Ferncliff Cemetery Mausoleum Co. v. Commissioner

FERNCLIFF CEMETERY MAUSOLEUM COMPANY, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ferncliff Cemetery Mausoleum Co. v. Commissioner Docket No. 75137. United States Board of Tax Appeals 35 B.T.A. 1037; 1937 BTA LEXIS 807; April 28, 1937, Promulgated *807 Petitioner entered into an agreement with a trust company for the establishment of a $100,000 trust fund to be accumulated from the sale of crypts in so-called building No. 1, the income therefrom to be used for the perpetual preservation and maintenance of said building. The contract with the purchasers of crypts provided that the purchase price included a permanent endowment fund for the perpetual maintenance of the mausoleum. Held, that the percentage of the amount of sales for the taxable year agreed upon by the parties should be excluded from gross income, following Community Mausoleum Co.,33 B.T.A. 19. John A. King, Esq., for the petitifoner. W. R. Lansford, Esq., for the respondent. MORRIS *1037 This proceeding is for the redetermination of a deficiency in income tax of $990.35 for the calender year 1931. The respondent, by amendment to his answer, asks that the gross profit from the sale of crypts in 1931 be increased by $3,996.92 and that the deficiency be increased accordingly to $1,469.98. Reply was duly made. By reason of stipulations between the parties, the sole issue for determination is whether the*808 stipulated percentage of the amount of sales of crypts during the taxable year should be excluded from gross income because impressed with a trust due to the establishment of a $100,000 trust fund on building No. 1, as hereinafter shown, the income therefrom to be used for the perpetual preservation or maintenance of said building. FINDINGS OF FACT. The petitioner is a corporation, organized and incorporated under the laws of the State of New York, and is engaged in the construction and operation of community mausoleums in Westchester County, New York, and in the sale of crypts therein for the interment of the dead. Under date of August 21, 1928, the petitioner entered into an agreement with County Trust Co., White Plains, New York, which, after certain recitals, provided: FIRST: The Mausoleum Company agrees that the Trust Company shall retain the sum of One Hundred Thousand ($100,000) Dollars, out of the monies to be paid it by the present and future subscribers of the Ferncliff Cemetery Mausoleum Company, after the Trust Company, has, out of the monies paid and to be paid it by present and future subscribers of the Ferncliff Cemetery Mausoleum disbursed to the builder, *809 James Baird Company, Inc. and to the *1038 Mausoleum Company the sums called for to be disbursed by it to them under an agreement heretofore entered into between the Mausoleum Company and Trust Company, and that this sum shall be deposited in the Trust Company in a special fund to be known and designated as the Ferncliff Cemetery Mausoleum Endowment Fund. * * * THIRD: The Trust Company, shall, from time to time, invest these funds in securities permitted by law for the investment of trust funds. FOURTH: The Trust Company shall retain the securities so purchased. FIFTH: The Mausoleum Company will submit to the Trust Company vouchers for the maintenance, repair and upkeep of the mausoleum, and the Trust Company, after approving the same, will pay them out of the interest from the said endowment fund. SIXTH: After the completion of the Mausoleum Company's program, upon written notice to that effect by the Mausoleum Company to the Trust Company, the Ferncliff Cemetery Association will take over the maintenance, repairing and upkeep of the Mausoleum, and it will submit to the County Trust Company vouchers for the maintenance, repair and upkeep of the said Mausoleum, *810 and the Trust Company, after approving the same, will pay them out of the interest from the said endowment fund. SEVENTH: In the event that the Mausoleum Company or the Ferncliff Cemetery Association fail to repair, maintain and upkeep the Mausoleum, the Trust Company, shall have the right to have the said Mausoleum property maintained and repaired, and pay for the cost of the same out of the interest from the said endowment fund. EIGHTH: The Trust Company is under no obligation to expend any monies for maintaining, upkeeping and repairing the said Mausoleum, unless there are funds available for that purpose out of the income from the Trust Fund herein created. NINTH: This agreement shall be binding upon the successors and assigns of the parties hereto. Not only has there been no change in said agreement, but the terms thereof have been faithfully adhered to between the parties. The said $100,000 was paid in on the dates and in the amounts following: Apr. 1, 1931 $10,112.11 June 7, 1931 10,000.00 June 19, 1931 10,205.06 Dec. 24, 1931 14,982.19 Mar. 2, 1932 10,000.00 Mar. 16, 1932 $5,127.01 July 14, 1932 7,217.50 Nov. 5, 1932 5,002.22 July 3, 1933 14.88 Feb. 3, 1936 27,339.03 *811 and on February 3, 1936, the Trust Co. notified the petitioner that the full $100,000 had been paid into the fund for the permanent maintenance provided for in the aforesaid agreement of August 21, 1928. As expenses were incurred by the petitioner for the maintenance of the mausoleum building, that is, for lighting, cleaning, and similar necessary expenses for keeping the building in order, and for minor repairs, a voucher was prepared, submitted to the Trust Co. for approval, and a check upon the income of the endowment fund *1039 was drawn and sent to the petitioner. The petitioner still receives the income from the endowment fund for such purposes. As crypts were sold or subscribed for the petitioner and the subscriber entered into an agreement providing, among other things, that all installment payments be made to the Trust Co. and that "The purchase price includes permanent endowment fund for the perpetual maintenance of the Mausoleum." Upon completion of the payments provided for under the terms of said agreement a transferable certificate of ownership was issued to each subscriber conveying a certain prescribed crypt or room to his "heirs and assigns forever*812 * * * TO HAVE AND TO HOLD the use forever." The original book entries recording the sales of crypts were made from contracts with subscribers. As payments were made to the Trust Co. by subscribers the petitioner received daily deposit slips showing the receipt thereof, also, monthly recapitulations from the Trust Co. dividing the amount received into the one-third to which the petitioner became entitled and two-thirds held by the Trust Co. to be disbursed first for construction and then for the endowment fund, from which its original credits to subscribers were made. The liability for the $100,000 endowment fund was recorded in the petitioner's books of account. That liability having now been satisfied, however, it no longer appears on the books, as such. It was represented by the petitioner to its subscribers that perpetual care was assured by an endowment fund and that the first cost to them would be the last. In one of its published pamphlets on the subject it said: UPKEEP Perpetual upkeep and maintenance is assured through the creation of an endowment fund ample in size and secure in its provision. Thus the person reserving space at Ferncliff pays the initial cost*813 only. The first cost is the last - there are no further charges for upkeep. DEPOSITORY The County, trust Company of White Plains is serving as depository. Copy of all contracts are filed with them and, should you prefer, check may be made out to their order. The County Trust Company is one of the largest and most important banks of Westchester County, being affiliated with the American Trust Company. In another such pamphlet the County Trust Co. is prominently mentioned as "Endowment Trustee." Substantially the same pronouncements are made in still further literature, together with instructions to such subscribers to "Make out your cheque, if you choose, to them as depository." Purchasers were informed by representatives that there was or would be such an endowment fund and that they had the privilege of examining the endowment agreement, which privilege was frequently availed of by lawyers representing purchasers. *1040 The following are the basic figures affecting the computation of gross profit derived from building No. 1: Total possible sales price of building $1,114.599.66 Total cost of land and building $449,315.58 Actual dollar sales during 1931 $118,570.00 *814 It is stipulated if the Board finds that this endowment fund should be properly excluded from gross income, that 8.97 percent of the sales for the taxable year would be the proper amount. The following computation of the gross profit upon building No. 2 has been agreed to by stipulation of the parties: Cost of Building $228,259.03 Total Selling Price 540,830.00 Total Possible Profit on #2 $312,570.97 Total profit of $312,570.97 on Total Sales of $540,830.00 indicates a profit of 57.80% on each sale made. Total Sales in 1931 were $33,333.75 $33,333.75 X 57.80 = gross profit of $19,266.91. The petitioner's books and records were kept on the accrual basis of accounting. OPINION. MORRIS: It is the contention of the petitioner that the $100,000 endowment fund for building No. 1 which it agreed to and did set aside in trust, irrevocably, out of the gross sales price of crypts for the perpetual maintenance of its mausoleum should be excluded from its gross income from the sale of crypts. In his argument the respondent divides the decided cases in two classes, (a) those where the corpus is created by specific payments of space holders, the ownership*815 of which is recognized to be in and the use thereof to be for the benefit of such space holders, and (b) where the fund is general in its nature and inures to the trustor's benefit, the trustor in this case being the petitioner. Conceding that in the first classification the fund should be excluded from gross income, he argues that the fund in the instant case is general and for the upkeep of the entire mausoleum property, and that, although incidentally benefiting the holders of burial space, the real and substantial benefit inures to the mausoleum company. He does not deny that there is a valid and subsisting trust, nor does he claim that there is a possibility that it may be invaded by the trustor as in ; reversed at . A great deal has been said upon this general subject in a multitude of cases handed down by this Board and by the courts, a review of *1041 which will serve no useful purpose in view of our recent decision in , in which we said: It is now settled law that a trust created to provide means for permanent care of cemetery*816 lots or crypts in accordance with the cemetery association's contracts with lot purchasers will impress the agreed portion of the purchase price of such lots with its character and thus remove so much of the association's gross receipts from taxable income. ; ; ; ; ; ; ; ; affd., ; ; . Finding in that case that there was an express trust and that the trust agreement was incorporated by reference into the petitioner's contract with crypt purchasers, we held that 10 percent of the total sales price so set*817 aside should be excluded from the petitioner's gross income. Here the proper percentage has been agreed upon. As we see it there could be no clearer adherence to the rule expressed in , than in the present case. Not only did the petitioner represent orally that an endowment fund would be established, but such was made a binding condition in the contract entered into with purchasers, wherein it was agreed that the purchase price paid by them would include a permanent endowment fund for perpetual maintenance of the mausoleum, and this fact was highly publicized in printed literature used as a sales medium. The petitioner entered into a binding and admittedly irrevocable trust indenture at the very outset with County Trust Co., pursuant to the plan held out to its purchasers, providing for the retention by that company of a fund of $100,000 out of payments made directly to it, to be held in a special fund, known as "Ferncliff Cemetery Mausoleum Endowment Fund", and by it invested in securities, also to be retained by it, the income therefrom to be paid to the petitioner upon the submission of vouchers to the Trust Co. for its approval. *818 This agreement has been faithfully adhered to. Up until the time payments aggregating $100,000 had been made to the fund, under said agreement, that amount was carried on the books of the petitioner as a liability to be satisfied out of each installment received. Finding that a trust fund was actually established, it seems to us that it makes no difference that an incidental or indirect benefit inures to the petitioner generally, i.e., because the income may be used, for instance, to pay the wages of employees who are engaged in the general upkeep and maintenance of all crypts alike. Even where a *1042 fund is set aside in cemetery cases for the perpetual care and maintenance of a particular lot, that fund may be, and is, used to pay employees and keepers who are engaged in the maintenance of the entire cemetery. There is no conceivable case, except where separate endowments are established for separate and distinct lots or crypts, where the fund could be administered in the strict manner urged by the respondent. And, even under those circumstances, such an endowment might conceivably operate in the case of a cemetery lot, but not in the case of a crypt, which, after*819 all, is merely a small sealed compartment or space in the walls of the mausoleum. Furthermore, the mere fact that the petitioner maintains some proprietary interest in the mausoleum building does not necessarily mean that the benefit inures to it because, from a very practical standpoint, there is nothing for it to own or from which it can derive any pecuniary benefit after all of the crypts have been sold. We are of the opinion that the facts of this case fall squarely within the rule of , and that therefore the stipulated percentage of the amount of sales for the taxable year should be excluded from gross income. Judgment will be entered under Rule 50.