Refund Claims and the Saturday-Sunday-Holiday Rule of Sec. 7503

Editor: Annette B. Smith

When the last day prescribed by federal tax law for performing an act falls on a Saturday, Sunday, or legal holiday, Sec. 7503 treats performance as timely if the act is performed on the next succeeding day that is not a Saturday, Sunday, or legal holiday.

Example 1: If the due date of a corporate taxpayer’s federal income tax return is March 15, 2008, and March 15 is a Saturday, under Sec. 7503 a return filed on Monday, March 17, 2008, will be considered timely. That “extension” applies, however, only if the taxpayer files the return on March 17. If the taxpayer does not, the normal March 15 due date applies for purposes of computing penalties, etc.

In two revenue rulings issued almost 40 years apart, the IRS explored the effect of the Saturday-Sunday-holiday rule on the limitation periods applicable to refund claims.

Limitation Periods

Sec. 6511 provides two limitation periods. The first determines whether a claim for refund is timely; the second determines how much money, if any, can be refunded to the taxpayer, assuming its claim is meritorious. Both limitation periods must be satisfied, because a timely refund claim would be pointless if the taxpayer could not obtain the requested refund.

Sec. 6511(a) provides that in order for a refund claim to be timely it must be filed within three years from the time the relevant return was filed, or two years from the date the tax was paid, whichever is later. As shown in the following example, the interplay between this rule and Sec. 7503 is fairly straightforward.

Example 2: If a taxpayer’s original 2004 return was filed on March 15, 2005, and March 15, 2008, is a Saturday, a refund claim filed on Monday, March 17, 2008, would be considered timely.

Sec. 6511(b) limits the amount that may be refunded. If a taxpayer files a refund claim within three years from the date its return was filed, Sec. 6511(b)(2)(A) provides that the amount of the refund shall not exceed the amount of tax paid during a lookback period that begins on the date the refund claim is filed. The lookback period is three years, plus the period of any extension of time obtained by the taxpayer for filing the relevant return. The interplay between this rule and Sec. 7503 can be complicated.

In Example 2, a refund claim filed on Monday, March 17, 2008, would be timely with respect to an original return that was filed on March 15, 2005. However, applying the lookback rule of Sec. 6511(b)(2)(A) to that situation appears to present a problem for the taxpayer. Tracing back three years from March 17, 2008, only gets to March 17, 2005, and under Sec. 6513(b) the taxpayer’s estimated tax payments for 2004 (as well as any withholding and prior year’s overpayment applied to 2004 estimated tax) are deemed to have been paid on March 15, 2005, which is outside the lookback period.

Rev. Rul. 66-118

The IRS took a pragmatic approach to the situation presented in Example 2 in Rev. Rul. 66-118. While acknowledging that nothing in Sec. 7503 affects the time when tax is paid or deemed paid, the IRS held that imposing the limitation of Sec. 6511(b)(2)(A) “would obviously nullify the full effectiveness” of Sec. 7503. Accordingly, the IRS ruled that Sec. 7503 not only makes the refund claim filed on the Monday at issue timely, but for purposes of the lookback rule of Sec. 6511(b) the filing of the claim is considered to have occurred on the preceding Saturday (i.e., on the actual due date). As a result, the date on which the taxpayer’s withholding credits are deemed paid falls within the lookback period.

Rev. Rul. 2003-41

Rev. Rul. 2003-41 provides guidance on three other factual situations involving refund claims and Sec. 7503.

First, if the due date of a return falls on a Saturday, Sunday, or legal holiday but the taxpayer files its return before the due date (and is not relying on the “timely mailing equals timely filing” rule under Sec. 7502), Sec. 7503 does not apply. Instead, under Sec. 6513(a), the return will be deemed to be filed on the actual due date. Accordingly, in order to be timely, a refund claim must be filed within three years of the actual due date.

Second, if the due date of a return falls on a Saturday, Sunday, or legal holiday and the taxpayer files a valid extension for the return but fails to file its return by the extended due date, for purposes of the “three year plus extensions” lookback period of Sec. 6511(b)(2)(A), Sec. 7503 is not treated as having extended the return’s due date.

For example, assume the facts are the same as in Example 1, except the taxpayer does not file the return until March 31, 2008. Because Sec. 6513(b) treats withholding and estimated tax payments as having been paid as of the actual unextended due date of the return (Saturday, March 15, 2008), in order to obtain a refund the taxpayer must file its claim by March 15, 2011.

A refund claim filed on March 17, 2011, creates something of a paradox. The claim would be timely (since it would be filed within three years of March 31, 2008, the date on which the taxpayer actually filed its 2007 return), but a refund attributable to excess withholding or estimated tax payments would be barred by Sec. 6511(b)(2)(A) because tracing back three years from the March 17, 2011, claim date only gets to March 17, 2008. Since the taxpayer did not file its return on Monday, March 17, 2008, Sec. 7503 is not treated as providing the two-day extension necessary to bring the deemed payment date of March 15, 2008, within the lookback period of Sec. 6511(b)(2)(A).

Third, if the due date of a return falls on a Saturday, Sunday, or legal holiday and the taxpayer files its return on the next succeeding day that is not a Saturday, Sunday, or legal holiday, Sec. 7503 applies and is treated as having extended the due date of the return to that next succeeding day. For example, assume again the facts from Example 1. In this situation, Sec. 7503 is treated as having extended the due date from Saturday, March 15, 2008, to Monday, March 17, 2008. As a result, a refund claim filed on March 17, 2011, would be both timely and effective to obtain a refund. The claim would be timely because it would be filed exactly three years after the return was filed. The taxpayer’s estimated and/or withholding tax payments would be refundable because the date on which they were deemed paid—March 15, 2008—falls within the lookback period of Sec. 6511(b)(2)(A). As in the second situation addressed by Rev. Rul. 2003-41, tracing back three years from the March 17, 2011, claim date only gets to March 17, 2008, but here the taxpayer did file its return on that date. Therefore, Sec. 7503 is treated as providing the two-day extension necessary to bring the deemed payment date of March 15, 2008, within the lookback period of Sec. 6511(b)(2)(A).

EditorNotes

Annette B. Smith is with Washington National Tax Services PricewaterhouseCoopers LLP in Washington, DC

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.

If you would like additional information about these items, contact Ms. Smith at (202) 414-1048 or annette.smith@us.pwc.com.