*1363 A state statute required the establishment of a trust fund equal to 10 per cent of the cost of a mausoleum as a condition precedent to the use thereof. The petitioner did not establish such a fund, but later borrowed a sum of money which it placed on deposit as a special interest fund. In the taxable year it repaid part of the loan. Hold that petitioner did not create a trust which would reduce income either by exclusion or deduction.
*128 The respondent determined a deficiency in income tax for the year 1924 in the amount of $2,114.14. Issues concerning depreciation deductions were settled by stipulation, which will be given effect under Rule 50.
The remaining questions have to do with an alleged trust for perpetual care of a mausoleum erected by petitioner. The principal claim of petitioner is that it is entitled to exclude from gross income amounts equal to 10 per cent of the cost of additions made in the years 1921 to 1924, inclusive. In the alternative it claims a deduction for 1924 of the amount of $10,000*1364 alleged to have been set up as a maintenance fund in that year.
The respondent, by amended answer, alleges that he erred in allowing certain deductions in the years 1922, 1923, and 1924, and *129 asserts claim for the increased deficiency that may result from the correction of the error.
FINDINGS OF FACT.
The petitioner, a New Jersey corporation, was organized in 1916 to erect a mausoleum and sell space therein.
The building was commenced in 1917 and completed in 1920 at a cost of $219,645.87. Thereafter additions were made to the building at the following costs: 1921, $871.50; 1922, $1,922.16; 1923, $36,542.01; 1924, $34,641.68, making a total cost of the building and additions (exclusive of land) of $293,623.22. Prior to 1921 the petitioner expended $1,796.60 in improvements to the grounds and in 1922 and 1924 spent the further sums of $86.40 and $451.11, respectively, making a total of $2,316.11 expended for such improvements.
The petitioner sold space in the building in 1916 from blue prints. The mausoleum was formally opened on May 30, 1919, and the first space was occupied about a month prior thereto. The contracts under which space in the building was*1365 sold provided that "The purchase price will provide for permanent endowment fund for the perpetual maintenance of the mausoleum and all other expenses, except a payment for opening and closing crypt or niche at time of interment." Folders sent to some prospective purchasers of space in the building contained a statement that "an endowment fund assures the proper continual up-keep, with no further expense to you besides the first cost."
Prior to 1921 nothing was done to establish a fund for the perpetual care of the building. On January 1, 1921, the petitioner charged an account designated "Maintenance Trust Fund," and credited an account termed "Reserve for Maintenance Trust Fund," with $22,144.24, of which amount $21,964.58 represented 10 per cent of the cost of the mausoleum to that date, and the balance the same percentage of the cost of improvements to the grounds. Entires were made in these accounts at the close of 1922, 1923 and 1924 for additional expenditures. On December 31, 1924, the accounts each totaled $29,593;93, representing 10 per cent of the cost of building and improvements to the grounds as of that date. The entries made in the accounts did not affect the net*1366 worth of the petitioner, they having been made merely in an effort to comply with a statute of New Jersey requiring owners of mausoleums to establish a trust fund equal to 10 per cent of the cost of the building for the perpetual care of the property from the interest thereon.
In January, 1921, the petitioner, having no funds with which to establish a trust fund in compliance with the New Jersey statute, borrowed $15,000 at 6 per cent interest from the Columbia Trust *130 Company of New Jersey, and immediately deposited the amount borrowed with the same bank to the credit of a special interest account at 4 per cent interest. The transaction was recorded in petitioner's booking by a charge to a "Special Interest Fund" account, and crediting notes payable. On December 18, 1924, the petitioner paid $10,000 on the note with funds taken from its business. The payment was recorded on its books by charging notes payable and crediting cash.
In its income-tax returns for the years 1922, 1923 and 1924 petitioner claimed as deductions the amounts, respectively, of $6.84, $6,493.78, and $949.07, which amounts purported to represent 10 per cent of the cost of additions and improvements*1367 to its property in those years. The deductions claimed were allowed by the respondent.
OPINION.
ARUNDELL: The statutes of New Jersey contain the following provisions:
No mausoleum, vault or crypt or structrue so erected as aforesaid shall be used for the purpose of interring or depositing therein any dead body until a trust fund shall have been established and set apart, in accordance with the laws regulating trust funds in this State, amounting to not less than ten per centum of the total cost of the structure; the interest, and that only, to be used for the perpetuation of said building; but this clause shall not apply to private mausoleums or temporary receivivg vaults. [Chap. 233, Laws of New Jersey, 1916.]
Petitioner claims that this statute, coupled with the terms of the sales of space in the building, imposed a trust upon its assets in an amount equal to 10 per cent of the additions made to the mausoleum from 1921 to 1924, inclusive, and following , such percentage of the construction costs each year is excludable from gross income or sales. It is contended, in the alternative, that the*1368 amount of $10,000 paid in 1924 on the loan of $15,000 made in 1921 is deductible from gross income in the taxable year.
In the Evergreen Cemetery Association case, supra, there was a state statute providing for setting aside as a trust fund a portion of the "money received from the sale of the lots." In ; , the taxpayer entered into a trust agreement under which it deposited with a trustee a percentage "of the gross amount of money received from the sale of all lands." In , the taxpayer set aside as a maintenance fund a percentage of "all receipts from the sale of niches, urns and vaults." In all of these cases the maintenance or perpetual care funds were taken out *131 of receipts from sales, and the amount the went into the trust funds so created was held not to be a part of income, on the theory that it was not subject to the taxpayer's unfettered use, but was received and administered for the benefit of the purchaser. In this group of cases the trust fund bore a direct relation to the taxpayer's sales. A*1369 portion of the sale price became impressed with a trust simultaneously with its receipt, and by reason thereof never was income to the taxpayers.
In the present case there was no requirement, either statutory or contractual, that any part of the receipts from sales was to go into a trust fund. If the taxpayer never made any sales it would still be required by the state statute to have on hand a trust fund before the property could be used. The cost of the mausoleum up to the years here involved was something over $200,000, and under the requirements of the law there should have been a trust fund in existence in excess of $20,000. How could this in any way reduce income in subsequent years? The statement in the sales agreement to the effect that the purchase price would provide a perpetual care fund did not obligate petitioner to set aside any ascertainable sum which a purchaser could require to be administered as a trust. As a matter of fact the petitioner never treated any part of the receipts from sales as having been received by it as a trustee. The record is entirely bare of evidence that petitioner created a trust fund with the $15,000 it borrowed in 1921 and left on*1370 deposit with the bank as a "special interest fund." Even conceding that the borrowed money could somehow be regarded as a trust fund, it does not appear that there was any relation between that sum and petitioner's income for the year 1921. It is obvious, we think, that the existence of a trust fund does not necessarily affect income one way or another. Such a fund may be created out of donations, surplus, or capital, with no effect whatever on current income. It is only in cases where sums that would otherwise be reflected in income are diverted from the use of the taxpayer, as in the cases above cited, that income is affected. When in 1924 the taxpayer paid off $10,000 of the loan it was merely liquidating a liability, which plainly could not serve to reduce income.
Inasmuch as the state law applicable to petitioner's operations required the maintenance of a trust fund based on cost, and no connection whatever is shown between cost and sales, we are of the opinion that petitioner is not entitled to reduce income from sales by reason of its so-called trust fund. It may be pointed out that during the years 1922 to 1924 petitioner did not in fact either create a trust fund or*1371 pay any sums into the special account carried by it at the bank. The petitioner concedes that the book entries made in *132 the years 1921 to 1924, inclusive, purporting to set aside a sum equal to 10 per cent of the additions and betterments during those years did not alter the income or surplus accounts and were altogether ineffective to accomplish any purpose. It follows that the deductions allowed by respondent based on the cost of additions in the years 1922, 1923, and 1924 were erroneously allowed and should be restored to income.
The pleadings in this case, and the facts developed, make a narrow issue, and we have no occasion to pass upon the question of whether a trust fund actually created pursuant to the New Jersey statute may be recovered as a part of the cost of sales, or through any other method of capital recovery recognized under the Federal taxing acts.
Decision will be entered under Rule 50.