Statute of Limitations Begins to Run on Date First Return is Filed, Not Date Superseding Return is Filed

In Chief Counsel Advice 202026002[1] the IRS looks at whether the filing of a superseding return following the filing of the first tax return that was placed on extension changes the starting date for the statute of limitations on the assessment of tax or claiming a refund.

Superseding Returns

A superseding return is a term that has been coined to describe a change made to a tax return after a return has already been filed, but before the due date of the return (including extensions if requested).  If the return was placed on extension before the first return was filed, the superseding return can be filed up to the extended due date of the return, otherwise the superseding return would be due by the original due date of the return.

A superseding return is a special category of amended returns.  The key difference is that, for many purposes, the superseding return replaces the return originally filed, allowing, for instance, a taxpayer to make an election that can only be made on an original tax return.  The CCA describes the history of the doctrine, arising from the case of Haggar v. Helvering, 308 U.S. 389 (1940):

In Haggar, for purposes of a new capital stock tax, the taxpayer was required to declare the value of its stock on what the statute referred to as the “first return.” The taxpayer could declare any value of capital stock for its first taxable year, but the declared value for the first year was a controlling factor for the computation of excess profits tax for later years. The statute provided that the declaration once made could not be amended.

On a timely filed return, Haggar mistakenly reported the par value, as distinguished from actual value, of its issued capital stock. Before the due date, it filed a superseding return declaring the actual value. The Commissioner, refusing to accept the value of the capital stock declared in the superseding return, gave notice of a deficiency in excess profits tax calculated upon what was declared in the first return. Noting that the government was not prejudiced, that the purpose of the statute was not thwarted, and that there was a longstanding administrative practice of accepting superseding returns in other contexts, the Court observed:

“First return” thus means a return for the first year in which the taxpayer exercises the privilege of fixing its capital stock value for tax purposes, and includes a timely amended return[2] for that year. A timely amended return is as much a “first return” for the purpose of fixing the capital stock value in contradistinction to returns for subsequent years, as is a single return filed by the taxpayer for the first tax year.

Haggar, 308 U.S. at 395–96.

Over the years, Haggar has come to stand for the proposition that a superseding return, whether filed on extension or not, is effective for most purposes. For example, courts have held that many elections required to be made on a timely return can be made or changed on a superseding return. See, e.g., National Lead Co. v. Commissioner, 336 F.2d 134 (2d Cir. 1964) (inventory accounting relief provision); Charles Leich & Co. v. United States, 329 F.2d 649 (Ct. Cl. 1964) (excess profits tax election); Wilson v. United States, 267 F. Supp. 89 (E.D. Mo. 1967) (partnership tax year); Cf. J.E. Riley Investment Co. v. Comm’r, 311 U.S. 55 (1940) (“[Haggar] would compel the conclusion that had the amended return been filed within the period allowed for filing the original return, it would have been a first return [for purposes of determining percentage depletion election]. . . .”) (citations omitted).

Superseding returns have gotten some additional discussion since the Bipartisan Budget Act of 2015 partnership audit rules began to apply—while generally a partnership cannot amend its return if it is covered by the BBA rules (rather having to go through the complex administrative adjustment request process for a BBA partnership), a superseding return can still be filed up to the due date or extended due date of the partnership return.  The superseding return allows the change to be simply passed out to the partners for use on their individual returns for the year in question.

Statute of Limitations and Superseding Returns

But while a superseding return supplants the original return for purposes of elections and the like, does it also move the date of filing of the return for purposes of starting the statute of limitations running under IRC §6501 (for the IRS to assess additional tax) or §6511 (for a taxpayer to file a claim for refund)?

In the fact pattern under consideration in this memorandum, the taxpayer had filed for an extension of time to file a corporate income tax return.  Prior to the expiration of the extension period, the taxpayer had filed its tax return.  However, the taxpayer noticed an error on the return and, again prior to the extended due date, filed a superseding return.

More than three years after the first return was filed, but less than three years after the superseding return was filed, the taxpayer filed a claim for refund.

The fact the returns were filed on extension made this an issue.  If the returns had been filed before the regular due dates with no extension, neither statute would have begun to run until that due date arrives—so in that case it wouldn’t matter which return triggered the beginning of the statute because the result would be the same.  Any assessment or claim must be raised prior to three years following that original due date.

But with returns on extension, the statute begins running on the date the return is filed.  So, in this case, if the original return’s filing date is used to determine the date when the statute begins to run, the claim was not filed timely.  As the CCA explains:

If both returns are filed before the original due date, this ambiguity has no effect on when the statute of limitations begins because a return filed before the last day prescribed for filing is deemed filed on the last day. See I.R.C. §§ 6501(b)(1) and 6513(a). Thus, in that situation, regardless of which return is “the return,” the statute will begin on the original due date for the return. But a return filed on extension is treated as filed on the day it is received. See, e.g., First Charter Financial Corp. v. United States, 669 F.2d 1342 (9th Cir. 1982) (finding that return filed during automatic extension period was filed when received for purposes of statute of limitation on assessment). So where the first return is filed before the last date prescribed for filing (original or extended), and a second return is subsequently filed during the extension period, the statute would begin running on different dates, depending on which return is “the return” for purposes of section 6501(a) or 6511(a).

The memorandum argues that it is the first filed return, and not the superseding one, that triggers the beginning of the running of the statute.  The memorandum looks to the cases of Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934) and National Paper Products Co. v. Helvering, 293 U.S. 183 (1934) to justify this conclusion.

In these two related cases, the issue before the Supreme Court was substantially the same, but the facts were slightly different. In both cases, new statutes were enacted after two companies had already timely filed their tax returns. Each statute affected income tax and was effective retroactively. In response to the new law, “[National Paper] filed an additional return, supplementing the original one by a statement of the additional taxes due.” Nat’l Paper, 293 U.S. at 186. Zellerbach Paper, on the other hand, “did not make a new or supplemental return correcting the computation in the one on file.” Zellerbach, 293 U.S. at 175. In both cases, the Commissioner issued a notice of deficiency after the limitation period for assessment had run from the original returns’ filing date.

The taxpayers argued that the notices of deficiency were untimely. The government’s position was that, since the original returns did not incorporate the changes under the statute, the original return in both cases was a nullity, so the statute of limitations on assessment had not begun to run with the filing of the original returns. The Court disagreed. Discussing what is now known as the Beard test, the Court found the original returns filed by both Zellerbach Paper Company and National Paper met that test and started the statute of limitations for assessment. Thus, the notices of deficiency were untimely.

The court disagreed with the government’s argument that starting the period of limitation for assessment with the original return unfairly curtails the government’s time for audit and assessment:

[A] second return, reporting an additional tax, is an amendment or supplement to a return already upon the files, and being effective by relation does not toll a limitation which has once begun to run. . . . Supplement and correction in such circumstances will not take from a taxpayer, free from personal fault, the protection of a term of limitation already running for his benefit.

Id. at 180.2 In coming to this conclusion, the Zellerbach Court deemed a loss of four months for audit insignificant, Id. at 181, and it apparently did not find a loss of ten months alone to be a factor that would change its decision in National Paper. Nat’l Paper, 293 U.S. at 185.

Although the returns in Zellerbach and National Paper were not superseding returns, the memorandum concludes that this would not have an impact on the holding:

The reasoning of Zellerbach also applies with equal force to superseding returns filed on extension. In both superseding- and amended-return situations, if the second return were to restart the limitations period, the taxpayer would lose the protection of the assessment statute for the period between the dates the two returns were filed. This is unfair to the taxpayer and thwarts the purpose of the statute of limitations, which, in the tax context, is “to cut off rights that might otherwise be asserted. . . .” See Kavanagh v. Noble, 332 U.S. 535, 539 (1947) (citing Rosenman v. United States, 323 U.S. 658, 661 (1945)), reh’g denied, 333 U.S. 850 (1948). This purpose is served best when the original return starts the period of limitations.

The loss of time to audit the superseding return, even if the superseding return were filed at the end of a six-month automatic extension period, does not influence our conclusion that an original return, despite its inaccuracy, is the return for purposes of the statute of limitations on assessment, and the filing of a superseding return during an extension period does not restart the period of limitations. See Zellerbach and National Paper (Court was unmoved by losses of four and ten months, respectively).

But doesn’t Haggar tell us that the superseding return is treated as the original return?  In the memorandum’s view not for purposes of restarting the statute once the second return is filed.  The memorandum reasons:

Nonetheless, Haggar does not compel a conclusion that a superseding return is “the return” for purposes of the statute of limitations. It has never been applied in that context; nor should it be because the purpose of the statute of limitations is distinct from the purpose of the statute in Haggar and from the purposes of the statutes covering elections and penalties to which Haggar has been applied. While Haggar has been applied to statutes aimed at determining what substantively is included in the return, the statute of limitations is a mechanical rule with the purpose of cutting off rights, as discussed above.

The IRS also argues that there is no conflict between the Haggar and Zellerbach decisions:

Furthermore, Haggar does not conflict with Zellerbach. A superseding return modifies or supersedes an original return under Haggar and still relates back to the date of the original return for timing purposes under Zellerbach. Zellerbach recognizes that a second return, although it does not restart the limitation period, is still “an amendment or supplement to a return already upon the files, and . . . [is] effective by relation.” Zellerbach, 293 U.S. at 180; see also Wilson, 267 F. Supp. at 91 (suggesting that the question Haggar addresses is “whether or not an amendment is part of a first return”) (emphasis added); Barber v. Comm'r, 64 T.C. 314, 317 (1975) (noting that if the amended return had been timely filed, then under Haggar, “[the amended] return might then be treated as part of the original return”).

The IRS view is that the superseding return is simply treated as if it had been in the return that was first filed.  Thus, the date of filing of the original return remains the same, and only the contents of that return are treated as being modified.

Example

Wanda filed for an extension of time to file her 2018 income tax return.  She filed a return on June 30, 2019.  Later Wanda discovered she had failed to make an election that was required to be made on her original return, so she files a superseding return on October 1, 2019.

Even though the superseding return was filed on October 1, 2019, the statute for Wanda to file a claim for refund will still end on June 30, 2022.  The same is true for the time the IRS has to assess tax on Wanda’s 2018 return.  The original return filing date of June 30, 2019 is treated as the date on which both statutes begin to run.


[1] Chief Counsel Advice 202026002, Internal Revenue Service, June 26, 2020, https://www.irs.gov/pub/irs-wd/202026002.pdf (retrieved June 27, 2020)

[2] Some CPAs seem to believe that, in order to get superseding treatment, the revision cannot be filed on an amended return form.  Clearly, the case from the Supreme Court that created this treatment has no such