1937 BTA LEXIS 632">*632 Petitioner acquired a tract of land which was improved for the purpose of selling cemetery lots. Under a contract between petitioner and a corporation organized to operate and maintain the cemetery, 10 percent of the sales of the lots was to be paid over to such corporation as a perpetual care fund, the income from which was to be used by the corporation for such purposes. The income not being sufficient, a subsequent oral agreement was made wherein petitioner retained the amount and operated and maintained the cemetery. Petitioner charged the 10 percent of its gross sales on its books to a reserve set up for the corporation, but the amount was not segregated or paid over. Held, the amount so retained was includible in petitioner's income.
36 B.T.A. 958">*958 The respondent determined a deficiency in income taxes against the petitioner for the calendar year 1931 in the amount of $604.45. The petitioner brings this proceeding for a redetermination of its tax liability.
The petitioner contends that the respondent erred in including in income the amount of1937 BTA LEXIS 632">*633 $4,449.85 representing 10 percent of gross sales of cemetery lots. Petitioner concedes that the respondent is correct in increasing its taxable income in the amount of $587.18, claimed as a loss from 1929 and 1930 and deducted in its return for 1931.
36 B.T.A. 958">*959 FINDINGS OF FACT.
Petitioner is a common law trust organized in the State of Missouri in 1925. It had acquired title to a tract of land in St. Louis County, Missouri, which was improved for the purpose of selling cemetery lots. It has its principal office and place of business at 122 North Seventh Street in St. Louis.
The Hiram Cemetery Association is a corporation organized in the State of Missouri under a pro forma decree by the Circuit Court of St. Louis County,Missouri, in 1925.
On May 4, 1925, petitioner, as "parties" of the first part, and the Hiram Cemetery Association entered into a contract which provided in part as follows:
WHEREAS, the Party of the Second Part is formed for the purpose of operating and maintaining a cemetery in the County of St. Louis, Missouri, and;
Whereas, said Party of the Second Part is desirous of obtaining a perpetual care fund for the support and maintenance of said1937 BTA LEXIS 632">*634 cemetery, and the Parties of the First Part desire to assist in the creation of such a fund;
* * *
The Parties of the First Part agree to convey to the Board of Trustees of said Party of the Second Part all lots in any and all sections being developed which bear the number that ends with a serial number naught. Said conveyances to be made as soon as each respective section is developed and ready for sale and same are to be free and clear of all encumbrances or liens of any kind whatsoever. * * * Parties of the First Part further agree to give ten percent of all money received from the sale of all remaining lots in any section and to that end to render semiannually a full and complete statement of all lots sold and pay to the Party of the Second Part said percentage of the amount so received within ten days from the date of said statement. The Party of the Second Part in consideration of said gifts and conveyances hereinafter mentioned and the mutual covenants and agreements herein contained agrees to assume the care and maintenance of the said sections of said cemetery when they are fully developed, provided, however it then has or is guaranteed by the Parties of the First Part1937 BTA LEXIS 632">*635 a perpetual care fund created as herein mentioned to care for said sections * * *. * * * Party of the Second Part agrees to create a perpetual care fund with which to maintain and care for said cemetery, which fund shall be created by said party by means of the proceeds of sale of all lots conveyed to it as hereinafter set out and all monies received by it shall be invested by party of the Second Part in safe and secure interest bearing securities * * * and the interest or income of said investment shall be used to meet the necessary expenses in maintaining and caring for the developed portions of said cemetery. * * * It is further agreed that this contract shall remain in full force and effect until all of the lots owned by Parties of the First Part are disposed of and that this contract shall be filed in the Recorder of Deeds Office of St. Louis County, Missouri, and a copy of it kept in the office of both parties hereto which shall be open for inspection of any interested party at all reasonable hours.
The petitioner at all times used a uniform sales contract for the sale of its cemetery lots. This contract was headed "Purchase Contract, 36 B.T.A. 958">*960 Hiram Cemtery, Perpetual1937 BTA LEXIS 632">*636 Charter-Perpetual Care" and provided among other things:
This contract is subject to the rules and regulations of HIRAM CEMETERY ASSOCIATION, and to the conditions and stipulations contained in a certain deed recorded in the office of the Recorder of Deeds for St. Louis County, Missouri.
The deed to the cemetery lots recites that the lot is sold "subject to the terms, conditions and limitations contained in an agreement recorded in the office of the Recorder of Deeds of the County of St. Louis, State of Missouri; which agreement contains conditions, restrictions and limitations governing Hiram Cemetery and provides for the perpetual care thereof."
Petitioner rendered to the Hiram Cemetery Association semiannual statements of lots sold as provided in its agreement. Such statements for the year 1931 were rendered July 7, 1931, and January 6, 1932. The statements were identical except as to amounts reported. The statement of July 7, 1931, is as follows:
July 7, 1931.
HIRAM CEMETERY ASSOCIATION,
Clayton, Missouri.
GENTLEMEN: Agreeable to the contract between your association and the Mason Securities Association, we hand you herewith statement of gross amount of installment1937 BTA LEXIS 632">*637 and contract sales of lots in Hiram Cemetery sold by us for the six months period ended June 30, 1931, which is as follows:
| Gross amount of installment and contract sales | $28,453.00 |
| Less sales cancelled during period | 1,750.00 |
| Net sales | $26,703.00 |
Ten percent of the above amount, as and when collected, will be payable to you in cash.
By reason of the fact that your income from these trust funds will not maintain the improvements, and agreeable to our understanding, you may charge the sum of $2,670.30 against us subject to being paid in cash and we will use the balance due you and such additional sums as may be necessary to enable us to maintain, improve, and develop the Cemetery grounds along the general plans heretofore outlined without further cost to you until your trust fund will care for same.
Respectfully,
MASON SECURITIES ASSOCIATION,
[Signed] HUGO ESSEN,
President.
An informal agreement was entered into between petitioner and the Hiram Cemetery Association under which the petitioner took care of the property and could use the money due to the Hiram Cemetery Association, provided it did not declare any dividends or pay out anything except1937 BTA LEXIS 632">*638 for the cemetery itself and kept double the amount shown by the accounts. This agreement was carried out. No part 36 B.T.A. 958">*961 of the 10 percent fund which was accrued semiannually by petitioner on its books has been paid by petitioner for the year 1931 and prior years.
Since the inception of the contract petitioner has charged 10 percent of its gross sales to a reserve set up for the Hiram Cemetery Association. At the beginning of 1931 this reserve amounted to $39,661.07. At the end of 1931 it amounted to $44,306.37. None of these amounts was actually set aside. At the end of the taxable year 1931, the amount actually due the Hiram Cemetery Association from completed sales was $9,280.47.
Petitioner reported its income tax return on the installment sales basis and for the taxable year eliminated from taxable income the amount of $4,449.85 representing 10 percent of its gross sales for that year. The Commissioner restored that amount to taxable income.
OPINION.
ARNOLD: The only question presented for our decision is whether the amount of $4,449.85, representing 10 percent of gross sales of cemetery lots during the taxable year, should be excluded from gross income.
1937 BTA LEXIS 632">*639 Petitioner argues that it was under a contractual obligation to pay 10 percent of its gross receipts from sales of cemetery lots to the Hiram Cemetery Association to establish a fund for the perpetual care of the cemetery, which amount was set up on its books as a reserve, and should not be included in income.
The respondent argues that since no amount was ever set aside to meet this reserve, but an informal agreement was entered into between the parties under which petitioner assumed the care of the cemetery and retained the amount it was supposed to pay the Hiram Cemetery Association and used it in its business, it is not entitled to have the amounts placed in reserve on its books excluded from gross income or deducted.
Petitioner contends that the decisions of the Supreme Court of the United States in , and , are direct authority under the facts of this case for the accrual of the amounts in question and authorize the deduction by petitioner of the 10 percent fund from its taxable income.
These cases arose under sections 12(a) and 13(d) 1937 BTA LEXIS 632">*640 of the Revenue Act of 1916. In the American National Co. case the Court quoted from the decision in the Anderson case in part as follows:
* * * A consideration of the difficulties involved in the preparation of an income account on a strict basis of receipts and disbursements … indicates 36 B.T.A. 958">*962 with no uncertainty the purpose of §§ 12(a) and 13(d) … to enable taxpayers to keep their books and make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred and properly attributable to the process of earning income during that period * * *.
The American National Co. reported as income the total amount paid on certain five-year notes received during the year and accrued and deducted the total amount of certain bonuses which it was obligated to pay over a period of five years at 1 percent of the balance of each note remaining unpaid during each year. Later, if it did not have to pay all the bonus which had been accrued, it reported the unpaid portion as income. The Court approved the method used as clearly reflecting the company's income.
In the instant case the petitioner, 1937 BTA LEXIS 632">*641 after entering into an agreement to pay to Hiram 10 percent of its receipts from the sale of lots for a perpetual care fund, set up a reserve on its books in that amount. Thereafter it did not carry out this agreement, but on the contrary entered into an oral agreement with Hiram under which petitioner assumed the care of the cemetery lots and used the total amount of the receipts from sales in its business, and, although it continued to set up on its books 10 percent of its receipts from sales, it never paid any money to Hiram and so far as the record shows this arrangement may continue indefinitely. Under these facts we do not think that this case is controlled by the decisions in the Anderson and the American National Co. cases.
Where a cemetery association is obligated to set apart a certain portion of its receipts from sales of lots for the purpose of establishing a fund for the perpetual care of such lots and has in fact not only accrued such amounts on its books but set them aside or paid them into a trust fund for that purpose, the Board and the courts have recognized the accrual of such amounts as clearly reflecting income and have either excluded them from gross1937 BTA LEXIS 632">*642 income or allowed their deduction. ; ; ; ; . Cf. ; ; . But where there is only a general obligation to maintain the cemetery or where there is an accrual and a reserve set up for a perpetual maintenance fund and no money has actually been paid into the fund, the amount has been included in income and only a deduction of the actual expense of maintenance 36 B.T.A. 958">*963 allowed. ; ; certiorari denied, 1937 BTA LEXIS 632">*643 ; . Cf. ; .
In , the Board said:
* * * A mere appropriation to a reserve set up by a taxpayer to provide for his contractual obligations does not serve to lessen his taxable net income either by way of exclusion from gross or by way of deduction, irrespective of whether the accounting system be a cash system or an accrual system. If, however, there is trust which the law recognizes, whether express or implied, and a prescribed part of the contract price received for a lot can be said to be received in trust, such part is excluded from gross income; or if, although not received in trust, a part is necessary immediately turned over to an established trust, such part is deductible. * * *
In , the Circuit Court of Appeals said:
* * * The law permitted petitioner to keep its books on the accrual basis, which as it well states, implies that the books shall1937 BTA LEXIS 632">*644 immediately reflect obligations and expenses definitely incurred and income definitely earned; and we think it further implies that the actions of the taxpayer shall be consistent with its books of account.
The rulings of the Board are consistent in permitting deductions for accrued liabilities where the books of account are kept according to the accrual method, and that permission has never been denied, in cases of trusts such as the one before us, where the money received has actually been paid into the trust fund. The Board's ruling in such cases requires the actual payment of the money into the trust fund as a prerequisite to its deduction as an accrued liability, and we think that ruling is proper. * * *
Here petitioner's obligation was contactual and no amount of the receipts from sales was turned over to an established trust. Petitioner has at all times treated the entire receipts from sales as income be using it for purposes not contemplates by the original agreement with Hiram on which it relies and has failed to pay over any amounts due under that agreement. The exact terms of the oral agreement are not clear, but the term is so indefinite that it can not be said1937 BTA LEXIS 632">*645 when if ever petitioner will pay over any money to Hiram.
From the facts before us we think that the amount in controversy should be included in income for the taxable year, and only the actual expense of maintenance should be deducted from income. The record does not disclose what this actual expense, is, and we can not, from the facts before us, agree with petitioner's argument that 10 percent of the receipts from sales should be considered expense of maintenance.
Decision will be entered under Rule 50.