Does IRS Owe $4.9M Tax Refund to Michigan Nursing Home?

If you thought tax season was stressful, try being a county-run nursing home in Michigan staring down the IRS over nearly $5 million in denied credits. Thornapple Manor, a 161-bed facility in Hastings, says the federal tax collector stiffed them on pandemic-era employee retention credits (ERC). Their lawsuit in the U.S. District Court of Western Michigan argues that the IRS has zero chill when it comes to recognizing what “partial suspension” really means. The big question now: can a small-town nursing home really force the IRS to pay up?

From Care to Courtrooms

Thornapple Manor’s beef isn’t about missed paperwork. The CARES Act of March 2020 originally excluded government entities from the ERC, but Congress later cracked the door open for those providing medical care starting January 2021. Thornapple checked the boxes: it wasn’t fully shut down but had to cut capacity, wall off isolation areas, and slash services like therapy and housekeeping. Census drops ranged from 4.5 per cent in early 2021 to 13.5 per cent by Q3. That’s no small potatoes for a facility trying to keep the lights on while juggling COVID mandates.

The IRS didn’t buy it. In March 2024, the agency denied refunds totalling $4.93 million across three quarters. The feds cited guidance that a partial suspension must have “more than a nominal effect” on operations. Thornapple, represented by K&L Gates attorney Robert Silverblatt, argues the IRS is leaning on notices that never went through proper rulemaking. Translation: the government is playing referee with rules it didn’t legally publish.

Past Lessons, Present Tension

This lawsuit isn’t a one-off tantrum. Silverblatt has filed similar cases for two other Michigan county-owned homes: Lenawee Medical Care Facility (chasing $3.5 million) and Marquette County Medical Care Facility (seeking $4.4 million). Together, that’s nearly $13 million on the line for facilities that cared for residents during what many call the worst public health crisis in a century. Why does this matter? Because the ERC was supposed to be a no-brainer support tool. If a business was forced to trim operations thanks to government orders, the credit kicked in. But what counts as “trimmed” has become a big fight. Did empty beds and slashed services hit Thornapple “nominally” or substantially? That’s the million-dollar; or in this case, the multi-million-dollar-question.

Heads-up for Professionals

For accountants, tax pros, and finance advisors, the Thornapple Manor case is more than a Michigan headline; it could shape how pandemic-era credits are handled across the country. Here’s what’s worth keeping on your radar:

• Potential precedent: If Thornapple wins, other government-linked care facilities may finally have a stronger legal footing in ERC disputes. If it loses, expect more clients asking why their “pandemic help” turned into a denial letter.
• Procedural challenge: Courts will decide whether the IRS skipped a key step under the Administrative Procedure Act. If those notices are tossed, eligibility guidance may need a reboot, giving pros a fresh card to play in similar fights.
• IRS workload: The agency isn’t just wrangling with nursing homes. It’s buried in ERC audits, fraud probes, and refund backlogs. Quick fixes aren’t in the cards, just ask anyone following the IRS’s $4 billion clash with Yum Brands or the quirky denial of theft-loss deductions for scam victims.

So, what’s the practical play? First, remind clients that ERC claims are far from slam dunks. Documentation is king: census numbers, service restrictions, staffing records, and contemporaneous notes about compliance orders all matter. Second, watch related cases closely; wins for Thornapple or Lenawee could open doors for similar claims nationwide.

Takeaway

Thornapple Manor’s $4.9 million fight isn’t just a Michigan headline. It’s part of a bigger tug between pandemic promises and tax bureaucracy. Whether this suit ends in refunds or rejection, it’s a heads-up for professionals: pandemic credits remain fertile ground for disputes, and the IRS is showing no signs of backing off.