Superseding returns and statutes of limitation

Editor: Valrie Chambers, CPA, Ph.D.

In a recently published Chief Counsel advice (CCA), the IRS indicated that a superseding return, which is a second return filed before the validly extended due date for the return, is effectively ignored for purposes of the statute of limitation on assessment under Sec. 6501 and the statute of limitation for refund claims under Sec. 6511. This approach is at odds with the Supreme Court precedent regarding superseding returns, which otherwise treats such filings as the “first return.” The CCA’s approach means that the IRS will calculate the statute of limitation on assessment from the earliest filed return. Likewise, taxpayers with potential refund claims may want to follow the same conservative approach of measuring the statute of limitation from the earliest filed return to ensure that their refund claim is not time-barred.

The topic of superseding returns is particularly timely because with the economic hardships and cash flow challenges arising from the current pandemic, many taxpayers are opting to take advantage of certain procedures to obtain tax refunds as quickly as possible. For instance, many corporate taxpayers are looking to expedite receipt of refunds resulting from the application of the net operating loss (NOL) provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. In many cases, obtaining a refund early in the tax filing season will require the filing of an original return and making a carryback claim for the NOL followed by a superseding return. However, taxpayers should consider certain procedural implications of filing superseding returns.

Superseding returns generally

A superseding return is defined as a second (or subsequent) return filed on or before the due date for filing, including extensions. In contrast, an amended return is one filed after an original return and after the due date, including extensions. Historically, a superseding return, or a second return, was generally deemed to replace or supersede the original return for all purposes of the Code. However, CCA 202026002 has challenged that assumption by concluding that a superseding return does not, in fact, replace an original return for purposes of determining the statutes of limitation for assessments and for the filing of refund claims.

CCA 202026002

In CCA 202026002, the IRS took the position that both the statute of limitation on assessment under Sec. 6501 and the statute of limitation on refund claims under Sec. 6511 start running upon the filing of the first return, and not the superseding return. This analysis turns the typical rules on superseding returns on their head. Under the analysis in the CCA, for statute-of-limitation purposes, it is the superseding return that is ignored, and the first filed return is considered efficacious.

CCA 202026002 presented two scenarios in which taxpayers filed superseding returns before the extended due date of Form 1120, U.S. Corporation Income Tax Return. In the first scenario, the taxpayer failed to file a copy of Form 3115, Application for Change in Accounting Method, with the original return. The taxpayer subsequently timely filed a superseding return that included the missing Form 3115. More than three years after filing the original return, but less than three years after filing the superseding return, the taxpayer filed a Form 1120X, Amended U.S. Corporation Income Tax Return, and claimed a refund. In the second scenario, the taxpayer also timely filed a superseding Form 1120 in which it reported losses additional to those reported on the original Form 1120, which resulted in a larger claim for refund.

The CCA considered two questions:

• When an original return and a second return are filed before the extended due date of the return, which return constitutes “the return” for purposes of starting the three-year statute of limitation under Sec. 6501?
• When an original return and a second return are filed before the extended due date of the return, which return constitutes “the return” for purposes of starting the statutory period for filing a refund claim under Sec. 6511?

In response to both questions, the CCA concluded that the original return, i.e., the first return, constitutes “the return” for purposes of starting the running of both statutes of limitation.

In reaching these conclusions, CCA 202026002 relied on two Supreme Court cases from 1934 in which newly enacted tax laws compelled a taxpayer to supplement original returns by filing an amended return (Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934), and National Paper Products Co. v. Helvering, 293 U.S. 183 (1934)). In both cases, the Supreme Court concluded that the filing date of the original return was the controlling date for purposes of applying the statute of limitation on assessments. Even though the 1934 Supreme Court cases involved the statute of limitation on assessments, the CCA concluded the same logic underpinning the Court’s decisions should be applied to the question of what constitutes the return for purposes of the statute of limitation for filing a refund claim.

Therefore, the CCA reaches the seemingly congruous conclusion that the original return, and not the superseding return, should start the running of both the statute of limitation on assessments and the statute of limitation on refund claims. However, in forcing a congruous conclusion, the CCA ignores the fact that Secs. 6501 and 6511 are operatively incongruous. For instance, the filing of an amended return does not limit the amount of tax the IRS may assess for that year. By contrast, Sec. 6511(b) contains rules limiting the amount of refund to which a taxpayer is entitled, depending on the timing of the amended return.

If the superseding return is not treated as the originally filed return for purposes of the statute of limitation on either assessments or refunds, the question remains as to how substantive positions taken on a superseding return could then be treated as being filed on a timely original return. For instance, if an election is required to be made on the return, how can that election be made timely on a superseding return if the original return, and not the superseding return, is considered “the return” for purposes of the statute of limitation on assessments and refund claims? The CCA addressed this concern by drawing a distinction between the purpose for enacting statutory limitations and the purpose underlying the requirement for reporting of substantive items, such as elections, on an original return.

Specifically, the CCA found that statutory limitations, unlike substantive reporting requirements, are designed to cut off rights that might be asserted by either the taxpayer or the government. As such, those limitations must be strictly adhered to in application. However, the CCA could have argued just as easily that many substantive reporting requirements, similar to statutory limitations, are also designed to cut off certain rights, such as the right to make an election. As such, there are many instances in which the Internal Revenue Code provides for strict limitations, which must be adhered to, on when and how to make an election.

Practically speaking, the Chief Counsel’s Office has taken a conservative approach in that it instructs IRS personnel to consider the statute of limitation on assessments to start running on the earlier possible date, i.e., the original filing date rather than the date a superseding return is filed. Under this reading, the IRS will not theoretically be at risk of jeopardizing its ability to assess tax if it adheres to the earlier of the two relevant dates. However, taxpayers must be mindful of the flip side of this approach in that the IRS will most likely challenge any refund claims made more than three years after the original return is filed. As with all CCAs, CCA 202026002 cannot be used or cited as legal precedent, but it should serve as a reminder that the IRS does not believe that a superseding return replaces an original return in all circumstances.