Lydle v. U.S., 79-3017

• Decision Date: 17 February 1981
• Docket Number: No. 79-3017,79-3017
• Citation: 635 F.2d 763
• Parties: 81-1 USTC P 9210 John E. LYDLE and Kathryn Lydle; and I. D. Lowe, Trustee for The Marilyn K. Lydle Trust, Barbara J. Lydle Trust, and Richard C. Lydle Trust, Plaintiffs- Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 763

635 F.2d 763

81-1 USTC P 9210

John E. LYDLE and Kathryn Lydle; and I. D. Lowe, Trustee for The Marilyn K. Lydle Trust, Barbara J. Lydle Trust, and Richard C. Lydle Trust Plaintiffs- Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 79-3017.

United States Court of Appeals Sixth Circuit.

Argued Oct. 22, 1980.

Decided Feb. 17, 1981.

Richard J. Kovach, Brouse & McDowell Co., L.P.A., Akron, Ohio, for plaintiffs-appellants.

James R. Williams, U.S. Atty., Cleveland, Ohio, David J. Curtin, Thomas M. Preston, M. Carr Ferguson, Gilbert Andrews, Richard Perkins, Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellee.

Before LIVELY and ENGEL, Circuit Judges, and PECK, Senior Circuit judge.

PECK, Senior Circuit Judge.

The question for decision in this tax-refund action is when the applicable two-year statute of limitations began to run. The taxpayers appeal from the district court's ruling that the refund action was not timely filed.

The pertinent period of limitations begins to run when the Secretary of the Treasury mails a taxpayer a notice of rejection of the taxpayer's claim for a refund, or when the taxpayer files a written waiver of this notice. 26 U.S.C. § 6532(a)(1) & (3). All of the taxpayers in this case have filed such waivers. They now dispute with the government over the claims their waivers referred to, but they do not dispute that this action was commenced over two years past the filing of their waivers.

Determination of the scope of taxpayers' waivers requires examination of a record that is turbid even though the facts of the case have been stipulated. An understanding of these facts has not been aided by the parties' failure to transmit to this Court the documentary exhibits accompanying their stipulation. Their references to these exhibits in briefs and argument have merely tantalized.

The facts underlying this action are as follows. The taxpayers, two natural persons and three trusts, were partners in Ken-Tool, a small manufacturing and sales company. On March 26, 1966, the partners agreed to sell Ken-Tool and four affiliated corporations to Cooper Industries. Under the purchase agreement, the partners were to receive the "short-period income" of Ken-Tool for the period from February 1 to April 30, 1966. The sale was closed on June 8, 1966; however, because of Cooper's possible liability in two tort actions then pending against Ken-Tool, Cooper withheld part of the agreed purchase price for Ken-Tool from the taxpayers until December 31, 1967. Thus arises the question whether the partnership was terminated for tax purposes in 1966 or 1967.

The taxpayers wrangled long with the Internal Revenue Service over their tax liabilities for 1966. In 1967 the taxpayers reported the capital gains from the sale of Ken-Tool as 1966 income, but not their shares of the short-period income noted above. The IRS audited these 1966 returns and took the position that the short-period income was taxable in 1966. On April 5, 1968, the IRS sent the taxpayers "notices of proposed (tax) deficiencies," which outlined the IRS's position concerning the short-period income.

The taxpayers counterattacked. On April 16, 1968, they filed amended returns that excluded not only the short-period income, but also the capital gains from the sale of Ken-Tool, from their reported income for 1966. Thus the taxpayers claimed overpayments of taxes for that year. The IRS district conference rejected the amended returns, treated them as claims for refunds, and submitted them to the Service's appellate division. In the period 1969-70, the taxpayer trusts filed additional refund claims that carried business losses back to 1966. The appellate division found the trusts entitled to these loss carrybacks, thus eliminating the tax deficiencies that the IRS had predicted for the trusts in 1966, and generating overassessments for that year. The individual taxpayers meanwhile made an advance payment of their proposed tax deficiency for 1966 on April 15, 1968. This deficiency was not actually assessed until April 24, 1972.

Despite these payments or offsets, the taxpayers continued to protest the IRS's position that the partnership had ended in 1966. Taxpayers' counsel wrote a follow-up protest letter to the appellate division on November 2, 1971, outlining in detail the taxpayers' position regarding the proper year for reporting their short-period income. On March 2, 1972, the trusts filed their crucial Waivers of Statutory Notification of Claim Disallowance (Form 2297's) with the IRS. The individual taxpayers filed this form on March 10, 1972.

This appeal turns on what notice the taxpayers in fact waived. The dollar amount listed on the waiver forms were the tax overpayments for 1966 calculated by eliminating the capital gains and, the short-period income from the Ken-Tool sale from the taxpayers' 1966 income (as the taxpayers did on their amended 1966 returns) and by carrying net operating losses back to 1966 (as the taxpayer trusts successfully did before the appellate division).

The taxpayers filed their refund action in the district court on March 14, 1974 more than two years after their waivers of notification were filed, past the statutory limitations period. The taxpayers now very subtly argue that they did not waive notification of rejection of their short-period-income claims. They argue that they each...