Implementation of PPP is Full of Confusion and Misinterpretations
The most publicized part of the Coronavirus Aid Relief and Economic Security Act (CARES act), was the Paycheck Protection Program (PPP). This program was designed to help small businesses survive the shutdown and economic uncertainty generated by the Coronavirus. However, the program has been saddled with bad press and implementation issues from the beginning. As the effects of the Coronavirus continue to hurt the US economy, small businesses are wondering if the PPP will be enough, while at the same time Treasury’s interpretation of the program is confusing many taxpayers. This has gotten so bad that a company has taken the step to file a lawsuit against Treasury and the SBA over their interpretation of the law.
After the first round of funding for the PPP ran out, it was published that many large companies such as Shake Shack and Ruth’s Chris had been awarded loans. Considering many small companies had not yet been awarded proceeds many people were upset at the implementation. Treasury pushed back questioning the legitimacy of the fund requests. Under the PPP small businesses had to certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This was all the guidance that was offered when the program rolled out on April 3rd. Then on April 23rd Treasury and the SBA updated their FAQ’s with Question 31. With the issuance of this FAQ Treasury seemed to push back on some companies stating “borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity.” Many applicants were left to wonder if this change made them ineligible for the program, however many of them had applied and been funded weeks earlier.
Companies have started to push back on Treasury stating that this was not the intent of the law. According to an article from The Washington Post “some public companies are declining to return the money, saying the program’s initial rules never barred them from applying and some outside experts agree”. According to an article published by Forbes the Treasury might have trouble enforcing any rules due to the vagueness of the term “necessary”. In this article, the author brings up the U.S. Supreme Court case Johnson v. United States were unconstitutional vagueness was discussed and stated that a statute may be considered too vague if it “’fails to give ordinary people fair notice’ of the conduct which will be punished”.
This vagueness has led to a California based company, Zumasys, suing the Treasury over their interpretation of the law. Zumasys believes that they do not need to repay their loan, even though they had access to other sources of capital. According to Zumasys’ lawyer they want the court to decide “whether or not this guidance given by the SBA and Treasury is valid, or is in fact invalid and unenforceable.” This court case could determine if companies need to repay their loans or suffer consequences, unfortunately this most likely will not be decided until after the May 14th safe harbor on repayment. Forgiveness could be a major issue according to a New York Times article, which stated that bankers are concerned that “struggling borrowers have been misled”.
Unfortunately the necessity of these loans is only one of the areas where interpretation of the CARES Act is causing havoc. As we have discussed in previous articles recent guidance from Treasury and the IRS does not seem to meet Congressional Intent. Similar to the debate over the word “necessity” it looks as if Treasury is misinterpreting Congressional Intent as it relates to the Coronavirus Stimulus. With businesses trying to rebuild it is imperative that Treasury and the legislative branch clear up these issues for businesses looking to recover.