Meridian Wood Products Co., Inc. v. U.S.

• Decision Date: 13 February 1984
• Docket Number: No. 82-3668,82-3668
• Citation: 725 F.2d 1183
• Parties: 84-1 USTC P 9222 MERIDIAN WOOD PRODUCTS CO., INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Harry F. LENTON and Colleen Lenton, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1183

725 F.2d 1183

84-1 USTC P 9222

MERIDIAN WOOD PRODUCTS CO., INC., a corporation, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

Harry F. LENTON and Colleen Lenton, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 82-3668.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 7, 1983.

Decided Feb. 13, 1984.

William H. Kinsey, Schwabe, Williamson, Wyatt, Moore & Roberts, Portland, Or., for plaintiffs-appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Sec., Libero Marinelli, Jr., Dept. of Justice, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the District of Oregon.

Before FLETCHER and ALARCON, Circuit Judges, and JAMESON ^*, District Judge.

ALARCON, Circuit Judge:

In these consolidated appeals, taxpayers Harry and Colleen Lenton, and Meridian Wood Products, Inc. (Meridian) appeal from a judgment of the district court. The district court upheld the Internal Revenue Service's (IRS) disallowance of certain business expense deductions taken by Meridian. The court also determined that Meridian's reimbursement of these expenses to the Lentons constituted constructive dividends to them.

We are asked to decide whether the district court correctly determined that: (1) the IRS assessments of deficiency were timely; (2) Meridian's evidence of deducted business expenses failed to meet the substantiation requirements of section 274(d), 26 U.S.C. Sec. 274(d) (1976); (3) Colleen Lenton's We affirm.

travel expenses were not properly deducted as business expenses by Meridian; and (4) amounts spent on a claimed roof repair were capital expenditures within the meaning of 26 U.S.C. Sec. 263(a) and therefore not deductible as a business expense pursuant to 26 U.S.C. Sec. 162(a). The Lentons also contest the timeliness of the IRS's assessment of deficiency. They further argue that the district court erred in concluding that Meridian's disallowed expenses, for which Meridian reimbursed the Lentons, were constructive dividends to them.

FACTS

Meridian manufactures and sells wood products. The manufacturing facility consists of seven buildings. Meridian's books and records are kept in accordance with certified audit standards; financial statements are prepared by accountants. Harry Lenton holds 50 percent of the stock and is Meridian's president.

In preparing its tax returns, losses for 1974 and 1975 were carried back to 1971 and 1972, Meridian's profitable years. An audit of these years was conducted by IRS Agent Lynn Sanders. Additional tax and interest were assessed against the Lentons for 1975 ($7,604.00) and 1974 ($5,313.00). Meridian was assessed tax and interest for the year 1972 ($54,567.13).

The audit disclosed that Meridian's expenditures were recorded in check registers. Supporting papers, however, failed to indicate the business purpose of an expenditure, the persons entertained, and the date of each expense. Only vouchers submitted by Lenton to Meridian for these expenses gave any indication of these factors. Besides the vouchers, Lenton kept no other record of business expenses for which he was reimbursed by Meridian.

The parties agreed to two extensions of time for the IRS's assessments of deficiency. No petition with the tax court was filed. Appellants instituted an action in district court; this appeal followed.

ANALYSIS

I. Timeliness of the Assessments

Appellants Meridian and the Lentons first contend that the IRS's assessments of deficiency, dated November 4 and 5, 1979, respectively, were not timely. They argue that, under their extension agreement with the IRS, the limitations period was to commence on the date the notice of deficiency was sent by the IRS. The government asserts that the limitations period began to run on the extension date expressed in the agreement. The government further suggests that, in any event, the assessments were timely by operation of law.

Pursuant to section 6501(c)(4), 26 U.S.C. Sec. 6501(c)(4) (1976) ¹ appellants executed two agreements, in 1977 and 1979, to extend the limitations period for assessing the taxes in issue. The instant argument concerns the 1979 agreement which provides in part:

[T]he amount(s) of any Federal Income Tax due under any return(s) made by or on behalf of the above-named taxpayer(s) for the period(s) ended October 31, 1974 and October 31, 1975 [in the case of Meridian] under existing or prior revenue laws, may be assessed at any time on or before October 15, 1979, except that if a notice of deficiency in tax for any such period(s) is sent to the taxpayer(s) on or before that day, then the time for assessing the tax shall be further extended for the period in which the assessment is prohibited, and for 60 days thereafter. Also, any assessment made within the extended period agreed upon may be collected in the same manner and subject to Both parties agree that under the agreement, the limitations period would have expired on October 15, if no notice of deficiency had been sent. They also agree that since a notice was sent, the limitations period, under the agreement, was 150 days. ² The only dispute is when this 150-day period commences. Under appellants' view, the extension agreement requires that the limitations period commence on the date the notice is sent. Accordingly, the limitations period set forth in the extension agreement began when the deficiency notice was sent--May 29, 1979--and ended 150 days later, on October 26, 1979. Consequently, the November assessments were not timely.

the same provisions and limitations as in the case of an assessment of any tax made within the applicable statutory period. (Emphasis added)

The IRS maintains that the plain language of the agreement discloses that the parties agreed to extend the limitations period to October 15, and if the IRS sent notices before that date, the limitations period would be further extended an additional 150 days beyond the October 15 deadline. The IRS asserts that the reference in the extension agreement to "the period in which the assessment is prohibited is a provision for [an] additional but unstated extension period." Thus, the clause determines the amount of time for extension rather than when the time period commences. Accordingly, the 150-day limitations period begins to run on October 15, 1979, the expiration date set forth in the agreement. The additional 60-day extension further advances the expiration date to March 13, 1980. We agree.

A notice of deficiency is a restriction on the assessment and collection of an asserted tax deficiency. Generally, the Commissioner may not attempt to collect an asserted tax deficiency until he has mailed a notice of deficiency and the time during which the taxpayer to petition the tax court has expired. 26 U.S.C. Sec. 6213(a); accord Shapiro v. United States, 499 F.2d 527, 531 (D.C.Cir.1974), aff'd sub. nom. Commissioner v. Shapiro, 424 U.S. 614, 96 S.Ct. 1062, 47 L.Ed.2d 278 (1976). In certain circumstances, however, a notice is not required. For example, the parties may execute a waiver of restriction thereby alleviating the Commissioner of any duty to send a deficiency notice. 26 U.S.C. Sec. 6213(d) (1976); accord Monge v. Smyth, 229 F.2d 361, 368 (9th Cir.1956) (footnote omitted) (in construing section 272(d) of 1939 Revenue Act, which is currently section 6213(d), 26 U.S.C. Sec. 6213(d) (1976), the court stated that a waiver obviated the need of sending a formal deficiency notice and precluded appeal to the tax court). ³

Appellants argue that since they did not waive the notice of deficiency, such a notice We conclude that the extension agreement provides that a notice of deficiency might or might not be sent. Had the appellants waived the requirement of a notice, no notice would have been sent. Under the agreement, October 15 would have been the expiration date of the limitations period. Because notice was sent under the express terms of the agreement, the limitation period which would have expired on October 15, was "further extended," for the period of prohibition--90 days. 26 U.S.C. Sec. 6213(a). The additional 60-day extension in the agreement further advanced the expiration date to March 13, 1980.

was required. Thus, they maintain, under the agreement the 150-day period commenced on the sending of the notice. We disagree. The mere fact that appellants had not waived notice at the time the parties executed the extension agreement, does not mean that they could not have subsequently executed a waiver. Thus, the execution of a waiver of notice remained a factual possibility notwithstanding the fact that the parties entered into the extension agreement.

Our conclusion is supported by Ramirez v. United States, 538 F.2d 888, 210 Ct.Cl. 537, cert. denied, 429 U.S. 1024, 97 S.Ct. 642, 50 L.Ed.2d 625 (1976). There, the court construed an extension agreement similar to the one before us. The agreement in Ramirez provided for an expiration date of June 30, 1972, "except that if a notice of a deficiency in tax is sent ... on or before that date, then the time ... shall be extended beyond that date by the number of days during which an assessment is prohibited and for 60 days thereafter." Id. at 889 (footnote omitted). As here, the taxpayer in Ramirez argued that the extension period ran from the date of the notice of deficiency. The taxpayer additionally pointed to the appearance of "that date" twice in the agreement, arguing that such a reference implied that two different limitations periods existed. The court rejected this contention, reasoning that the only date set forth in the agreement that referred to an assessment was June 30, 1972. Consequently, the 150-day period was to be measured from "that date", not the date of the notice of deficiency. Id. at 891. See also Estate of Goetz v. United States, 286 F.Supp. 128, 130 (W.D.Mo.1968) (where taxpayer agreed to...