Gracelawn Memorial Park, Inc. v. United States

      UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

The taxpayer is a corporation organized for profit, engaged in the business of operating a cemetery. It sells cemetery lots in accordance with a form of contract which, among other things, requires that payments by purchasers of lots shall be divided between two trust funds, a 'Trust Fund for care' and 'Building Trust Fund'. We are not concerned with the first trust but with the second, the preamble to which states:

     'Whereas, it is desired that a suitable building or buildings be

     (1) The trust fund provides (pp. 1-2) that at least 15 per cent

The rationale of these decisions turns upon the fact that such monies form an irrevocable trust over which the trustee had no power of control and received no benefits. ³ But the Government urges very strenuously that this line of decisions cannot be relied upon under the facts here. While conceding some analogy between the two because of certain language in the American Cemetery case, ⁴ it points out that the intent and purpose of Section 22 of the Internal Revenue Code would be partially nullified if its reasoning were adopted under such facts as these.

In the interpretation of the trust here under consideration, there are two important facts to bear in mind. First, is it apparent from the language of the instrument itself that the taxpayer either (a) retains some substantial measure of control over the trust or (b) receives a benefit from it? Secondly, what are the benefits which might possibly be derived by the taxpayer as opposed to those which the literal language of the instrument would seem to bestow?

For example, the preamble sets forth a need for suitable buildings to be erected '* * * for the use of lot owners, and their families as a chapel, administrative building and for such other purposes as are consistent with the operation of the cemetery.' The quoted language refrains from any inference that the erection of such buildings would benefit not only the lot owners but also the taxpayer. That they would benefit the taxpayer substantially is inescapable. One of the buildings contemplated is termed an administration building. Such a building must necessarily, or at least could, serve the purposes of the taxpayer by containing offices for its officers, for the keeping of corporation records, rooms for sales personnel, etc. Moreover, nothing in paragraph 7 prohibits the trustees from erecting a building containing vaults or crypts. After such a building were fully paid for, the proceeds of ninety per cent of the sales of crypts or vaults would pass directly to the taxpayer. Indeed, the concluding language of paragraph 16 states in so many words that the construction of a building or buildings as contemplated by the trust would sooner or later accrue to the taxpayer's benefit. ⁵

Not only can aclear benefit to the taxpayer be found from the very language of the instrument but a substantial measure of control by the taxpayer over the trust is inherent in its terms. At the outset, it is apparent that the trustees of the Building Fund Trust are the executive committee of the taxpayer which, moreover, has the sole power to fill vacancies among the trustees. The investments made by the trustees are subject to approval by the taxpayer. The plans, specifications and payments for labor and material for the building or buildings are also subject to taxpayer's approval as is the right to dictate the placing of construction loans or mortgages upon the building.

Altogether, it is very plain that the taxpayer here not only may benefit substantially from the trust but also exercises a large measure of control over it. ⁶

While some small comfort may be drawn by the taxpayer from the language of the American Cemetery Association case cited in footnote 3, yet this is not that case. The facts here go far beyond. If, upon the completion of an hotel, its directors created a trust requiring twenty per cent of the proceeds of the rentals from all rooms to be placed in trust for the purchase of land for the building of a golf course, tennis courts and swimming pool and providing that all fees exacted from guests for the use of these facilities be paid into the trust but that, upon the final payment for such facilities, they be deeded to the hotel corporation in trust forever, could it be reasonably argued that, although for the use and benefit of hotel guests, the hotel corporation did not also benefit? Yet, stripped of window dressing, the trust here does not differ substantially from that in the hypothetical case mentioned.

Under facts strikingly similar to those at bar, the Fourth Circuit Court of Appeals in National Memorial Park v. Commissioner, 145 F.2d 1008, 1012, held a similar trust fund taxable as income. The Court said in part:

     'Even were it admitted that the improvement fund constituted a

The taxpayer's motion for summary judgment is denied; that of the Government granted.

² A cemetery association may be operated as a non-profit corporation in which case it is exempt from taxation. (Sec. 101 Int.Rev.Code 1939, 26 U.S.C. Section 101; Sec. 501 of the Int.Rev.Code of 1954, 26 U.S.C. Section 501.)

³ In point of fact, in many of these cases these funds were required to be set aside for perpetual care, etc., by state statute. A typical expression of the reasoning of the Courts may be found in the American Cemetery case, supra, at page 919 of the reports where the Court stated:

     'If, on the other hand, a trust is created, and a taxpayer is

⁵ '* * * it being the intention that the cemetery and space owners as a whole shall be the sole beneficiaries of this Trust * * *.'

⁶ Taxpayer points to a deposition of one Hagenback, manager of the cemetery, in effect denying that it will benefit from the terms of the trust. Thus, argues taxpayer's counsel, no motion for summary judgment can be granted because there is an issue of fact. In my opinion, where depositions or affidavits attempt to negate the very language of the instrument itself and all necessary inferances therefrom, the depositions must be disregarded.

⁷ For instance, the trustees were authorized to construct a chapel. Though the witness Hagenback denied that the existence of a chapel would benefit the taxpayer by increasing sales of lots, it is fairly obvious that both the taxpayer as well as the lot owner would benefit.