Blog · 15 October 2026

Employee Retention Credit After Sevillo: Suspension Test vs Gross Receipts, Form 941-X and What US CPA Firms Should Tell Clients

By Keshav Bansal, CA

Employee Retention Credit refund suits keep turning on which eligibility door the employer used. In Sevillo Fine Foods LLC v. United States, No. 2:25-cv-00273-DBP (D. Utah Sept. 28, 2026), Magistrate Judge Dustin B. Pead dismissed with prejudice a Utah food maker’s suspension-test claims for Q3 2020, Q1 2021 and Q2 2021, while leaving alternative gross receipts claims for Q3 2020 and Q1 2021 pending. For US CPA firms still defending Form 941-X ERC files—or “supply chain” suspension theories—the opinion is a checklist for what a government order, proximate cause and a partial suspension must look like.

What Sevillo claimed

Per Ed Zollars’s September 29, 2026 write-up in Current Federal Tax Developments, Sevillo Fine Foods LLC is a Salt Lake City specialty food manufacturer. Treated tomato products from a single Turkish supplier—shipped through the Port of Long Beach—accounted for roughly 75% of products sold and about 75% of revenues in the latter half of 2019. Sevillo alleged that COVID-era California and local workplace-safety rules and related guidance understaffed the ports, congested cargo, delayed its inputs, raised costs and forced production slowdowns and cancelled orders.

Sevillo filed Forms 941-X claiming refundable Employee Retention Credits under CARES Act §2301 (as amended). Count One (Q3 2020) and Count Two (Q1 2021) pleaded both the Gross Receipts Test and the Suspension Test; Count Three (Q2 2021) rested only on the Suspension Test. The United States moved under Fed. R. Civ. P. 12(b)(6) to dismiss every Suspension Test theory, leaving the Gross Receipts theories in Counts One and Two untouched.

On the pleadings Zollars summarizes, Sevillo kept about 85 employees and, in Q3 2020, reported gross receipts of $3,967,258.04 against $5,240,712.73 in Q3 2019—about 76% of the prior-year quarter.

Holding: three independent reasons the Suspension Test failed

Judge Pead granted the partial motion and denied leave to amend as futile. Count Three was dismissed with prejudice. Counts One and Two were dismissed with prejudice to the extent they relied on the Suspension Test under CARES Act §2301(c)(2)(A)(ii)(I); the Gross Receipts Test claims under §2301(c)(2)(B) survived. Zollars reports three independent grounds:

• No qualifying order limiting commerce. Advisory CISA, Coast Guard, CDC and ports guidance was not a compulsory “order.” Even enforceable Cal/OSHA Emergency Temporary Standards and Long Beach “Safer At Home” orders regulated how essential port operations could continue; they did not cap throughput. Safe-operating conditions are not, on this record, orders “limiting commerce.”
• Proximate cause, not a six-link supply chain. “Due to” required both but-for and proximate causation. Sevillo’s chain (California rules → absent dockworkers → port congestion → delayed ocean cargo → late Salt Lake arrivals → halted lines) introduced uncontrolled third parties the court called fatally attenuated. Congestion is not suspension; Notice 2021-20’s supplier pathway still needs a direct supplier whose own operations a qualifying order suspended.
• Delay and higher cost are not a partial suspension. Keeping ~85 employees and ~76% of prior-year Q3 receipts while alleging that a 75%-of-revenue input became unavailable left the suspension allegation implausible. Increased costs and reduced capacity are economic injury the Gross Receipts Test measures—not cessation of a more-than-nominal business segment.

Employee Retention Credit: two doors in (and who bears the burden)

As general ERC rules (IRS FAQs and the ERC overview—not holdings unique to Sevillo), an eligible employer for the refundable payroll-tax credit generally had to show, for the relevant 2020–2021 quarters, either (1) a full or partial suspension of operations due to an appropriate governmental order limiting commerce, travel or group meetings because of COVID-19, or (2) a qualifying decline in gross receipts (with a recovery-startup path for certain Q3/Q4 2021 claims). Employers that missed the credit on the original Form 941 typically claimed it on Form 941-X and reduced the wage deduction on the income-tax return for the same period.

The court treated the ERC as a “presumption out” statute: the employer starts outside relief and must prove each Suspension Test element—suspension of its trade or business, in the quarter, due to a qualifying governmental order. That burden matters when promoters sold thin supply-chain memos. For preparer diligence themes, see our ghost preparers and preparer responsibility lessons.

OBBBA bars and the longer assessment window

Separate from Sevillo’s facts, P.L. 119-21 (OBBBA) tightened Q3/Q4 2021 ERC enforcement. Per IRS FAQs (FS-2025-07) on §70605(d), after July 4, 2025 the IRS may not allow or refund ERCs for those quarters if the claim was filed after January 31, 2024. Instructions for Form 941-X (04/2026) restate that cutoff and extend the assessment period for those quarters to six years after the credit was claimed or the original return was filed, whichever is later—keep related wage records at least seven years for qualified wages paid after June 30, 2021 and before January 1, 2022. Confirm each client’s postmark and refund history before treating a late Q3/Q4 2021 claim as live.

What US CPA firms should tell clients

• Separate the two tests in the workpapers. A supply-chain narrative does not substitute for documented gross-receipts percentages—or for a qualifying order that limited the client’s own commerce.
• Demand the order text. Guidance, recommendations and “essential business may stay open” carveouts are weak Suspension Test foundations after Sevillo.
• Watch attenuation. Multi-step port and overseas-vendor theories face proximate-cause scrutiny; one-link supplier suspension under Notice 2021-20 Q/A 12 is a narrower path than “the ports were busy.”
• Reconcile receipts and headcount. Courts will notice when the complaint says a dominant input vanished but Forms 941 and books show most of the workforce and most of prior-year receipts stayed.
• Payroll notices still matter. ERC adjustments sit on the Form 941 track; unpaid withholdings raise personal exposure under the trust fund recovery penalty—see our Amodio §6672 guide. For payment plans and OICs, see our IRS collection alternatives overview.

A short firm checklist

1. Inventory open ERC Form 941-X claims by quarter and eligibility theory (suspension vs gross receipts vs recovery startup).
2. For suspension claims, pull the order PDF, effective dates and the client’s contemporaneous operations log—not a promoter one-pager.
3. Map any “supplier” theory to a named supplier whose own operations a qualifying order suspended; stop at one link.
4. Compare quarterly gross receipts to the 2019 baseline and note headcount continuity before defending a partial-suspension story.
5. Flag Q3/Q4 2021 claims filed after January 31, 2024 against the OBBBA §70605(d) bar and the six-year assessment period in the Form 941-X instructions.

Where this fits for Tax Brew readers

ERC controversy work needs Form 941-X calendars, order files and wage reconciliations while signing professionals own eligibility judgment. If your firm needs capacity on that preparation work, outsourced tax prep and bookkeeping support for US CPA firms can help. Email info@taxbrewglobal.com.

Sources: Sevillo Fine Foods LLC v. United States, No. 2:25-cv-00273-DBP (D. Utah Sept. 28, 2026); Ed Zollars, Current Federal Tax Developments (Sept. 29, 2026); CARES Act §2301 / IRC §3134 (as applicable); IRS Employee Retention Credit FAQs and overview; IRS ERC eligibility checklist; IRS FAQs on OBBB ERC provisions (FS-2025-07); Instructions for Form 941-X (04/2026) (P.L. 119-21). General information, not tax or legal advice. Sources as of 15 October 2026.