In plain terms: some letters say you "did not experience the required decline in gross receipts." The statute offers two separate ways to qualify, joined by the word "or": a full or partial suspension of operations because of governmental orders, or a decline in gross receipts. An employer who qualifies under the first owes no showing under the second. The United States has said so in two federal courts. It told the District Court that an employer is eligible "first" through a decline in gross receipts, "Or, second," through a partial suspension. In Tri-State it described the gross-receipts test as "another method to qualify," and the court held that an employer "can be eligible and affected without partial or full suspension." A letter that demands the gross-receipts test of an employer who claimed under the suspension test reads "or" as "and."
"The employer did not experience the required decline in gross receipts."
Form language of the Service's letters and Forms 886-A
Section 2301(c)(2)(A)(ii) of the CARES Act and section 3134(c)(2)(A)(ii) of the Internal Revenue Code make an employer eligible for any calendar quarter in which either of two things is true. Clause (I) is the Suspension Clause: "the operation of the trade or business ... is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19)." Clause (II) is the gross-receipts test, which in section 3134 asks whether the employer's gross receipts for the quarter were "less than 80 percent of the gross receipts" of the same quarter of 2019, and which in the CARES Act refers to the decline in gross receipts described in section 2301(c)(2)(B). The two clauses are joined by "or." An employer eligible under the Suspension Clause need show no decline in gross receipts at all, and Congress wrote a percentage threshold into clause (II) and none into clause (I).1
Tri-State and the United States
The United States argued in Tri-State Memorial Hospital v. United States that the gross-receipts prong shows the suspension prong to be narrow. The court found that "even Defendant's own argument is contradictory," quoting the United States' own motion: "Under the Gross Receipts Test, an employer who did not experience even a partial suspension of operations but had a certain reduction in gross receipts during the pandemic would qualify for the same amount of ERC as if a government order had suspended the employer's operations." The court held: "Considering the Gross Receipts Test is by Defendant's admission, another method to qualify under for the credit, the fact an employer can be eligible and affected without partial or full suspension is reasonable."2
The United States told the District Court the same thing, in the disjunctive:
"Still, the answer to [the plaintiff's] question lies first in the statute, which provides that employers who suffered a cumulative burden were eligible to claim the ERC if it resulted in a significant decline in gross receipts. Or, second, as explained in the Notice, if under the facts and circumstances, the employer also can show a partial suspension."
Doc. 44 at 30
The "or" is the United States' own.3
A ground that demands the second prong of an employer who claims under the first reads "or" as "and," and the United States has told two courts that the prongs are alternatives.
If you claimed the credit because governmental orders suspended part of your operations, the gross-receipts test does not apply to your claim. The statute says "or." The United States has said "Or, second" in the District Court and called the gross-receipts test "another method to qualify" in Tri-State. Answer the letter by identifying the prong you claimed under, quoting the statute's "or," and turning to the orders that reached your operations in the quarter you claimed. The statute page sets out both clauses with their citations.