Effect of superseding returns.

If a taxpayer files two returns for the same period on or before the due date, the IRS generally will consider the second return filed as the original return; see IRM 120.1.3.2.7 and Rev. Ruls. 78-256 and 83-36. For example, if a calendar-year corporate taxpayer files an income tax return on February 1 and then files a second return on March 15, the March 15 return will supersede the February 1 return. The Service treats the last corporate return filed on or before March 15 as "the return" for all Code purposes.

The question arises, however, as to whether the IRS would adopt a similar position for a second return filed pursuant to a properly filed extension. Put simply, does a return filed by a calendar-year corporate taxpayer on or before September 15 pursuant to an extension supersede a return previously filed on July 15? The answer to this question could affect the manner in which a taxpayer chooses to elect certain types of tax treatment not included in the original filing.

Supreme Court Decision

In Haggar, 308 US 389 (1940), the Supreme Court seemingly addressed this issue. The taxpayer in that case filed a second return during the extension period, correcting a capital-stock valuation. The National Industrial Recovery Act of 1933 required corporations to pay an excess-profits tax based on a capital stock's declared value. The declaration had been reported on the corporation's first return after the close of its tax year. The value reported on the second return was greater than that reported on the first return.

The Service argued that the statute's language precluded a company from reporting a value for the stock other than that reported on the "first return." The Supreme Court held that the statutory phrase "first return" meant a return for the first year that the taxpayer fixed the stock's value; thus, the term also included a second return filed within the filing period (including extensions).

The following year, the Supreme Court emphasized its focus on the second return's timing when it considered a slightly different fact pattern. In Scaife Co., 314 US 459 (1941), the Court did not allow a taxpayer to amend the declared value of its capital stock because the taxpayer had failed to file a request to extend the time for filing the return. Thus, the original due date for filing the declaration had expired at the time the taxpayer attempted to correct the capital stock value. The Court distinguished this case from Haggar on the grounds that in the earlier case, the taxpayer had filed the second return within the extended time period for filing its return for the tax year.

IRS's Position

The Service subsequently followed the Haggar holding in Rev. Rul. 78-256. The ruling addressed whether a corporation's amended return, which was filed prior to the extended due date of the corporation's return, was the "return" for purposes of determining whether there was an underpayment of estimated taxes for that year. Citing Haggar, the IRS held that the second return, flied prior to the taxpayer's extended due date, was the return for estimated tax purposes.

This treatment also has been supported in Letter Ruling 9018039. A taxpayer filed a timely request for an extension to Aug. 15, 1989 to file its original return. It filed the return on May 19, 1989. Due to an oversight, the May 19 return failed to make a Sec. 1042 election to defer the gain on stock sold by the taxpayer to an employee stock option plan. Sec. 1042(c)(6) requires that taxpayers file deferral elections on or before the last day prescribed by law (including extensions) for filing a return for the year in which a sale occurs. On Aug. 8, 1989, prior to expiration of the extended due date, the taxpayer filed a second return including the proper election. The Service held that because the taxpayer had requested an extension to file the return for the year at issue, and the taxpayer filed a corrected return prior to the expiration of that date, the election had been timely made.

Taxpayer Gets Extension, But Files on Time

The foregoing authorities support the proposition that a second return should be treated as a superseding return when both returns are filed by the statutorily extended due date. However, it is not as clear that a second return will be treated as a superseding return when a taxpayer timely files a request to extend its return's due date but actually files the return on or before the statutorily prescribed due date (e.g., March 15 for a calendar-year corporation). In this situation the issue is whether the extension is effective (because the taxpayer filed by the original due date, the extension is technically unnecessary). In this particular situation, it is not clear that a second return will be treated as superseding the first return. However, there is a way that a taxpayer in this situation can achieve certainty as to the validity of an election made on a return filed within six months of the statutorily prescribed due date of the original return.

When the taxpayer timely files its original return on or before the original due date, the regulations provide relief for making elections that are due either by the return's original due date or its extended date. Under Regs. Sec. 301.9100-2, taxpayers that timely file their returns are granted an additional six months after the return's due date (excluding extensions) to make any regulatory or statutory elections whose due dates are the return's due date or its extended date. The regulations specify the procedural requirements that must be followed to ensure that such filings will be treated as timely under this provision. This automatic-extension period, however, does not apply to regulatory or statutory elections that must be made by the return's due date, excluding extensions.

Given the relief provided by the regulations, it may be advisable for taxpayers that timely extended their Federal return's filing date, but actually filed before the statutorily prescribed due date, to follow the procedures in the regulations to make an election not made in an original filing, rather than to rely on the superseded-return doctrine. By contrast, if both the original and the subsequent filings occur during a validly extended filing period, either approach should allow a taxpayer to make a timely election that originally had been overlooked.

FROM RUTH PEREZ, J.D., AND DONALD T. ROCEN, J.D., LL.M., WASHINGTON, DC

Editor:
Annette B. Smith, CPA
Partner
Washington National Tax Service
PricewaterhouseCoopers
Washington, DC