*1337 The Resthaven Memorial Trust transferred in 1928 all its assets to the petitioner in exchange for petitioner's capital stock and its contract to pay the liabilities of the trust. Held, petitioner is liable as a transferee for the unpaid Federal income tax of the trust for the taxable year 1927; held, further, that, in determining the profits of the Resthaven Memorial Trust on its sales of cemetery lots in the taxable year 1927, there may not be added to the cost thereof anything more than the amount actually expended on the lots prior to the end of the taxable year.
*383 The Resthaven Memorial Trust, a common law trust, filed its income tax return for its fiscal year ended November 30, 1927, on February 11, 1928. On November 6, 1930, a deficiency notice addressed to petitioner as in the caption was mailed, stating, "the determination of your tax liability for the fiscal year ended November 30, 1927, discloses a deficiency of $3,707.42."
On January 3, 1931, the Resthaven*1338 Memorial Cemetery, Inc., under the same caption, filed its petition and on February 15, 1934, after motion duly made and granted, filed an amended petition, assigning errors, in substance, as follows: (1) Failure of respondent to add to the cost of petitioner's land an amount of $3,000 per acre to provide for perpetual care of the cemetery; (2) failure of respondent to increase the initial cost of the land by the amount actually expended in its development for cemetery purposes; (3) failure *384 to add to the original cost of the land, plus expenditures for development, an amount representing reasonable extimated future development expenses; (4) that if respondent was correct in not adding to the cost of the land any portion of the $3,000 per acre to provide for perpetual care, he erred in not holding 20 percent of the receipts from the sale of lots up to $3,000 for each acre was received in trust and should not be included in petitioner's income; and (5) failure of the respondent to carry forward a proper net loss for the year 1926.
The respondent in his amended answer, filed on the same date as the amended petition, denied all errors assigned and the allegations of fact*1339 upon which the petitioner relied to show error. Respondent also asked for affirmative relief based on the correction of an error he asserted he committed in determining the profit on the sale of lots, in overstating development cost in the amount of $40,031.48, the correct amount of development cost to be used in computing petitioner's tax liability for the year in issue being $41,097.40 instead of $81,128.88, which he erroneously used.
Immediately after the filing of the amended petition and amended answer there was a brief hearing and some additional evidence was introduced.
FINDINGS OF FACT.
The Resthaven Memorial Trust was organized as a common law trust on July 31, 1926, Charlton D. Putnam, Virgil Schaeffer, and Lewis C. Tingley being the trustees thereof. On that date the trust acquired about 120 acres of land in Jefferson County, Kentucky, approximately nine miles from the city of Louisville. The purpose of the trust as expressed in its declaration was "to hold, improve, develop and sell real estate," aforementioned, "as well as any other property" which thereafter might be acquired by the trustees for the uses and benefit of the beneficiaries of the trust.
On*1340 December 2, 1926, the Resthaven Memorial Park & Cemetery Association (hereinafter called the association), a Kentucky corporation, not for profit, was incorporated and on January 26, 1927, entered into an agreement with the trustees or owners of the Resthaven Memorial Trust (hereinafter called the owners) in which in substance it was provided in part that, when the owners desired to lay out lots, walks, and streets and develop and improve any part of their cemetery lands for burial purposes, it should be done under the supervision of competent architects and engineers, pursuant to subdivisions and surveys submitted and approved by the association; that the owners, concurrently with the filing for record of any plat of any section or portion of their lands, should convey to the association, clear of all liens or encumbrances, "the roadways, *385 walks, water mains, sewers, buildings, enclosures, improvements and structures, constructed, erected or installed upon the section or subdivision covered by the plat filed"; that the owners should provide the association a trust fund, the income only from which might be used for the permanent care and maintenance of the burial ground*1341 known as the Resthaven Memorial Park and Cemetery, which trust fund should be provided as follows: After the owners had received from the sale of lots in the Resthaven Memorial Park and Cemetery the sum of $75,000, then 20 percent of any moneys received from such sales was to be set aside by the owners until such an amount would be euqal to $3,000 for each acre in each section of the cemetery, which fund, upon all the real estate being sold, should not be less than $360,000. The agreement provided in part that the association should operate, maintain, and conduct the cemetery in a modern and businesslike way; employ a superintendent and necessary help; assume forever the care, maintenance, and policing of the cemetery and the burial lots, graves, buildings, roads, walks, fences, drains, lawns, trees, flowers, and shrubbery; clean headstones and monuments and keep in proper repair all buildings and improvements.
For the purpose of providing a control over the management of the association by owners of lots in the cemetery, the association agreed that it would admit to its membership lot owners and issue to them certificates entitling each lot owner at any stockholders' meeting to*1342 one vote for each lot owned.
It was further agreed between the owners and the association as follows:
The Trust Fund provided by the "Owners" from the sale of lots shall be known as "The Perpetual Care Endowment Fund",
The funds of The Perpetual Care Endowment Fund shall be invested in such securities as are permissible for Trust Fund Investments under the laws of the State of Kentucky; and on the twentieth day of each month, a sum of money equivalent to twenty per cent of the cash receipts from the sale of lots in the previous calendar month shall be delivered by the "Owners" to the Trustees of the Perpetual Care Endowment Fund.
The Perpetual Care Endowment Fund herein created shall be under the care and custody of three Trustees, who shall be appointed as follows:
The "Owners" shall appoint one, who may be one of the "Owners";
The "Association" shall appoint one of its officers; and
A banking corporation to be selected by the parties hereto, which is duly authorized to transact a banking and trust business in the City of Louisville, Kentucky.
It shall be the duty of the Trustees of the Perpetual Care Endowment Fund to keep the principal of the same inviolate and*1343 constantly invested in securities as herein specified; and they shall collect the income of such securities and pay such income to the Association on the twentieth day of January, April, July and October of each year. * * *
The *386 record does not show that any trustees for the perpetual care fund were ever appointed, though it is shown that there was kept in the office of petitioner, under supervision of its president, under the title "Perpetual Care Fund," a record of a fund which represented "20 per cent of the money received from the sale of lots in Resthaven after the sales had crossed the $75,000 mark"; that up to September 1, 1932, the amount was in excess of $67,000; and that in the years hereinafter given there were set aside for the trustees the following amounts:
| Years ended nov. 30: | |
| 1927 | $769.55 |
| 1928 | 19,142.46 |
| 1929 | 19,580.03 |
| 1930 | 13,459.34 |
| 1931 | 9,600.92 |
| Dec. 1, 1931, to Aug. 31, 1932 | 4,909.97 |
On November 9, 1927, there was a meeting of the beneficiaries and trustees of the Resthaven Memorial Trust, at which it was unanimously agreed and resolved that the trustees, for and "in consideration of $1.00 and other valuable considerations, *1344 " should, and they were directed to, convey to a Kentucky corporation to be organized all the assets of the trust, wheresoever situated, "of a gross value of $190,620.09, subject to all liablities in the sum of $67,997.20," which the corporation was to assume and pay. The trustees were authorized and directed to proceed with the formation of the proposed corporation and to take the necessary steps to transfer the trust assets to the corporation and to assign and transfer to it the agreement between the owners and the association.
On November 21, 1927, there was incorporated under the laws of the State of Kentucky the Resthaven Memorial Cemetery, Inc., with an authorized capital stock of $350,000. By deed bearing date of January 10, 1928, the trustees of the Resthaven Memorial Trust conveyed to the Resthaven Memorial Cemetery, Inc., the assets of the Resthaven Memorial Trust, subject to the stipulations and covenants contained in the Resthaven Memorial Trust of July 31, 1926, and to the agreement between the trustees of the trust and the Resthaven Memorial Park & Cemetery Association, bearing date of January 26, 1927, and also subject to the vendor's lien and all the conditions*1345 and reservations set out in the deed of July 6, 1926, from Jake Greenberg and Mary Greenberg to Lewis C. Tingley. The Resthaven Memorial Park & Cemetery Association joined in the deed from the trustees of the Resthaven Memorial Trust to the Resthaven Memorial Cemetery, Inc.
At the hearing on February 15, 1934, it was stipulated that in consideration of the receipt by the Resthaven Memorial Cemetery, *387 Inc., of the assets of the Resthaven Memorial Trust, the former issued its capital stock to the latter and/or its beneficiaries or certificate holders and agreed in writing to pay the debts of the Resthaven Memorial Trust.
The cost of the 120 acres to the Resthaven Memorial Trust was $95,447.50. The land was divided into cemetery sections as needed and the first six sections, the ones involved in this controversy, have a total area of 27.74 acres, for which the respondent computed an aliquot part of the total cost to be $25,458.78, which petitioner accepted as correct.
Since the beginning of operations in 1926, expenditures as follows were made in the development of the cemetery:
| 1926 | $7,141.75 |
| 1927 | 33,955.65 |
| 1928 | 40,031.48 |
| 1929 | 26,295.87 |
| 1930 | $13,615.31 |
| 1931 | 12,197.63 |
| 1932 (to Sept. 1) | 1,736.26 |
| 1933 (to Nov. 30) | 7,945.03 |
*1346 In computing the total cost of the first six sections, the respondent added to $25,458.78, the cost of the land, the development costs for the years 1926, 1927, and 1928, amounting to $81,128.88, and in so doing now asserts in his amended answer that he erred in including in the added cost of the land the sum of $40,031.48, the amount of development costs in 1928, and makes claim for an increased deficiency resulting from the correction of this error.
Future development of the cemetery contemplated an elaborate water system costing in excess of $20,000 and an administration building costing about $25,000, and representations as to such developments had been made in advertising matter and by salesmen in the sale of cemetery lots. No definite or approximate date had been determined when such developments would be made, though their cost had been estimated. When cemetery lots were purchased and fully paid for, general warranty deeds were made to the owners of the lots, there being inserted on the face of the deeds the statement, "Perpetual care included."
OPINION.
SEAWELL: The record shows that on November 21, 1927, there was incorporated under the laws of Kentucky the Resthaven*1347 Memorial Cemetery, Inc., the petitioner herein, which by deed of January 10, 1928, acquired the assets of the Resthaven Memorial Trust and issued therefor its capital stock and agreed in writing to pay the debts of the trust. Having acquired all the assets and assumed all the liabilities of the Resthaven Memorial Trust and having received, as stated herein, the deficiency notice and filed petition and amended petition as heretofore set forth, petitioner, in our opinion and we so hold, is properly before the Board as a transferee of the Resthaven *388 Memorial Trust. See ; . And as such transferee, petitioner, in the circumstances detailed in our findings of fact, is liable for whatever income tax may be due from the Resthaven Memorial Trust for the firscal year in issue. , and authorities therein cited. What the correct amount of the tax so due is, if any, we will consider in discussing the errors assigned.
(1) Failure of the respondent to add to the cost of petitioner's*1348 land an amount of $3,000 per acre, or at the rate of $20 per burial lot (there being 150 such lots to the acre), to provide a trust fund for perpetual care of the cemetery is the first error assigned. The agreement of January 26, 1927, relative to such trust fund was not entered into with the purchasers of burial lots by the trustees of the Resthaven Memorial Trust, but by the latter with a corporation, the Resthaven Memorial Park & Cemetery Association, and the trustees were not obligated thereby to set aside 20 percent, or any other amount of money received from the sale of lots, to provide for a perpetual care fund until they should have first received from such sales the sum of $75,000. The record fails to show that any certain part or percentage of the amounts paid by purchasers of lots was paid by them with the understanding on their part that the same was paid and would be received by the trustees of the Resthaven Memorial Trust as a trust fund for perpetual care of the cemetery. The record shows that by the termination of the fiscal year ended November 30, 1927, there had been set aside for the trustees of the perpetual care endowment fund, in the manner indicated in our*1349 findings of fact, only $769.55. The owners were entitled (under the agreement with the Association) to receive $75,000 from the sale of lots in the Resthaven Memorial Park and Cemetery before the 20 percent provision of the agreement was to become operative and it is not shown that any more than the $769.55 should have been set aside for the trustees of the perpetual care endowment fund.
Under the circumstances disclosed by the record, we are of the opinion and hold that the respondent did not commit error in failing to add to the cost of petitioner's land an amount of $3,000 per acre to provide a trust fund for perpetual care of the cemetery. In determining profits on the sale of lots in the year in issue there may not be added to the cost of lots sold a sum representing an amount which may have been merely intended to be set aside for perpetual care. ; affd., .
(2) The petitioner in its second assignment of error asserts that respondent erred in not increasing the initial cost of the land (sections *389 1 to 6, inclusive) by the amounts actually expended on its development up*1350 to and including expenditures to November 30, 1933, to wit, $142,918.98. The respondent in his amended answer denies error in the regard asserted, but, on the other hand, affirmatively alleges that he did err in his determination of tax deficiency in that in the cost of land he included the development expense incurred in 1928, after the taxable year, in the sum of $40,031.48 and that, therefore, the deficiency in tax should be increased by the correction of this error. Neither the development expense of $40,031.48 in 1928 nor any thereafter is shown to have been either incurred or borne by the Resthaven Memorial Trust and did not increase the initial cost of the land to it. We are of the opinion and hold that respondent did not err as asserted by petitioner, but did err as he affirms, and that the deficiency asserted should be increased by excluding $40,031.48 as part of the cost of the lots to the Resthaven Memorial Trust.
(3) The record shows that before the end of the fiscal year in issue there was a meeting of the trustees and beneficiaries of the Resthaven Memorial Trust on November 9, 1927, at which it was agreed and resolved by them to dispose of all its assets to a separate*1351 entity, a corporation to be formed, which would assume and pay all the debts of the Resthaven Memorial Trust. The proposed corporation, the Resthaven Memorial Cemetery, Inc., the petitioner herein, was incorporated on November 21, 1927, and to it by deed dated January 10, 1928, were conveyed all the assets of the Resthaven Memorial Trust and all the latter's liabilities were assumed by the corporation, which issued its capital stock to the Resthaven Memorial Trust, etc., as set forth in our findings of fact.
In view of the action taken and the resolutions adopted by the trustees of the Resthaven Memorial Trust prior to the close of the fiscal year in issue, it can not, in our view of the matter, reasonably be presumed that the trust itself contemplated or intended future development of the land, which it was preparing to dispose of absolutely, and definitely so determined on November 9, 1927. While the record indicates that the trustees of the Resthaven Memorial Trust had, in a sense, contemplated the construction on the land of an elaborate water system costing in excess of $20,000 and an administration building costing about $25,000, no definite or even approximate date had*1352 been determined at which such developments would be made, and such future development by the Resthaven Memorial Trust appears from the record to have been abandoned, so far as any action by it was concerned, when it disposed of the land to the corporation. We are of the opinion and hold that the respondent did not commit error with respect to the disallowance of future development expense claimed by petitioner.
*390 (4) In reference to the fourth assignment of error, the record fails to show that there were ever any trustees appointed for the perpetual care endowment fund. While the evidence shows there was kept in the office of the petitioner a record of the amounts which should have been collected under the terms of the agreement between the owners and the association by the three trustees of the fund, who were to keep the principal of the fund inviolate and constantly invested in certain securities, etc., as the agreement provided, it fails to show that any trustee so acted and dealt with any perpetual care endowment fund or that any such fund was actually in existence, though there was a record showing what money was realized from lot sales for such fund. In the circumstances, *1353 we are of the opinion and hold that the respondent did not commit error as herein assigned and the petitioner's contention is not sustained.
(5) Our determination on prior assignments of error being in favor of the respondent, there is not in our opinion, and we so hold, any sufficient evidence in the record showing the respondent failed to carry forward a proper net loss for the year 1926 as alleged by the petitioner, and, therefore, such assignment of error is not sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.