First Charter Financial Corp. v. U.S.

• Decision Date: 26 February 1982
• Docket Number: Nos. 80-5262,80-5288,s. 80-5262
• Citation: 669 F.2d 1342
• Parties: 82-1 USTC P 9222 FIRST CHARTER FINANCIAL CORP., Plaintiff-Appellee-Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1342

669 F.2d 1342

82-1 USTC P 9222

FIRST CHARTER FINANCIAL CORP., Plaintiff-Appellee-Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant-Cross-Appellee.

Nos. 80-5262, 80-5288.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Oct. 7, 1981.

Decided Feb. 26, 1982.

David E. Carmack, Washington, D.C., argued, for United States; Johnathan S. Cohen, John F. Murray, Michael L. Paup, Richard D. Buik, Washington, D.C., on brief.

Robert J. Wynne, Hill, Wynne, Troop & Meisinger, Los Angeles, Cal., for First Charter Financial Corp.

Appeals from the United States District Court for the Central District of California.

Before SNEED, KENNEDY and SKOPIL, Circuit Judges.

SKOPIL, Circuit Judge:

FACTS

American Savings & Loan ("American"), a subsidiary of First Charter Financial Corporation, is a domestic building and loan association as defined in I.R.C. § 7701(a)(19). American reported its taxable income on the cash receipts method of accounting and its bad debt deduction under the reserve method. American loaned money secured, either directly or indirectly, by interests in real property. The direct security was a promissory note secured by a first lien deed of trust with a power of sale. Under the indirect financing method American bought the property and sold an option to a purchaser. In addition to charges for purchase and development of the property, American charged the purchaser "option fees" equivalent to the interest American would have charged on a comparable loan.

When borrowers defaulted on loans, American generally foreclosed. American acquired clear title to option property when an optionee defaulted. American's acquisition and disposition of the properties it acquired is governed by I.R.C. § 595. During the 1971 tax year American sold a number of section 595 properties.

American's 1971 tax return was due March 15, 1972. It received an extension to September 15, 1972. It mailed its return to the IRS on September 8, 1972, which received it on September 11. American treated the proceeds from the sale of security properties as a nontaxable credit to its bad debt reserve. American treated proceeds from the sale of option properties as taxable gain.

On September 5, 1975 American timely filed a refund claim. It asserted that the gain realized from the sale of option properties had been erroneously reported as taxable gain. On September 11, 1975 American executed an agreement with the IRS granting the IRS an extension to March 31, 1976 in which to assess a tax deficiency. This was later extended to September 30, 1976. Both extensions were conditioned on the first extension having been executed before the statute of limitations expired. On September 2, 1976 the IRS mailed a deficiency assessment to American. American paid under protest and filed another refund claim, alleging that this deficiency assessment was barred by the statute of limitations. The IRS denied American's claims, and American sued.

PROCEEDINGS BELOW

The district court held that the deficiency assessment was not barred by the statute of The government appeals the district court's holding that American was not required to recognize delinquent interest which it recovered from sale of section 595 properties. American cross-appeals, arguing that the deficiency assessment is barred by the statute of limitations and that its post-foreclosure disposition expenses are deductible. We affirm in part, reverse in part, and remand.

limitations. Yet it held that American was not required to recognize any of the gain it realized from the sale of section 595 properties as taxable income. The court also held that American's post-foreclosure disposition expenses were not deductible business expenses.

ISSUES

1. Was the 1971 deficiency assessment barred by the statute of limitations?

2. Were American's costs of selling section 595 properties deductible business expenses?

3. Was American required to recognize as ordinary income the accrued interest it recovered from sale of section 595 properties?

DISCUSSION

I. Standard of Review

The questions presented are legal. This court's review is de novo. This court generally defers to decisions of the Tax Court, and will not disagree with that court unless an unmistakable question of law so mandates. Merlino v. Commissioner, 660 F.2d 415, 416 (9th Cir. 1981); Cruttenden v. Commissioner, 644 F.2d 1368, 1374 (9th Cir. 1981). Uniformity among the circuits is especially important in tax cases to ensure equal and certain administration of the tax system. We would therefore hesitate to reject the view of another circuit. See Gulf Inland Corp. v. United States, 570 F.2d 1277, 1278 (5th Cir. 1978); North American Life & Casualty Co. v. Commissioner, 533 F.2d 1046, 1051 (8th Cir. 1976); Federal Life Insurance Co. v. United States, 527 F.2d 1096, 1098-99 (7th Cir. 1975).

II. Statute of Limitations

The Commissioner is required to assess any tax "within three years after the return was filed". I.R.C. § 6501(a). The parties agree that the deficiency assessment was timely if the statute of limitations had not expired when they executed the first extension agreement on September 11, 1975. American contends the statute started running when it mailed its return on September 8, 1972, and expired September 8, 1975. The IRS contends the statute began to run when it received American's return on September 11, 1972, making the deficiency assessment timely.

Before 1966 a return was "filed" and the limitations period started running on receipt by the IRS. E.g., Phinney v. Bank of the Southwest National Ass'n., Houston, 335 F.2d 266, 268 (5th Cir. 1964). In 1966 Congress amended I.R.C. § 7502(a) to apply to tax returns. As amended, the statute provides:

(1) Date of delivery.-If any return ... or other document required to be filed ... within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the ... office with which such return ... or other document is required to be filed ... the date of the United States postmark stamped on the cover in which such return ... or other document ... is mailed shall be deemed the date of delivery....

(2) Mailing requirements.-This subsection shall apply only if-

(A) the postmark date falls within the prescribed period on or before the prescribed date-

(i) for the filing (including any extension granted for such filing) of The IRS contends that section 7502 does not apply to this case, and that even if section 7502 does apply, the 1971 deficiency assessment was timely.

the return ... or other document ....

Treas. Reg. § 301.7502-1 interprets section 7502. Interpretive regulations merit less deference than legislative regulations implementing a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision. United States v. Vogel Fertilizer Co., --- U.S. ----, ----, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982); Rowan Cos. v. United States, --- U.S. ----, ----, 101 S.Ct. 2288, 2292, 68 L.Ed.2d 814, 821 (1981). Interpretive regulations should be followed "if found to implement the congressional mandate in some reasonable manner." United States v. Vogel Fertilizer Co., supra; Rowan Cos. v. United States, supra.

Regulation provides, in pertinent part:

(c) Mailing requirements. (1) Section 7502 is not applicable unless the document is mailed in accordance with the following requirements:

(i) The document must be contained in an envelope ... properly addressed to the ... office with which the document is required to be filed.

(iii)(a) If the postmark on the envelope or wrapper is made by the United States Post Office, such postmark must bear a date on or before the last date, or the last day of the period prescribed for filing the document.

(3) As used in this section, the term "the last date, or the last day of the period, prescribed for filing the document" includes any extension of time granted for such filing....

(d) Delivery....

(2) Section 7502 is applicable only when the document is delivered after the last date, or the last day of the period, prescribed for filing the document....

The regulation was issued before section 7502 was amended to include tax returns as well as other documents. American does not contend that the regulation does not also apply to tax returns. It has remained in effect since section 7502 was amended.

Section 7502 only applies where a document is delivered to the IRS after the last date prescribed for filing. American contends that it met this requirement. The original due date for its return was March 15, 1972. It mailed its return after that date, though before the extended deadline. American points out that section 7502(a)(2) specifically refers to extensions of time in stating the period within which a return must be mailed but that the delivery requirement of section 7502(a)(1) does not refer to extensions. American argues that whether the return had been received after the due date should be computed without reference to any extensions of time.

We reject this argument for the same reason that the Tax Court rejected it in Pace Oil Co. v. Commissioner, 73 T.C. 249 (1979). Section 7502(a) intended to make the date of mailing the date of delivery only where a document would otherwise be considered untimely filed. Section 7502(a)(1) "is sufficiently broad to include a period or date for filing prescribed by the Commissioner under authority of section 6081." Pace Oil Co., supra, 73 T.C. at 253-54. Accord, Carnahan v. United States, 81-2 U.S.T.C. P 13,435 at 18,984-85, --- F.Supp. ----, at ---- (S.D.Ind. Feb. 4, 1981).

Because American's return was received within the time prescribed, section 7502(a) does not apply. The return was filed when received on September 11, 1972. The 1971 deficiency assessment was therefore timely. Because we conclude that...