Editor: Mark G. Cook, CPA, CGMA
In Chief Counsel Advice (CCA) 202026002, published June 26, 2020, the Chief Counsel determined that the original return and not the superseding return is "the return" starting the three-year statutory period for assessment under Sec. 6501 or for filing a refund claim under Sec. 6511. In this CCA, the Chief Counsel deviated from prior guidance in which it determined that an amended return constitutes "the return" that starts the statute ticking under Sec. 6501 (CCA 200645019).
Under Sec. 6501(a), the IRS must assess additional tax for a given tax year within three years after "the return" for that year was filed. Under Sec. 6511(a), a taxpayer must file a claim for refund of any tax within three years from the time "the return" was filed or two years from the time the tax was paid, whichever period expires later. On their face, these statutes are ambiguous as to whether the original return or a superseding return is "the return" that begins the running of the clock on the statute of limitation.
A superseding return is a return filed subsequent to the originally filed return and filed within the filing deadline. Under Sec. 6501(b)(1), if both the original return and the superseding return are filed before the original deadline, then there is no effect on the limitation period because both returns are deemed filed on the due date. However, a return filed on extension is considered filed when it is received (see, e.g., First Charter Financial Corp., 669 F.2d 1342 (9th Cir. 1982)). Consequently, in cases where a second return is filed during the extension period, the starting date of the statute of limitation depends on which return is "the return" for purposes of Sec. 6501(a) or 6511(a).
Previously, in CCA 200645019, the Chief Counsel primarily relied on Haggar Co., 308 U.S. 389 (1940), in determining that the superseding return is considered "the return." The Supreme Court in Haggar ruled that the amended return would be considered "the return" for purposes of determining a corporation's first return. Over the years, Haggar has come to represent that a superseding return, whether filed on extension or not, is effectively considered "the return" for most purposes. For example, a taxpayer may properly make an election on the superseding return when it did not do so on the original return (see National Lead Co., 336 F.2d 134 (2d Cir.1964)). Essentially, where the superseding return aims to make changes to the content of the return, it will be honored as if it were the original tax return.
Unlike CCA 200645019, in CCA 202026002 the Chief Counsel uses the related cases of Zellerbach Paper Co., 293 U.S. 172 (1934), and National Paper Products Co., 293 U.S. 183 (1934), to support its view that the original return begins the statute of limitation, thereby drawing a distinction for limitation purposes. In these cases, the IRS issued a notice of deficiency after the limitation period for assessment had run from the original returns' filing date. The issue in these cases was whether the statute of limitation had begun running on the date of the original tax return, even though it contained errors that required amendment. The Supreme Court found that the original returns filed in National Paper and Zellerbach met the definition of a "proper return" under what is now known as the Beard test (see Beard, 82 T.C. 766 (1984), aff'd, 793 F.2d 139 (6th Cir. 1986)). Under this test, an original tax return must (1) purport to be a return; (2) be signed under penalty of perjury; (3) contain sufficient information to allow the tax to be calculated; and (4) represent an honest and reasonable attempt to satisfy the requirements of the tax law.
In CCA 202026002, the Chief Counsel reasoned that although the original returns in National Paper and Zellerbach contained errors, they still retained essential characteristics of a proper return. As proper returns, they were immediately subject to assessment upon filing and were therefore the natural starting point for the statute of limitation. The court in Zellerbach clarified that the superseding return is simply treated as if it had been in the return that was first filed. Thus, the date of filing remains the same, and only the contents of the original return are treated as being modified. Essentially, while a second return has the power to relate back to the original return in substance, it cannot toll a limitation once it has begun to run.
Whereas Zellerbach is distinguished from Haggar, the two cases are not in disagreement. Haggar sets the precedent for amending the substance of a return, while Zellerbach touches on timing for statute-of-limitation purposes. The Supreme Court validates the difference in treatment by acknowledging that the statute of limitation is a mechanical rule with policy at the heart of its purpose. To illustrate the effect of Zellerbach, an example is warranted:
Example: A taxpayer timely extended its time for filing from March 15 to Sept. 15. The taxpayer timely filed its original return on Sept. 10, before the extended due date. After noticing a mistake, the taxpayer subsequently filed a superseding return on Sept. 15, correcting the error prior to the extended due date. Under the reasoning in Zellerbach, the statute of limitation would begin running on Sept. 10 when the original return was filed. Therefore, the IRS should use the filing date of the original return as the beginning of the statutory period for assessment and for claiming a refund.
The reasoning in Zellerbach has been determined to broadly apply for statute-of-limitation purposes (Badaracco, 464 U.S. 386 (1984)). Furthermore, although Zellerbach only discusses the issue of assessment, it has been construed by courts to also apply in the case of refunds. In Kaltreider Construction, Inc., 303 F.2d 366 (3d Cir.), cert. denied, 371 U.S. 877 (1962), the court held that the statute of limitation for refund began on the filing of the original return because the language of Zellerbach is directly on point.
Considering the above, one of the effects of CCA 202026002 is to draw attention to the distinct policy purpose of the statute of limitation. The Supreme Court respects that the statute of limitation is a policy matter for Congress and the judiciary must strictly adhere to it. It gives great weight to Congress's overarching goal to create a cutoff point for untimely claims and encourage a timely resolution to all claims. The Court acknowledges that its interpretation may impose a hardship on the government's right to assessment by shortening the statute-of-limitation period under Sec. 6501. By contrast, under Sec. 6511, the hardship falls upon the taxpayer that may have a shorter time period to request a refund. By concurrently enforcing Secs. 6501 and 6511, the outcome encourages timely action by both the government and the taxpayer and, in doing so, maintains a strict adherence to long-standing policy considerations.
Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600 or email@example.com.
All contributors are members of SingerLewak LLP.