BMW’s $38.4 Million Tax Refund Claim

 

I had a partner who would likely snap if you mentioned a superseding tax return.

We had one go south. We electronically filed an individual tax return before April 15^th. We then learned that the return had omitted a significant transaction. Many tax practitioners would file an amended return after April 15 and square up with the IRS at that time. Since there was still time before April 15 and the dollars were enough to draw a significant penalty – and I have a big mouth – we decided to file a superseding return instead.

It did not go well. The IRS got surprised with the superseding, as it received a second return which was not marked “amended.” The IRS was paralyzed and assumed a filing mistake. The taxpayer had sent a check, which the IRS of course refunded. We had the client void and return the check, as taxes were due when the dust eventually settled. We could not resolve the matter administratively and wound up in Appeals. The issue was eventually resolved, but at needless time and cost – and a practitioner who may have forsworn superseding returns for the remainder of his career.

I am now looking at a case involving a $38.4 million tax refund and a superseding return.

With the above story as background, let’s start.

The case involves BMW US, itself a subsidiary of BMW AG (the German parent).

• The 2019 BMW US return was due April 15, 2020 and extended to October 15, 2020.

• BMW US filed its 2019 corporate (Form 1120) tax return on September 15, 2020.

• On October 14, 2020, BMW US filed a 2019 superseding Form 1120.

• On October 13, 2023 BMW US filed an amended 2019 return requesting a refund of $38,436,000.

COMMENT:  A C corporation return (such as the BMW US Form 1120) is initially due 3 and ½ months after year-end. For a calendar year-end return, that initial due date would be April 15. An extension is available for six months, making the extended due date October 15. A superseding return – by definition – must be filed on or before the due date (original or extended) of the return. We can see what BMW US was doing: it filed a 2019 superseding return on October 14, 2020 – one day before the extended due date. Had BMW US filed on October 16, it would have needed to file an amended return, as it would have been one day too late to file a superseding.

Let’s talk about superseding returns in general. To be fair, you can have a long and prosperous tax career and never file a superseding. Like so much of tax practice, it depends on your clients and what they get themselves into.

Think of a superseding return as a do-over. There is something on the initially-filed return that you want to change, and an amended return will not work (or work as well). There are elections, for example, that cannot be made on an amended return. A BBA partnership comes to mind. One does not amend a BBA partnership (unless one is able to elect out) the same way as other tax returns. There instead are special procedures - called the administrative adjustment request (AAR) process - which require IRS permission and which you must follow. I elect out of BBA for my partnerships whenever possible, as the AAR process is a pain.

The superseding - while its requirements are strict – steps into and takes the place of the initially-filed return.

Tax returns fall into three categories:

• Initial returns

• Superseding returns

• Amended returns

Initial and superseding returns filed before April 15 are deemed filed on April 15. The statute of limitations period begins on April 15.

Returns filed after April 15 but within a valid extension period are treated as filed on the date received by the IRS. The statute of limitations period begins on the date received.

Amended returns received after the valid extension period must be received within the statute of limitations period.

What happened to prompt BMW US to file a superseding?

On September 21, 2020 the IRS issued new Regulations addressing changes to depreciation under Section 168. More specifically, the changes were taxpayer-friendly, and BMW US wanted the new depreciation expense.

The Court found itself facing a new issue: when does the statute of limitations for refunds start when both initial and superseding returns are timely filed within an extension period?

The BMW US case went before the U.S. Federal Court of Claims.

The IRS position was straightforward:

• The initial 2019 return was due April 15, 2020.

• The 2019 return was extended to October 15, 2020.

• The return was filed on September 15, 2020. This is the initial return and begins the Section 6511 statute of limitations period for refunds.

• A superseding return was filed on October 14, 2020.        

• An amended return was filed October 13, 2023. This filing was outside the statute of limitations period, which started September 15, 2020 and expired September 15, 2023.

Code § 6511 - Limitations on credit or refund

(a) Period of limitation on filing claim

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

(b) Limitation on allowance of credits and refunds

(1) Filing of claim within prescribed period

No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

The IRS cited two Supreme Court decisions on its side: Zellerbach and National Paper Products. Those decisions however involved Section 6501, which is the statute of limitations for IRS assessment.

Code § 6501 - Limitations on assessment and collection

              (a) General rule

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

The Supreme Court reasoned that a second return acts as an amendment or supplement to the initially-filed return. What it did not do is toll a limitation (referring to Section 6501) which has already begun to run.

BMW US fired back:

• This is not a case involving Section 6501 (the statute of limitations for the IRS to assess tax). Rather it is a case involving Section 6511 (the statute of limitations for the IRS to issue refunds).

• That being so, reliance on Zellerbach and National Paper Products is misplaced.

• The court should rely instead on Haggar, which dates back to the era of excess-profit tax. Capital stock was included in the calculation of excess profit, and once that value was declared it could not be changed. Whether a superseding took the place of an initially-filed would have meant something. 

• In Haggar the taxpayer whiffed on the calculation of capital stock. Before the due date it filed a superseding return. The IRS refused to accept it. The case went to the Supreme Court, which reasoned with the concept of a “first return.” It decided that the superseding was a first return, and Haggar won its case.

• Relying on Haggar, the Section 6511 limitations period began on October 14, 2020, when the superseding return - that is, the “first return” - was filed.

• This would make the amended return (October 13, 2023) timely filed. 

The Court observed:

The parties have found no directly analogous precedent for determining the operative trigger to start the statute of limitations when the IRS provided a taxpayer with an extension, and both the initial and superseding returns are filed before that extended deadline.”

I agree. I do not remember ever seeing this fact pattern in my career.

The Court philosophized: there can only be one “initial” return.

The Court reasoned that both Zellerbach, National Paper Products, and Haggar could be read together without inconsistency. Haggar addressed the substance of the return, its elections and disclosures.  Zellerbach and National Paper Products instead addressed the Section 6501 statute of limitations. They were addressing different issues, so the decisions do not contradict.

BMW US noted that Zellerbach and National Paper Products were Section 6501 cases. This was not a Section 6501 case. It was instead a Section 6511 case. The two Sections could – depending on their drafting - yield different results, as the use of Section 6501 reasoning might not apply to a Section 6511 case.  

The Court was concerned that BMW US’ argument would whipsaw the IRS. A taxpayer could reset the three-year period for a refund under Section 6511 by timely filing a superseding return, whereas the IRS would have to use the initially-filed return for the three-year assessment period under Section 6501.

COMMENT: True, but if that is how Congress drafted it then Congress would have to change the law.

The Court decided that it would apply Zellerbach and National Paper Products to Section 6511, making BMW US’ $38.4 million refund request untimely. Except …

… there is another case in the works that might affect this decision.

It is the Kwong case. It comes out of the COVID era, when the IRS postponed numerous filing and payment deadlines.

These postponements are called “tolling” in tax jargon. Let’s say that you have 12 months to file something, but for whatever reason there is a toll of three months. You now have 15 months to file that something.

The Court called intermission on BMW US pending Kwong.

BMW US may yet have game.

Our case this time was BMW (US) Holding Corporation and Subsidiaries v United States, US Court of Federal Claims, No. 1:25-cv-01984.

What Makes A Tax Extension Valid?

 

You file an extension on April 15th for your personal tax return.

Is the extension valid if you wind up owing money but entered zero (-0-) on line 6?

What if you entered a balance due on line 6 but entered zero (-0-) on line 7?

A couple of things come immediately to mind:

(1)  There are clients – numerous clients – who have no intention of fully paying their taxes by April 15^th. The best the CPA can do is get them to pay something - anything - to take the pressure off the tax due (plus interest and penalties) when they finally file. I have heard the scold many times over the decades: the tax should be fully paid-in by April 15; the extension is for time to file not time to pay; yada yada. This is not a classroom, folks. This is real life, and I cannot control people. I think that I do some good just by nudging clients closer to compliance with the tax law.

(2)  Are you trying to get me sued? What if I (i) enter a number on line 4 but (ii) file the extension with no payment due (line 6)? Will the IRS bounce the extension? This is where procedural consistency is critical. I need high confidence in how the IRS will process this extension.

Let’s look at Karp.

The Karps wanted the IRS to apply a 2016 tax overpayment (of $336,558) to a later tax year.

Problem: The Karps were not diligent about filing tax returns on time. They were counting on that huge overpayment/carryover to keep them out of trouble. While true, there are ways this can blow up.

The IRS told the Karps that the 2016 overpayment could not be applied to 2017 because they filed the 2016 return in April 2021.

COMMENT: That’s how it blows up: you have to get that return in within 3 years (plus the extension, if you obtained one). The 2016 return was due April 15, 2017. Three more years is April 15, 2020. The IRS did not receive the return until April 2021 - a year late.

The Karps responded with proof that the IRS received their 2016 return on October 15, 2020.

COMMENT: Good! That is why practitioners recommend certified mail (which is becoming a dinosaur as we move to electronic filing) with proof of mailing.

FURTHER: We are not told whether the Karps actually waited until the last day for filing or were instead impacted by IRS closures during COVID.

The IRS backed down when presented proof. The IRS refunded $154,720 and credited the remaining 2016 overpayment to 2022.

The IRS then changed its mind.

Huh?

The IRS argued that the 2016 extension was invalid.

Because it was invalid, there was no extension until October 15, 2017.

Which means that the 2016 return filed October 15, 2020 was outside the three-year window (without the extension, that date was now April 15, 2020). The IRS wanted its $154,720 back. Oh, the IRS also reversed the portion of the overpayment that was credited to 2022.

“No soup for you” snarled the IRS.

Let’s catch our breath.

First, what was the IRS’ reasoning to blow up the 2016 extension?

The IRS looked at Form 4868 and saw zero (-0-) on both lines 5 and 6.

Mind you, the Karps had a sizeable overpayment from 2015 to 2016 (in fact, the Karps had reported sizeable overpayments for years). There was enough there to pay a subsequent year’s tax and send the Karps a refund check for 2016.

The IRS was relying on a Tax Court case (Crocker) where the taxpayer did not appear to even try to estimate the tax due on the extension. When finally filed, the return showed significant additional income and tax (because: of course). The Court agreed with the IRS that the extension was void. The return was late. Penalties. Interest. Brussels sprouts and lima beans. It was catastrophic.

Second, how was the IRS to know?

The 2015 return had not been received or processed by the time the 2016 extension arrived. Maybe - if the Karps ever got around to filing a tax return on time - the IRS might have had a clue of knowing what they intended for 2016.

While I disagree, I do have some sympathy for the IRS.

First, the Court noted that the Karps had a track record of (a) huge overpayments that (b) they repetitively applied to the following tax year.

COMMENT: I personally think this was THE factor that saved the Karps here.

The Karps looked at that overpayment and said: we do not owe anything for 2016. They then put zeros all over that Form 4868. Technically, they should have put (1) estimated gross tax on line 4; (2) the overpayment on line 5: and the (resulting) negative amount on line 6. The Karps did not do that, explaining that they mistakenly thought that the tax estimate was the amount they would be required to pay upon filing. The Court considered it a ministerial error, and they had conflated gross tax with net tax.

The Court also pointed out – devastatingly, I think – that the IRS initially accepted the 2016 return, including the extension as filed. That is why the IRS now wanted the refund check back.

Second, the Court noted that the IRS was put in a tough spot, as it did not have a 2015 return when processing the 2016 extension.

While it was easy for the Court to point out that the Karps had applied their prior overpayments, the IRS could not automatically predict that they would do so again. This dance was getting close to: heads you win, tails I lose for the IRS.

The Court pointed out that the Karps were still within procedural guardrails. They pushed it, but they got it done within three years.

Technically correct, but not an optimal real-world approach to tax filing.

The Court ordered summary judgement for the Karps and instructed both sides to sort the dollars involved and report the results back to for judgement.

I point out that this was not a Tax Court case. It was heard in the Court of Federal Claims, which hears civil claims against the federal government. While specialized (cases against the U.S. government), it is not the same specialization as the Tax Court (which hears only tax cases).

The cynical part of me wonders if the verdict would have been the same had the case gone to Tax Court. The Karps had an advantage: many cases go to Tax Court because one does not need to pay the tax before bring suit in Tax Court. Here, the Karps had already paid the tax (hence the huge overpayment), so filing outside the Tax Court was an option.

Our case this time was Karp v United States, U.S. Court of Federal Claims, No. 23-926, filed May 21, 2026.