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Firm Seeks Accounting Method Change Guidance for Funeral Group

AUG. 26, 2021

Firm Seeks Accounting Method Change Guidance for Funeral Group

DATED AUG. 26, 2021
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August 26, 2021

Mr. John Moriarty
Associate Chief Counsel (IT&A)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Re: Comments on Revenue Procedure 2021-34 relating to Deathcare Industry

Dear Sir:

On August 12, 2021, the Internal Revenue Service issued Revenue Procedure 2021-34, which provides accounting method change procedures to facilitate implementation of the changes to the revenue recognition and cost offset rules that are incorporated into the final regulations under sections 451(b) and451(c), added by the Tax Cuts and Jobs Act (TCJA). Unfortunately, the new procedures omit the accounting method changes required by these provisions with respect to pre-need sales of burial plots and interment rights by members of the deathcare industry. The purpose of this letter is to bring this omission to your attention and to urgently request the issuance of additional procedural guidance to enable taxpayers in the deathcare industry to implement the revenue recognition and cost offset rules that apply to that industry. We are hereby submitting this request on behalf of our client, the International Cemetery, Cremation and Funeral Association (“ICCFA”), which represents members of the deathcare industry.

Background

On December 30, 2020, the Treasury Department and IRS issued final regulations under section 451(b) and section 451(c) of the Internal Revenue Code (“Code”), implementing the revenue recognition provisions in the TCJA. In these final regulations, in contrast to taxpayers in most industries, the IRS dealt with the issue of revenue recognition and cost offsets in the case of pre-need sales of burial plots and interment rights in the preamble to the final regulations, rather than in the body of those regulations. As a result, ICCFA believes that members of the deathcare industry are not covered by the guidance issued in Rev. Proc. 2021-34. Accordingly, separate procedural guidance is needed for taxpayers in the deathcare industry that are engaged in pre-need sales of burial plots and interment rights and that must change their methods of accounting to conform to the provisions in the preamble to the final regulations.

In the absence of such guidance, taxpayers in the deathcare industry would be required to file non-automatic accounting method changes in order to implement the guidance provided by the preamble to the final regulations. Thousands of taxpayers would be required to incur a substantial filing fee. They would also be denied the opportunity to apply the provisions in the preamble to the final regulations to their 2020 taxable years, in contrast to all other taxpayers covered by Rev. Proc. 2021-34. Finally, taxpayers engaged in pre-need sales of burial plots and interment rights would be required to endure the lengthy delays that inevitably result when accounting method change requests are processed as non-automatic accounting method changes.

Guidance Requested

In comments submitted by the ICCFA on November 7, 2019, with respect to the proposed regulations under sections 451(b) and (c), ICCFA commented on the proper tax treatment of pre-need sales of burial plots and interment rights in light of the enactment of the TCJA. In those comments, ICCFA noted that since burial plots and interment rights are deemed to be an interest in real property under state law, the taxation of pre-need sales of burial plots and interment rights is governed by sections 1001 and 1016, rather than by sections 451(b) and (c). The tax treatment accorded to sales of burial plots and interment rights would thus be similar to the tax treatment accorded to land sales by real estate developers. Under those rules, a seller of a burial plot or interment right would not be taxable on a sale of the burial plot or interment right until the sale is deemed complete for tax purposes, without regard to the taxpayer's financial accounting treatment of the transaction.

In addition, in determining when a pre-need sale of a burial plot or interment right is deemed complete for federal income tax purposes, ICCFA pointed out in its comments that the IRS had previously issued two letter rulings to cemetery companies, PLR 9533002 and PLR 199935060, which addressed the issue of when a pre-need sale of a burial plot is complete for tax purposes. In those letter rulings, the IRS held that if the purchaser of a burial plot or interment right may cancel any deferred installment payment obligations prior to payment of the obligations and a decedent is not entitled to possession of the burial plot or interment right prior to payment of the entire sales price of the burial plot or interment right, the sale of the burial plot or interment right is not considered complete for tax purposes until the entire sales price of the burial plot or interment right has been paid by the purchaser of the plot or right and the purchaser is entitled to title and possession of burial plot or interment right. This conclusion is consistent with the tax treatment of taxpayers in other industries that are subject to the “enforceable right” standard adopted in the final section 451(b) regulations.

The ICCFA's comments also addressed the tax treatment of installment payments received in a pre-need sale of a burial plot or interment right prior to the time when the sale is complete. The ICCFA noted that sections 1001 and 1016, as well as case law, support the conclusion that the seller would not be taxable on any installment payments received from a purchaser of the burial plot or interment right until the aggregate amount of installment payments received by the seller exceeded the seller's adjusted basis in the burial plot or interment right.

After considering these comments, the IRS and Treasury indicated their agreement with ICCFA's position that sections 1001 and 1016 of the Code, rather than sections 451(b) and (c) of the Code, govern the tax treatment of pre-need sales of burial plots and interment rights. The IRS and Treasury announced their agreement with this position in the preamble to the final section 451(b) regulations as follows:

1. Burial Plots and Interment Rights

Commenters request clarification on the treatment of income from contracts with customers for the sale of burial plots or interment rights, on a pre-need basis (pre-need contracts). The terms of the pre-need contracts typically require the customer to make an initial down payment and pay the balance of the sales price over several years. If the purchaser cancels or fails to perform under the contract before the entire purchase price is paid, commenters represent that, under every state law, the taxpayer's sole remedy is to keep all or a portion of the installment payments previously received from the customer as liquidated damages. Commenters highlighted that there may be an extended period of time between the date the pre-need contract is executed and the date the taxpayer collects the full sales price from the customer.

Commenters represented that ASC 606 requires the entire transaction price from a pre-need contract, net of costs, to be included in revenue in the year in which the parties execute the contract. However, for Federal income tax purposes, commenters requested that the final regulations clarify that taxpayers with pre-need contracts should not include the unpaid balance of the transaction price in income in the taxable year the contract is executed under the AFS Income Inclusion Rule. In commenters' view, the sale of a burial plot should not be treated as a completed sale for tax purposes until the entire sales price of the burial plot is paid by the customer and ownership rights in the burial plot are transferred. Further, the taxpayer does not have an enforceable right to payment for the entire transaction price of the plot if the customer cancels or fails to perform under the contract.

Commenters concluded that these taxpayers should be entitled to recover any allocable cost basis in the burial plot before including in gross income any of the installment payments received from the customer. Commenters viewed the sale of a burial plot as the sale of an interest in real property and assert that the basis recovery rules of sections 1016 and 1001 apply to prepayments for burial plots. Under this approach, prepayments for the purchase price of a burial plot before the sale of the plot first decrease the taxpayer's basis in the burial plot. See § 1.1016– 2(a). When the prepayments exceed the taxpayer's basis in the burial plot, the taxpayer recognizes the excess amount as gain. See § 1.1001–1(c)(1). Accordingly, commenters requested that the final regulations clarify the application of sections 1001 and 1016 to the sale of pre-need burial plots.

Commenters also requested clarification on the income recognition treatment of pre-need contracts with customers for the sale of interment rights. Commenters noted that the ASC 606 treatment for pre-need contracts for the sale of interment rights resemble the treatment for pre-need contracts for the sale of burial rights. Commenters viewed the receipt of any installment payments prior to the transfer of those rights and prior to the payment of the entire transaction price to be controlled by sections 1001 and 1016, rather than by sections 451 and 471. Under this rationale, a taxpayer's treatment of the down payment and the installment payments from pre-need contracts in its AFS should not determine the timing of income for tax purposes. Instead, commenters suggested that the amounts received before the transfer of the interment rights should be viewed as a return of capital and a reduction in the taxpayer's basis in the interment space.

The IRS and the Treasury Department agree that the sale of burial rights and interment rights are governed by sections 1001 and 1016 but consider the determination of whether a sale has occurred to be a factual issue. If a sale has occurred under the facts and circumstances, any income resulting from the sale is realized under section 1001 and the right to the income is fixed, therefore the AFS Income Inclusion Rule does not result in the acceleration of AFS revenue. If the sale has not occurred, and the right to the future payments is extinguished if the customer cancels the contract, the AFS Income Inclusion Rule does not require acceleration because there is no enforceable right to the future payments if the contract is cancelled by the customer provided that the taxpayer is not using the alternative AFS revenue method in § 1.451-3(b)(2)(ii).

Guidance Requested

In light of the foregoing provisions in the preamble to the final regulations, ICCFA requests that the IRS and Treasury expand their guidance in Rev. Proc. 2021-34 to cover taxpayers in the deathcare industry that are engaged in pre-need sales of burial plots and interment rights and are covered by the provisions in the preamble to the final section 451(b) regulations. That guidance should address the following types of accounting method changes that pre-need sellers of burial plots and interment rights might need to make in response to the preamble to the final regulations:

1. A taxpayer that recognizes gross income (i.e., revenue minus expenses) from pre-need sales of burial plots or interment rights upon the execution of a pre-need sales contract changes to the method of deferring the revenue from the sale until the sale is complete, upon payment of the entire sales price. That accounting method change would cover changes in the time of recognition of both revenue and expenses.

2. A taxpayer that recognizes gross income (i.e., revenue minus expenses) from pre-need sales of burial plots upon payment of the entire sales price changes to the method of recognizing gross income upon the execution of the pre-need sales contract because the contract is binding and the seller acquires an enforceable right upon the execution of the contract to compel the purchaser to pay any unpaid balance of the purchase price of the plot or right. That change would cover changes in the time of recognition of both revenue and expenses.

3. In a situation where installment payments are received by a seller of a burial plot or interment right prior to the time the sale is deemed complete and the seller recognizes installment payments as revenue as the installment payments are received changes to the method of deferring the recognition of the installment payments as revenue until the aggregate amount of installment payments received by the seller exceed the seller's adjusted basis in the burial plot or interment right.

4. Any combination of the foregoing changes.

One additional point is that while the guidance in Rev. Proc. 2021-34 is limited to taxpayers using the accrual method of accounting because section 451(b) is limited in its application to taxpayers using the accrual method, the guidance in the preamble to the final regulations under section 451(b) relating to pre-need sales of burial plots and interment rights being subject to the provisions in sections 1001 and 1016 is not limited to taxpayers that use the accrual method of accounting. Taxpayers in the deathcare industry that satisfy the gross receipts requirement in section 448 of the Code are eligible to use the cash method of accounting. Those taxpayers would be subject to the same tax rules as accrual method taxpayers, as it relates to the tax treatment of pre-need sales of burial plots or interment rights under sections 1001 and 1016. Accordingly, any expansion of Rev. Proc. 2021-34 to encompass the situations noted above should apply equally to taxpayers using the cash method of accounting.

If you have any questions about our suggestions or would like to discuss them in more detail, please contact the undersigned at (301) 785-0294.

Sincerely yours,

Leslie J. Schneider
Ivins, Phillips & Barker for International Cemetery, Cremation & Funeral Association
Washington, DC

Cc:
Krishna P. Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
Wendy Friese, Attorney-Advisor, Office of Tax Legislative Counsel, Department of the Treasury
Timothy Powell, Attorney-Advisor, Office of Tax Legislative Counsel, Department of the Treasury
Charles Gorham, Special Counsel, Income Tax & Accounting, IRS National Office
Karla Meola, Special Counsel, Income Tax & Accounting, IRS National Office
Douglas Kim, Income Tax & Accounting, IRS National Office

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