Sevillo Fine Foods LLC v. United States, Case No. 2:25-cv-00273-DBP, 2026 U.S. Dist. LEXIS _____ (D. Utah Sept. 28, 2026)

As tax practitioners evaluating Employee Retention Credit (ERC) refund claims, CPAs and Enrolled Agents (EAs) face heightened scrutiny from both the Internal Revenue Service and federal courts regarding claims grounded in the “Suspension Test.” A significant subset of ERC claims filed during the pandemic relied on indirect supply chain disruptions, arguing that upstream bottlenecks—such as maritime port congestion—constituted a partial suspension of business operations.

In Sevillo Fine Foods LLC v. United States, Case No. 2:25-cv-00273-DBP (D. Utah Sept. 28, 2026), Magistrate Judge Dustin B. Pead granted the government’s partial motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, dealing a decisive blow to supply chain ERC claims predicated on generalized port delays and indirect workplace safety regulations. The District Court articulated three independent, legal grounds for dismissal:

Identification of a qualifying governmental order: Advisory documents and workplace safety mandates that regulate conditions of operation rather than capping throughput do not constitute orders “limiting commerce.”
Standard of causation: The statutory phrase “due to” in Section 2301(c)(2)(A)(ii)(I) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) requires both factual (but-for) and proximate cause, barring claims linked through an attenuated supply chain.
Definition of partial suspension: Supply delays, increased costs, and capacity reductions do not equate to an operational suspension, particularly where a taxpayer maintains its workforce and revenues.

This article provides an in-depth technical analysis of the factual background, taxpayer arguments, judicial reasoning, and statutory interpretations in Sevillo Fine Foods, offering crucial guidance for tax controversy practice and penalty exposure defense.

Factual Background and Supply Chain Dynamics

Sevillo Fine Foods LLC (“Sevillo”) is a specialty food manufacturer headquartered in Salt Lake City, Utah. The taxpayer’s manufacturing model relied heavily on treated tomato products imported from a single vendor in Turkey. These specialized tomato products were treated via a proprietary partial-dehydration process for which no domestic or alternate global supplier existed.

For the baseline period in the second half of 2019, products containing these Turkish tomatoes accounted for approximately 75% of Sevillo’s sold product line and generated approximately 75% of its total gross revenues. Due to shipping routes and logistical constraints, Sevillo imported 100% of these critical raw ingredients through maritime shipments passing through the Port of Long Beach, California.

Beginning in March 2020 and continuing throughout the relevant calendar quarters, various regulatory bodies—including the State of California, the California Division of Occupational Safety and Health (Cal/OSHA), Los Angeles County, the City of Long Beach, and the City of Los Angeles—issued health directives, workplace safety standards, and stay-at-home orders designed to curb the transmission of COVID-19.

Sevillo alleged that compliance with these directives caused widespread understaffing and reduced operational capacity at the Ports of Los Angeles and Long Beach. The resulting maritime congestion delayed raw material deliveries to Sevillo’s facility in Salt Lake City. Consequently, Sevillo experienced production line halts, idling of equipment and personnel, increased supply and freight costs, and the unprecedented cancellation of customer orders during 2020 and 2021.

Despite these operational hurdles, Sevillo maintained its full workforce of approximately 85 full-time employees throughout the relevant period. Furthermore, during the third quarter of 2020, Sevillo generated $3,967,258.04 in gross receipts compared to $5,240,712.73 in Q3 2019 (retaining approximately 76% of its prior-year gross receipts). In the fourth quarter of 2020, Sevillo similarly retained approximately 75% of its prior-year gross receipts.

Taxpayer Claims and Request for Judicial Relief

Sevillo filed amended employment tax returns (Forms 941-X) claiming refundable Employee Retention Credits under Section 2301 of the CARES Act, Pub. L. No. 116-136, 134 Stat. 281 (2020), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), Pub. L. No. 116-260, div. EE, §§ 206–207, 134 Stat. 1182 (2020). Sevillo sought relief across three distinct tax periods:

Count One: Third Quarter of 2020 (Q3 2020), pleading eligibility under both the Gross Receipts Test pursuant to CARES Act § 2301(c)(2)(B) and the Suspension Test pursuant to CARES Act § 2301(c)(2)(A)(ii)(I).
Count Two: First Quarter of 2021 (Q1 2021), pleading eligibility under both the Gross Receipts Test and the Suspension Test as amended by the Relief Act.
Count Three: Second Quarter of 2021 (Q2 2021), resting exclusively on the Suspension Test.

The United States filed a Second Partial Motion to Dismiss under Fed. R. Civ. P. 12(b)(6), moving to dismiss all claims in Counts One, Two, and Three that depended on the Suspension Test. The government did not seek dismissal of the alternative Gross Receipts Test claims in Counts One and Two, which remained pending.

Statutory Framework and the Four-Prong Suspension Standard

To qualify as an “eligible employer” under the Suspension Test of CARES Act § 2301(c)(2)(A)(ii)(I) (and its successor codification at 26 U.S.C. § 3134(c)(2)(A)(ii)(I) for wages paid after June 30, 2021), an employer carrying on a trade or business must demonstrate that:

“the operation of [its] 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).”

The District Court highlighted that the ERC is a “presumption out” statute, meaning employers start outside the scope of statutory relief and bear the burden of proving that they “satisfy applicable statutory definitions to get ‘in’ and qualify for the relief” (In re JSmith Civil LLC, 674 B.R. 207, 213 (Bankr. E.D.N.C. 2025)).

Synthesizing established jurisprudence, Magistrate Judge Pead outlined a four-element test required to establish Suspension Test eligibility:

A full or partial suspension;
Of the operation of the claimant’s trade or business;
During the specific calendar quarter at issue; and
Due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19.

Failure to establish any single element renders the taxpayer ineligible for the credit (Northeast Health Services LLC v. United States, 181 Fed. Cl. 566, 574 (2026); I Health & Life Insurance Services v. United States, 2026 U.S. Claims LEXIS 1858, at *17 (July 23, 2026)).

Judicial Analysis: Absence of Qualifying Governmental Orders Limiting Commerce

The court’s first independent ground for dismissal focused on whether the administrative and local documents cited by Sevillo qualified as mandatory orders that limited commerce.

Distinction Between Advisory Directives and Binding Orders

The court held that a statutory “order” requires a compulsory directive carrying enforcement authority or repercussions for noncompliance (In re JSmith Civil LLC, 674 B.R. at 214–15). Examining the judicially noticed exhibits, the court found that four primary documents relied upon by Sevillo were non-binding advisories:

Cybersecurity and Infrastructure Security Agency (CISA) Essential Critical Infrastructure Workforce Guidance: Self-described as “advisory guidance” aimed at “[p]romoting the ability of [critical infrastructure] workers to continue to work.”
United States Coast Guard Marine Safety Information Bulletin 11-20: Expressly stated it was “advisory in nature and quarantine orders and their enforcement are ultimately up to State and local officials.”
California Department of Public Health (CDPH) “COVID-19 Industry Guidance: Ports”: Explicitly noted it was “not exhaustive . . . nor is it a substitute for any existing safety and health-related regulatory requirements.”
Centers for Disease Control and Prevention (CDC) Interim Guidance: Advised that exposed infrastructure workers “may be permitted to continue working.”

Judge Pead rejected Sevillo’s contention that federal advisory guidelines became mandatory orders when incorporated by local authorities, observing that:

“publications describing themselves as advisory, using permissive language, or imposing no consequence for noncompliance, do not constitute ‘orders’ as contemplated under the statute.”

Mandatory Safety Regulations vs. Orders Limiting Commerce

Addressing the compulsory directives—such as the City of Long Beach “Safer At Home” Orders and the Cal/OSHA Emergency Temporary Standards (ETS) (Cal. Code Regs. tit. 8, §§ 3205–3205.2)—the court acknowledged that these carried enforcement power (e.g., misdemeanor penalties under Cal. Health & Safety Code). However, the court ruled that they failed the second statutory requirement because they did not “limit commerce.”

Construing “limiting” according to its ordinary meaning (citing F.D.I.C. v. Meyer, 510 U.S. 471, 476 (1994)), the court explained that an order limits commerce when it restricts volume, caps capacity, closes business categories, or prohibits transactions. Crucially, Judge Pead drawn a clear line:

“an order does not limit commerce when it prescribes the conditions under which the same activity may continue at whatever volume the operator is able to achieve.”

The Long Beach orders explicitly exempted “port operations” as essential infrastructure and strongly encouraged essential businesses to remain open. Similarly, the Cal/OSHA ETS required workplace safety protocols (masking, distancing, testing, and exclusion of exposed workers) but did not restrict port cargo volume or order operational curtailment.

Aligning with JPM Restaurant v. United States, 2026 U.S. Dist. LEXIS 40902 (E.D. Tenn. Feb. 27, 2026) and RAAM Construction Inc. v. United States, 2026 U.S. Dist. LEXIS 140475 (C.D. Cal. June 23, 2026), Judge Pead stated:

“An order that removes individual workers from the workplace does not amount to an order limiting the institution’s commerce. The ETS do not tell the port to move less cargo or to reduce operations and, as a result, the ETS do not qualify as orders that limit commerce within the meaning of the statute.”

De Novo Statutory Review of IRS Guidance

The court also evaluated IRS Notice 2021-20, 2021-11 I.R.B. 922, specifically Q/A 11, 17, and 18, which discuss operational modifications. Applying Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the court noted that agency guidance is reviewed de novo and persuasive only.

Judge Pead clarified that Notice 2021-20 “answers a question of magnitude, not a question of threshold.” The Notice presupposes a qualifying order limiting commerce directly applicable to the taxpayer’s own business:

“The provision does not convert a condition on the manner of performance into an order limiting commerce, nor does it permit a claimant to borrow a third party’s modification and treat it as a suspension of its own business.”

Furthermore, as to Count One (Q3 2020), the court noted an additional temporal defect: the Cal/OSHA ETS took effect on November 30, 2020, and thus could not have limited commerce during the quarter ending September 30, 2020.

Judicial Analysis: Proximate Causation Standard and Attenuation in Supply Chain Claims

The court’s second independent ground for dismissal addressed the statutory causation requirement embedded in the phrase “due to.”

Rejection of Sole “But-For” Causation

Sevillo argued that “due to” requires only “but-for” causation, citing Supreme Court precedent such as Bostock v. Clayton County, 590 U.S. 644 (2020) and Burrage v. United States, 571 U.S. 204 (2014). Judge Pead rejected this premise, holding that those cases established but-for cause as a necessary floor, not an exhaustive ceiling.

Invoking Lexmark International Inc. v. Static Control Components Inc., 572 U.S. 118 (2014) and Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992), the court held that federal statutory causes of action carry a background common-law presumption requiring both factual (but-for) and proximate causation.

From a statutory design perspective, requiring only but-for cause would allow the Suspension Test to absorb every indirect economic ripple of the pandemic, rendering the mathematical Gross Receipts Test surplusage and collapsing the two pathways into “concentric circles” (Northeast Health Services LLC, 181 Fed. Cl. at 580; JPM Restaurant, at *12).

The court explicitly declined to follow minority decisions like Tri-State Memorial Hospital v. United States, 2026 U.S. Dist. LEXIS 118332 (E.D. Wash. May 28, 2026) and Titan Mutual Lending Inc. v. United States, 2026 U.S. Dist. LEXIS 173676 (C.D. Cal. Aug. 3, 2026), which rejected proximate cause.

Fatal Attenuation in the Six-Step Supply Chain

Analyzing Sevillo’s pleaded causal chain, the court identified six distinct links:

Government authorities imposed California workplace safety rules.
Port dockworkers were absent, reducing staffing.
Ports became congested.
Ocean carriers carrying Turkish vendor goods experienced delays.
Sevillo experienced delayed arrivals at its Salt Lake City plant.
Sevillo halted production lines and cancelled customer orders.

Judge Pead held that this multi-step sequence was fatally attenuated under proximate cause standards:

“Problematically, each step in Sevillo’s chain introduces an actor whom Plaintiff does not control and whose conduct the identified orders did not direct. The chain crosses international borders, traverses a third-party marine terminal, and depends on the shipping decisions of independent carriers. Each link adds distance and independent intervening actors that sever Plaintiff’s chain of causation.”

Supply Chain Framework Under IRS Notice 2021-20

Addressing the narrow supply chain exception in IRS Notice 2021-20 Q/A 12, the court explained that a downstream employer can only claim an ERC if its direct supplier was unable to deliver critical materials due to a governmental order that forced the supplier to suspend its own operations.

Sevillo failed under both potential supplier theories:

Turkish Vendor: The complaint contained no allegation that any governmental order suspended or reduced the Turkish vendor’s operations; the vendor produced and shipped the goods, which simply arrived late.
Port of Long Beach: The port was designated essential infrastructure and ordered to stay open. Furthermore, Sevillo failed to plead the absence of alternative ports, carriers, or shipping routes.

Judge Pead emphasized the critical boundary separating actionable suspension from non-actionable congestion:

“congestion is not suspension, and the distinction between them is the limiting principle the statute supplies: the chain may be extended by one link, to a supplier whose own operations a qualifying order suspended, and no further.”

Even under a strict but-for standard, the court held the claim failed because port congestion stemmed from market forces—surging import volume, general employee illness, equipment shortages, and carrier routing—rather than specific government orders.

Judicial Analysis: Definition of Partial Suspension vs. Operational Slowdowns and Increased Costs

The court’s third independent ground for dismissal addressed whether Sevillo experienced a “full or partial suspension” of its trade or business.

Plain Meaning and Statutory Distinctions

Referencing Black’s Law Dictionary (12th ed. 2024), the court distinguished between “suspension” (the temporary interruption, delay, or termination of an activity) and “delay” (the act of postponing or slowing).

Judge Pead held that a partial suspension requires proof that a discrete, more than nominal portion of the business ceased operations during the quarter. The court stressed:

“Increased costs are not a suspension; rather, they indicate that operations continued at greater expense. Delay is not cessation, and a reduction in capacity is not the cessation of a discrete portion of the business.”

Inconsistency with Pleaded Financial Results

Applying the pleading standard of Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), Judge Pead highlighted an unresolvable contradiction in Sevillo’s Second Amended Complaint.

Sevillo alleged that an input supplying 75% of its revenue became unavailable, yet its financial records showed it earned ~76% of its prior-year gross receipts in Q3 2020 ($3.97 million) and maintained its entire workforce of 85 employees:

“The Second Amended Complaint pleads that an input accounting for three-quarters of Sevillo’s revenue became unavailable, and pleads in the same document that Sevillo earned roughly three-quarters of its prior-year receipts while retaining its entire workforce. It pleads no facts reconciling the two. Absent that reconciliation, the assertion that the operation of the business was suspended does not cross the line from possible to plausible.”

Finally, the court flatly rejected Sevillo’s theory of “constructive suspension,” concluding that “the word ‘constructively’ appears nowhere in § 2301.”

Denial of Leave to Amend and Final Order

Magistrate Judge Pead denied Sevillo’s request for leave to amend under Fed. R. Civ. P. 15(a)(2), finding amendment futile because the deficiencies were legal rather than factual (Jefferson County School District v. Moody’s Investor’s Services, 174 F.3d 848, 859 (10th Cir. 1999)).

The court entered the following formal order:

Granted the United States’ Request for Judicial Notice.
Granted the United States’ Second Partial Motion to Dismiss.
Dismissed Count Three (Q2 2021) WITH PREJUDICE.
Dismissed Counts One (Q3 2020) and Two (Q1 2021) WITH PREJUDICE to the extent they relied on the Suspension Test under CARES Act § 2301(c)(2)(A)(ii)(I).
Denied leave to amend.
Preserved Counts One and Two solely under the Gross Receipts Test pursuant to CARES Act § 2301(c)(2)(B).

Concluding the decision, Judge Pead summarized:

“Sevillo describes delayed deliveries, higher freight and storage costs, and an inability to operate at full capacity. While sympathetic to Sevillo’s plight, what Plaintiff describes is an economic injury of the kind the Gross Receipts Test is designed to measure. It is not a suspension of business operations due to an order limiting commerce.”

Critical Takeaways for CPAs, EAs, and Tax Controversy Practitioners

The decision in Sevillo Fine Foods offers vital technical insights for practitioners managing ERC audits, administrative appeals, and refund litigation:

Strict Order Qualification Standard: Government directives that prescribe operating protocols, sanitization, or employee exclusion without capping total throughput do not qualify as orders limiting commerce.
Rigorous Causation Requirement: Practitioners cannot rely on loose, multi-tier supply chain disruption theories. To utilize the supply chain pathway under Notice 2021-20 Q/A 12, the taxpayer must substantiate that a direct supplier suffered a mandatory operational suspension under a qualifying order and that no alternative suppliers existed.
Audit and Penalty Exposure Risk: Claims filed based on general port congestion or market-driven delays carry severe risk under judicial scrutiny. Practitioners evaluating existing claims should analyze whether clients qualify under the Gross Receipts Test or consider administrative resolution mechanisms where Suspension Test positions are untenable.

Prepared with assistance from Gemini Notebook.