Court Upholds OBBBA's Retroactive Prohibition of ERTC Refunds

(Parker Tax Publishing April 2026)

The Court of Federal Claims dismissed a claim for a refund of the employee retention tax credit (ERTC) for the third quarter of 2021, which the taxpayer made in May 2024, because it was disallowed by Section 70605(d) of the One Big Beautiful Bill Act (Pub. L. 119-21), which retroactively bars ERTC refund claims filed after January 31, 2024. The court rejected the taxpayer's argument that the retroactive bar was a due process violation, finding that the provision is rationally related to the legitimate legislative purpose of preventing tax fraud. Juggler Dave and Friends, LLC v. U.S., 2026 PTC 74 (Fed. Cl. 2026).

Background

On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act established an Employee Retention Tax Credit (ERTC) to provide a refundable tax credit for certain eligible businesses that had employees and were affected during the COVID-19 pandemic. The ERTC originally applied only to wages paid after March 12, 2020, and before January 1, 2021, and was later extended to cover wages paid through the end of 2021.

The One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21), enacted on July 4, 2025, established a new time bar for claiming the ERTC. Section 70605(d) of the OBBBA provides that "no refund with respect to [the ERTC] shall be made, after the date of the enactment of this Act, unless a claim for such credit or refund was filed by the taxpayer on or before January 31, 2024."

Juggler Dave and Friends, LLC (Juggler Dave), is an Ohio business whose claim was affected by the ERTC time bar enacted by the OBBBA. Juggler Dave sued the IRS seeking ERTCs for the first three quarters of 2021 (designated as Q1, Q2, and Q3). Juggler Dave's claims for ERTCs for Q1 and Q2 of 2021 had been filed with the IRS before January 31, 2024. The IRS paid those ERTCs, and the related claims were dismissed. The claim for an ERTC for Q3 remained pending due to the intervening enactment of the OBBBA's time bar.

The IRS moved to dismiss the remaining claim, invoking the OBBBA's retroactive deadline for seeking an ERTC as a bar to Juggler Dave's Q3 claim. Juggler Dave argued that the retroactive application of the OBBBA's time bar violated due process and was therefore invalid. Juggler Dave conceded that Congress has the authority to amend tax laws to apply retroactively. But Juggler Dave argued that Section 70605(d) of the OBBBA violated its due process because: (1) the 16-month retroactive time bar was excessive; (2) the amendment lacked a curative rationale; (3) the retroactive change was not tailored to prevent fraud; (4) Juggler Dave had a property interest in its pending refund claim; and (5) when Juggler Dave amended its 2021 Form 941 in May 2024, it reasonably relied on the existing law, which had no time bar to claim the ERTC, and it lacked notice that Congress would soon amend the law to add a time bar.

Constitutionality of Retroactive Tax Laws

Retroactive tax legislation is a longstanding and well-recognized feature of federal law. The Supreme Court has repeatedly upheld, against due process challenges, the authority of Congress to enact tax laws with retroactive effective dates. Under the rational basis standard, a retroactive tax law is constitutional if supported by a legitimate legislative purpose and rational means. If the statute is supported by plausible reasons, the law will be upheld.

In GPX International Tire Corp. v. U.S., 780 F.3d 1136 (Fed. Cir. 2015), the Federal Circuit set forth five factors to be considered in assessing the rational basis of retroactive statutes, including tax statutes, against a due process challenge: (1) whether the provision is "wholly new," (2) resolves uncertainty in the law (curative in nature), or (3) is remedial; (4) the length of the retroactivity period; and (5) whether affected parties had notice of the potential change before engaging in the regulated conduct.

A retroactive tax law is "wholly new" if it imposes a new and previously nonexistent tax liability on completed transactions or property interests that were not subject to tax at the time they occurred. Legislation that cures a drafting error or closes an unintended loophole is considered by the Federal Circuit to be particularly appropriate for retroactive application, even with a lengthy retroactive period. The length of the retroactive period is relevant in evaluating whether a change to a tax law violates due process, but there is no fixed limit on retroactivity. In Milliken v. U.S., 283 U.S. 15 (1931), the Supreme Court upheld a two-year lag between a transaction and the challenged law's effective date, and a four-year lag before the tax was due.

Analysis

The Court of Federal Claims granted the government's motion to dismiss after finding that the OBBBA's retroactive time bar was supported by and rationally related to the legitimate legislative purpose of preventing tax fraud.

The court found that the time bar acted to restrict taxpayers from claiming the previously available credit but did not create new or additional tax liability for any taxpayer, including Juggler Dave. Viewed in this light, the court said that the time bar could not be considered a "wholly new tax" because it simply brought changes in the operation of an existing tax law. The retroactive application of the time bar, the court found, simply modified the period within which a taxpayer could claim the ERTC.

The court also found that the ERTC time bar was curative and remedial in nature. The court observed that in July 2023, the House Ways and Means Committee held a hearing on widespread ERTC fraud. In September 2023, the IRS announced a moratorium on processing ERTC claims to prevent fraudulent claims. In addition, members of both chambers of Congress later introduced bills restricting ERTC refunds or credits to claims filed on or before January 31, 2024. An identical provision became law in the OBBBA. The court found that this history of legislative and administrative concern over fraud involving ERTCs supported the IRS's argument that the time bar aimed to prevent fraud by barring claims that were no longer justified two or three years after the worst effects of the COVID-19 pandemic.

Regarding the period of retroactivity, the court noted that retroactive tax legislation extending much further into the past than the one at issue here has been upheld consistently against due process challenges by the Supreme Court and the courts of appeals. The retroactive period involved in this case was in the court's view modest by comparison and could not be said to undermine Juggler Dave's reliance interests to such a degree that it violated due process. The court further found that Juggler Dave had notice of possible changes to the ERTC as early as 2023, when the IRS widely publicized ERTC fraud and placed a moratorium on such claims, and Congress proposed restrictions on ERTC claims -- including a time bar effective as early as January 2024. Finally, the court found that Juggler Dave had no reliance interest since Section 70605(d) merely barred the company from receiving that it did not seek until May 2024, two and half years after it filed its original return for Q3 2021.

For a discussion of the retroactive bar on ERTC claims under the OBBBA, see Parker Tax ¶106,460.

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