*2131 1. TRANSFEREE. - Held, petitioner Lester L. Robison not liable as transferee. Petitioner Elmer D. Bryson liable as transferee.
2. INCREASE OF DEFICIENCY. - Section 308(e) of the Act of 1926 gives the Board jurisdiction to increase the deficiency over that determined by the Commissioner, if asserted by the Commissioner before or at the hearing, and the action of the Board in permitting respondent to amend his answer to that effect is not error.
3. LIMITATION. - The burden of proof to establish the plea of limitation is on petitioners and where it is not shown when the return was filed the plea of limitation must fail, for lack of evidence to support it.
4. TAX SETTLEMENT. - Petitioner's action in approval of a revenue agent's report does not establish a closing agreement under either section 3229, Revised Statutes, or section 606, Revenue Act of 1928.
5. Claims for invested capital and salaries allowed in part.
*395 These two cases were consolidated for hearing and decision. They involve deficiencies*2132 in income and profits taxes determined against the Bryson-Robison Corporation of $2,863.42 for 1917; $5,741.89 for 1918 and $2,973.54 for 1919, and now sought to be collected from the petitioners as transferees of the assets of the taxpayer. The total amount of the deficiencies was $11,578.85. In his deficiency letter the respondent only proposed one-half thereof, viz., $5,789.42, against each transferee, but at the hearing, by permission of the Board, filed amended answers increasing the claim against each petitioner to the full amount. Errors complained of by the petitioners will be fully stated in the opinion.
FINDINGS OF FACT.
The petitioner, Lester L. Robison, is an individual and resides at R.F.D. No. 4, Walla Walla, Wash., and the petitioner, Elmer D. Bryson, is an individual and resides at 605 Boyer Avenue, Walla Walla, Wash. In 1916, the taxpayer Bryson-Robison Corporation*396 was organized under the laws of the State of Washington for the purpose of engaging in farming, raising sheep and the operation of a sheep ranch. Its capital stock was $100,000, divided equally between the petitioners, except that the wife of each held one share each for organization*2133 and qualification purposes. The corporation engaged in business until June 4, 1919, when the petitioner Elmer D. Bryson purchased the stock and interest of the petitioner Lester L. Robison in the corporation for the sum of $70,000, took possession of its entire assets and operated the business thereafter as an individual. Prior to the sale by Robison of all his shares of stock in the corporation to Bryson, to wit, on April 22, 1919, a petition to dissolve the corporation was filed in the Superior Court for Walla Walla County, but no final judgment was ever entered. However, it became dissolved by operation of the laws of the State of Washington, as will be seen by the certificate of the Secretary of State of the State of Washington, dated May 14, 1930, and reading as follows:
I, J. Grant Hinkle, Secretary of State of the State of Washington and custodian of the Seal of said State, do hereby certify that I have carefully examined the records of this office and find that the "BRYSON-ROBISON CORPORATION", a domestic corporation of Walla Walla, Washington, filed a copy of its articles of incorporation in this office on the 13th day of October, 1916.
I further certify that the above*2134 mentioned corporation was stricken from the records of this office July 1, 1921, and was further "Stricken from Records and dissolved" July 1, 1924 under the provisions of Chapter 144, Laws of Washington of 1923, for failure to pay the annual license fees and accruing penalties, the last license fee paid being for the fiscal year ending June 30, 1919.
And I further certify that the above mentioned corporation has had no legal corporate existence since stricken July 1, 1921, pursuant to Chapter 140, laws of 1907.
Upon its organization the corporation purchased certain lands at a cost of $40,000 for its business purposes. Other smaller tracts were afterwards purchased, but the cost was not shown.
No formal corporate meetings were held and no regular set of books or accounts were kept. The principal records of the corporation were canceled checks and sheets of paper showing receipts and disbursements of the corporation. Robison was president and Bryson was secretary and treasurer. In verbal agreement it was understood that each should receive a salary of $5,000 per year. This was paid for the year 1918, but none was paid in 1917 or in 1919. Petitioners devoted most of their*2135 time to the business, performing various duties connected with the business during the taxable years up to June 4, 1919, when the corporation ceased to do business. A reasonable allowance for salary for 1917 is $2,500 for each petitioner *397 and for 1919 until June 4 an allowance of $2,500 in full for both petitioners, or $1,250 each, is reasonable.
There is no evidence in the record as to the date of the filing of the tax returns of the corporation for the taxable years 1917 and 1918. That for 1919 was filed March 15, 1920, and was signed by petitioner "Elmer D. Bryson, sole remaining officer." On February 12, 1923, a one-year waiver for the Bryson-Robison Corporation for 1917 was executed and reads as follows:
INCOME AND PROFITS TAX WAIVER.
FEB. 12, 1923.
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Elmer D. Bryson, of Walla Walla, Wash., and the Commissioner of Internal Revenue hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Bryson-Robison Corporation for the year 1917 under the Revenue*2136 Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations.
This waiver will be effective only one year from date of signing.
(Signed) ELMER D. BRYSON,
Taxpayer,
As former Secretary - Bryson-Robison Corp.
D. H. BLAIR, C.,Commissioner.
On January 2, 1924, an unlimited waiver for 1917 and 1918 for the corporation was executed and reads as follows:
INCOME AND PROFITS TAX WAIVER.
In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Bryson-Robison Corp., of Walla Walla, Washington and the Commissioner of Internal Revenue, hereby consent to a determination, assessment and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Corporation for the years 1917 and 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act*2137 to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909, irrespective of any period of limitations.
(Signed) ELMER D. BRYSON,
Former Secretary of the Bryson-Robison Corp.,Taxpayer.
D. H. BLAIR, c.,Commissioner.
*398 The deficiencies were assessed against the taxpayer corporation as follows: for 1917 on March 21, 1924; for 1918 on September 1, 1925, and for 1919 on March 14, 1925. These assessed taxes remain unpaid. The sixty-day letters to the petitioners as transferees were mailed November 3, 1926. The net value of the assets transferred to Bryson exceeded the amount of the deficiencies.
OPINION.
BLACK: Each of the petitioners based his appeal on the following assignments of error:
That the Commissioner of Internal Revenue in arriving at the amount of the invested capital of the Bryson-Robison Corporation erroneously reduced the said invested capital by the sum of $45,000.00.
That the Commissioner in arriving at the net income of the Bryson-Robison Corporation in error disallowed the salaries of the corporation officers for the years 1917 and 1919. That*2138 said lawful and proper deduction for salaries during 1917 was the sum of $10,000, (the same as allowed in 1918), and for 1919 was at the rate of $10,000 per year up until June 4, 1919 when the company ceased to operate as a going concern. Disallowing said salaries was in error.
The Commissioner erred in determining petitioner to be a transferee of one-half the assets of the corporation of Bryson-Robison Corporation on dissolution thereof.
That all of said proposed assessment against the petitioner is barred by operation of the Statute of Limitations.
In addition to the foregoing assignments of error, each of the petitioners complains of the action of the Board in allowing respondent at the hearing to amend his answer and assert a liability against each petitioner for all of the deficiency determined against the transferor corporation, instead of the assertion of a liability for one-half of the deficiency against each petitioner contained in the sixty-day letter mailed to each of said petitioners November 3, 1926. We think the allowance of the amendment was proper. Section 308(e) of the Revenue Act of 1926. *2139 .
Petitioners' assignment of error that respondent erred in failing to include as invested capital of the taxpayer for the taxable years certain real estate belonging to it, which it had purchased with funds belonging to the corporation, is sustained to the extent of the costs of such lands, proved at the hearing. Respondent, by amended answer filed at the hearing, confessed error in failing to allow the costs of such lands as a part of the corporation's invested capital, but contested the amount of costs claimed. Petitioners claim the value of the land at $45,000 or over, and ask that the invested capital of the corporation be increased by that amount. Petitioners proved that $40,000 was paid for 10,360 acres of land used in the corporation's business. It was also proved that the corporation purchased *399 other small tracts of land, but no evidence was offered as to the cost thereof. We can not allow as a part of the corporation's invested capital, assets, the cost of which is not proved. In view of the admissions by respondent in his amended answer, invested capital should be increased by $40,000 over that which respondent*2140 allowed in his deficiency letters. Any increment in value over cost may not be included in invested capital. .
Relative to the claim for salaries for 1917 and from January 1, 1919, to June 4, 1919, we think the evidence is sufficient to show that the amounts set out in our findings of fact would represent a reasonable allowance to the corporation for salaries incurred for personal services actually rendered to it during the period of time therein mentioned by Robison, president, and Bryson, secretary-treasurer. The respondent will make this allowance in recomputing the deficiency.
As to whether petitioners are liable as transferees, we think the facts show that Robison is not liable as a transferee, but that Bryson is so liable, under the applicable statutes and the decisions of this Board. The attorney who represented the corporation in its various legal matters testified that Robison sold his stock to Bryson and that such stock was actually transferred to Bryson. This statement of the transaction seems to be well supported by the other evidence in the proceeding. There is nothing to show that prior to his sale of stock*2141 to Bryson, Robison received one-half of the assets of the corporation in liquidation and then sold these assets to Bryson. On the contrary, the facts show that Robison sold his stock and interest in the corporation to Bryson for $70,000; whereupon Bryson took over all the assets of the corporation and assumed all of its liabilities and from that time on operated the business as an individual and not as a corporation. We hold that Robison is not a transferee of the corporation. The mere sale of stock by a stockholder in a corporation does not make him a transferee of the assets of the corporation. But the action of Bryson taking over all the assets of the corporation and assuming all of its liabilities, makes him a transferee of the assets of such corporation and liable as such. ; ; .
Limitation is pleaded as to the deficiencies determined against the transferor corporation for each of the taxable years and the validity of the waivers is vigorously attacked in briefs of counsel. *2142 The burden of proof is upon the petitioners to establish the plea of the statute of limitations and this requires first proof of date of the filing of the statutory returns and second, the expiration of the statutory period. There is no evidence of the date of the filing of the *400 statutory returns of the corporation for either 1917 or 1918 and for that reason the plea of limitation must fail for those years. ; .
Petitioners in their briefs refer to the assessment lists introduced in evidence by the respondent, showing that the deficiencies determined against the transferor corporation for each of the taxable years were duly assessed, but these assessment lists do not in any way show when the corporation's tax returns for 1917 and 1918 were filed. We are without any evidence on this point.
Under these circumstances it is immaterial whether the two waivers are valid or not. Even if we should hold them to be invalid, we have no evidence before us which would support petitioners' plea of limitation.
Relative to the taxable year 1919, that return was introduced in evidence and*2143 shows that it was filed March 15, 1920, and the assessment against the taxpayer corporation was made March 14, 1925, which was in time.
Section 280(b)(2), Revenue Act of 1926, provides: "If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, - then six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act." See also section 278(d), Revenue Act of 1926.
The Act of 1926 was effective February 26, 1926, and one year thereafter was February 26, 1927. The deficiency letters in this case, asserting liabilities against the respective petitioners, were mailed November 3, 1926, and were in time.
Counsel for petitioner Bryson urges in his brief an alleged settlement in behalf of his client. Failure to recognize such a settlement was not alleged as an error in the petitioner and the rule is that an issue argued in brief of counsel, but not raised in the pleadings will be disregarded. There is no evidence in the record of any settlement either under section 3229, Revised Statutes, or section 606, *2144 Revenue Act of 1928. The document urged by petitioner Bryson as supporting his contention that a settlement was made, is simply a report of a revenue agent recommending a refund of $7.45 for 1920 and no change for 1919. This is no closing agreement as contemplated under the applicable revenue acts. .
As to petitioner Lester L. Robison, decision will be entered that there is no liability as transferee. As to petitioner Elmer D. Bryson, decision will be entered under Rule 50.