consultant, ABC body shop can file, can file suit in District Court just like this suit and can actually get a judgment on whether or not they qualify for the credit and how much credit they qualify for. So the court said, nope, those guys have an alternative remedy. So you know, you can't consider the impact on them. Even if we know that they don't have a practical solution, let's say that body shop has an overall, you know, ERC refund coming to them of a hundred grand. It's almost certainly not worth the cost of litigating, especially because you might lose. Now, if you have 200 million, which you shouldn't be able to get into this program, let's say, you know, then of course, you can litigate the thing, right? That's part of the way it works. But that's not something court considered. They said also another factor here in considering that they said, even though we said that the IRS is a primary reason why there's a harm to the firm, the plaintiff should have known that the IRS tends to move slowly when issuing refunds. There was, in essence, Stenson and Tamadine could not know how quickly these claims would be processed, right? And especially, I think if push came to shove, they'd also point out they were also aware that there were a lot of other companies like them doing this. And so there would be a huge flood of claims. So even if the IRS had never gone down the path of having a moratorium, it's still likely that they would have taken quite a while to be paid. So they should have figured out a business plan as to how they could live with an extended period of not being paid. And then number two, you know, where a lot of claims don't get paid into wait online, or number two, come up with a different compensation scheme. So that, you know, they did that, that was part of the risk and that that's a risk that they reasonably should have been aware of. That also kind of argues against saying their harms, in essence, a certain part of their harm came from their own acceptance of the terms they moved forth with. If you were like a number of CPA firms, I knew said, well, we'll do this work and we'll help you with the RSC claims, but it's not contingent, you know, we're going to help you. We'll help you file them, but we're charging for the hours right now, right? We're not going to get behind this because you realize exactly how this works. You know, we'll do that, we'll go there, you know, we'll give you advice, yes or no. And they also probably point out, you know, when you give an up or down advice like that, and how much you get paid does not depend on whether or not, you know, the client, whether or not you decide the client qualifies, that also tends to make the advice of a professional stronger defense. That is something that's very true. Okay. So they said, look, your design of your compensation program, you know, that's partially to blame with why you have cash flow problems right now. You decided to take this risk, okay. So while they said, well, there are other arguments on this point that favored the plaintiff, overall the balance did not just tilt decisively in favor of the plaintiff when you compare it with potential downsides on public policy that are there. You know, the IRS has a right to set timing for, they have a right to manage their workload, right, reasonably manage it. And so that's also something, and if you do this, that could have knock on effects that could, let's say, but let's be honest, could even slow down things like the refunds people are getting for 24 tax returns or 23 tax returns or 24 returns, right? Other things like that could be slowed down if the IRS has to go all hands on deck, everybody process ERC claims tomorrow. Yeah, we all know from the IRS scrambling around and moving people on phones, off phones and getting everybody on the phones and not handling mail. We've all been around the path of how the IRS allocations have had some knock on effects. It appears at times, the IRS didn't quite figure out we're going to happen. So there is that risk. So because of this, the court decided that preliminary injunctive relief was not appropriate in this case, that does not make sense for them to offer that relief. And so the court decided not to do so. There it is. Now, here's a practical issue. I do presume the plaintiffs are going to take this on appeal to the Ninth Circuit Court of Appeals. Why do I say that? First thing is, hopefully the ERC consulting firm realized, and I suspect their law firm told them, is a law firm is basically a well-known law firm here in the Phoenix area. I am certain they were informed that obviously if we win this injunction, the IRS would immediately appeal the decision to the Ninth Circuit. So you know already that if you're going to win, you would have to go to the Ninth Circuit. So the fact that this court turns you down, well, you have a right to appeal the decision as well. So I would suspect to see somewhere in the near future an announcement that this decision will be appealed by the plaintiffs and they will file an appeal with the Ninth Circuit. Now that doesn't move terribly fast, so we have to remember that, right? You know, and in this case, it doesn't look like, you know, the plaintiff's case, you know, would lead to relief, right? The alternative pro, the alternative, you know, oh, I should say, now I'm trying to start what I meant with this note, hey, now I know. Like I said, that case in California, the other case coming up in District Court, if that court, and I suspect they will says, hey guys, why aren't you litigating, you know, if you believe the IRS is wrong in that notice and you believe you're qualified under the law to get this refund claim, why aren't you asking me to rule on that? Now, to me, the first question I had reading that case, I know why in this case, we're not asking me to rule on it because that's not before the court. You know, Stenson Tamadon does not have a claim with the IRS on the ERC and therefore does not, you know, has no way to bring the facts of a case before the court to get them to rule on relief. But their clients all do. So I don't see that coming. So I think the Ninth Circuit appeal of this, this has unique reasons why a junction could be issued. The junction is the only possible relief. And if the Ninth Circuit decides, and in fact, the damage to the consulting firm is so significant that it overwhelms any public policy considerations, then if you make that decision, as I read this decision, the rest of it would argue for it, you have to get relief. So let the Ninth Circuit decides they screwed up on another issue, which I'm sure the IRS would argue that they had screwed up on part of their analysis. And therefore, you know, it doesn't matter whether the public policy thing no longer matters because I'm sure the IRS is not just going to let it go on one issue. They would counter appeal on the other issue saying that, you know, the case should have been dismissed. There's no standing here, you know, in essence, it's a bad finding, you know, all of those issues. Well, we'll see it. As I said, I am very certain that this thing is destined for a Ninth Circuit Court of Appeals case. Now, I'm going to, we're going to keep our eye on that case in California. If we get a decision out of it, it's great, right? And if, and if by with the taxpayer wins, it's a great, it'd be a great decision because getting rid of the moratorium would certainly, because I know people who are very conscientious, who were working with clients that were just late to the game and, you know, who basically hadn't known it was there and who have done very well supported and backed up claims for refund that clearly qualify, but that didn't get submitted by September 14th. You know, essentially they had that by the time you knew September 14th was a deadline, it was too late. Right. We've learned about that. I think like two days before that the 14th to be the last date. And secondly, some of these clients weren't even discovered by people, you know, who actually said, Hey, you know what, you qualify, I think you might qualify for this, you know, you're a restaurant. You know, you're a restaurant here in Phoenix. It seems difficult to believe that you didn't qualify for this, you know, for at least some of your periods because, again, it was up until March of 2021 that restaurants that had, you know, indoor seating facilities, you know, which would be, you know, most higher-end restaurants and even a lot of fast food restaurants were still greatly restricted. They had to shut off a number of their tables to give enough distance between customers. And so it seems like virtually every restaurant with very few exceptions, maybe something like a, you know, Dutch brothers, it has no seating whatsoever, then it'd be difficult for them to say how they were impacted by it. In fact, from the lines of cars, the Dutch brothers on those days, you know, back to the pandemic days, I would say it was a boon for them. It's like, we, you know, we went big. But for, you know, let's say a, you know, let's say a family-owned Italian restaurant, family-owned Mexican restaurant, you know, family-owned steakhouse, those guys probably should qualify, right, at least to some extent because of partial suspension rules. Yeah, when they were fully suspended, they probably shut the restaurant down, but they might have tried to work takeout. So there's all kinds of things there. Unfortunately, those sorts of cases where there was no refund filed, yeah, there was no claim filed initially, they didn't get into it, yeah, it would at least free up those cases where it's very, very clear, they're low risk. And right now, it doesn't matter if they're low risk. If they came in after September 14th to 2023, IRS is not looking at them. So yeah, that, that'd be the position. So anyway, keep your eyes open, watch out for further developments, but if you were thinking we're going to get a quick resolution here, answer is probably not in the Ninth Circuit. We're probably looking at, at best, any relief under this case coming out in 25 and probably mid-25. Because remember, we're still waiting on the Eleventh Circuit to pick up the beneficial ownership information case, right? And here arguments, that, that came down in, you know, that case, that decision came down in March of this year. We know the arguments aren't scheduled until mid-September. And I would not expect an opinion until a few months after that. So again, now this case is just getting started a point that somebody could file the appeal and that process could be begun. So again, I think clearly it'd go into 26. So certainly to your clients, they're not getting their money anytime soon. And the only way to speed that up right now is to file suit, US District Court. And frankly, you know, depending on the size of their claim, you know, I've, you know, if you're sitting on a $10 million claim of $2 million claim, maybe, yep, you start talking about that at this point. It makes some sense. Your case is really good because what you'd like to do is file the District Court case, write it in front of counsel's office because you have to get ready for trial and have them figure out we're going to lose this thing and get your settlement. I would say a very clean case, yeah, it would make sense. But it's got to be a really clean case because it'll justify the legal fees and the risk the service will just want to take it to court. So yeah, you know, it's going to be one of those things to be careful, but discuss those issues. This has been the careful tax developments for the week of August the 4th, 2020, from almost at September. Careful tax developments is brought to you by your state's site of CPAs and by capital financial education. I remember if you need to contact me at dollars@careymauties.com. I try to look free mail in there. Also, you can find me on the Connect sites for Arizona, Society of CPAs, New Jersey Society of CPAs, Minnesota Society of CPAs, Illinois Society of CPAs, and Idaho Society of CPAs. So if you have any questions, pose there. Otherwise, we'll see it back here next week, see what comes up over the coming week. Now we know Congress is getting out of town, so legislation is not going to be our issue. We'll certainly see if cases come up and other IRS rulings and what goes on over the next week in the area of federal tax developments.
