Crystal Lake Cemetery Asso. v. United States

            U.S. District Court, Dist. Minn., Fourth Div.

DEVITT, District Judge: In this taxpayer's action against the government to recover income taxes paid for the years 1961, 1962 and 1963, the basic issue is as to whether Minnesota law and a trust agreement between the taxpayer and the Marquette National Bank, as trustee, constitute an irrevocable trust. The taxpayer seeks the return of $12,000 tax paid in 1961 and $10,000 tax paid in 1963 on contributions made to a permanent care and improvement fund of the Crystal Lake Cemetery Association on the theory that the Minnesota Statutes, M.S.A. 306.78, et seq. and the trust agreement authorize and create a permanent care and improvement fund which is irrevocable, and that contributions to the fund by the taxpayer in those years were not includable in gross income and were improperly collected by the government.

The taxpayer also contends, in a second issue, that $50,000 paid from the fund in 1962 toward the construction of a $113,000 administration building on the cemetery grounds of the taxpayer was not properly taxable as income because the same was a contribution to capital under Section 118 of the Internal Revenue Code, and such a contribution was specifically authorized by the Minnesota statutes and by Paragraph 5 of the permanent care and improvement fund agreement, each of which permitted the withdrawal of not more than 50% of the principal of the permanent improvement fund for the erection of a chapel, greenhouse, or "other buildings" for the operation of the cemetery.

The 1961 and 1963 Contributions to the Trust Fund

The plaintiff's argument, in so far as the contributions to the fund in 1961 and 1963 is concerned, is based principally onRevenue Ruling 58-190 which provides that a cemetery company operated for profit "shall not be required to include in gross income" that portion of the contract sale price of burial lots which by requirement of State law or its own by-laws and/or contracts "it is obligated to irrevocably set aside in trust solely for perpetual care and maintenance of the cemetery, burial lots or mausoleum crypt to the extent that such portion is so set aside."

Taxpayer argues that it comes under this revenue ruling because the State law, M.S.A. 306.78, requires the payment of 20% of the sale price of the lot into the permanent fund, and M.S.A. 306.79 and the trust instrument make such trust fund irrevocable.

The government's position on this first issue is that the payments into the trust fund in 1961 and 1963 are taxable because the trust into which they were paid is not an irrevocable one principally because the statute and the trust instrument permit the trustees, under certain circumstances, to withdraw up to 50% of the amount then in the trust fund.

It appears to the court that the Minnesota Statutes and the trust agreement of August 3, 1928 do require the Cemetery Association to set aside 20% of the sale price of cemetery lots to a "permanent care and improvement fund," that such was done, and that such monies, within the meaning ofRevenue Ruling 58-190, were set aside in trust solely for perpetual care and maintenance of the cemetery and burial lots.

To be sure, provision was made for the withdrawal of monies from the fund, but this was only to be "for the acquisition of additional land for cemetery purposes for the erection of a chapel, greenhouse, or other buildings desirable or necessary for the operation of such cemetery." M.S.A. 306.79. But these statutorily expressed purposes fall within the ambit of the terminology employed inRevenue Ruling 58-190, i.e., "for perpetual care and maintenance of the cemetery."

In my view the taxpayer is entitled to a refund of these disputed taxes paid for the years 1961 and 1963 because the Commissioner erred in disallowing exclusions from the taxpayer's gross income of those amounts which the taxpayer contributed to the perpetual care fund on the grounds that such amounts were not irrevocably set aside. The court finds that such amounts were irrevocably set aside and did not constitute taxable income.

The 1962 Withdrawal of $50,000 from Trust Fund

In 1962 the taxpayer caused the withdrawal of $50,000 from the permanent care and improvement fund and used it, along with other funds from its savings accounts, for the erection of an administration building costing $113,808.68.The Commissioner took a jaundiced view of the taxpayer's effort to exclude this $50,000 from income, and upon audit, viewed the withdrawal from the perpetual care fundas income and assessed a tax accordingly. It was paid and the plaintiff also seeks recovery of that tax paid.

I see no basis for viewing it, as plaintiff urges, as excludable because it is a claimed contribution to capital; and no other basis for excluding it from the statutory category of income, to wit, "income from whatever source derived." 1954 Int. Rev. Sec. 61.

It may well be doubtful if M.S.A. 306.79 authorizes the withdrawal of permanent care funds for the erection of any kind of a building (the statute, as amended in 1923 is not clear whether the authority extends to "a chapel, greenhouses or other buildings" or only to the acquisition of land for such buildings), but at all events the evidence here reflected that the principal purpose of the building was, or has been, to serve the profit-making activities of the taxpayer, (e.g., the testimony of Douglas E. Lindeman, Secretary of the taxpayer, p. 25, et seq. of the Transcript), rather than to provide for "the perpetual care and maintenance" of the cemetery. In the court's view, the $50,000 was income and taxable. 26 U.S.C.A. 111.

The court will sign Findings of Fact, Conclusions of Law and Order for Judgment reflective of these expressions, and counsel are requested to prepare and submit them promptly.