*1027 A nonprofit corporation was organized in 1926 under the laws of California for the purpose of operating and managing memorial park cemeteries in that state; acquiring, selling, and dealing in lands for such purpose; and doing all things necessary for, incidental to, or convenient in the interring of the human dead, including the preparation of bodies for burial and the operation and management of a mortuary. During the taxable years the corporation engaged in these and other incidental activities authorized by its articles of incorporation. A portion of the selling price of lots, mausoleum niches, crypts, etc., was paid under contract to a land company from which land was purchased for cemetery purposes and which constructed the buildings in the cemetery. The net earnings of the corporation under its charter and bylaws were required to be expended in the improvement of the cemetery property and no part thereof inured to the benefit of any private shareholder or individual. Held, petitioner is exempt from Federal income tax under the provisions of section 103(5) of the Revenue Act of 1932 and section 101(5) of the Revenue Acts of 1934 and 1936.
*1091 Respondent determined deficiencies in the income tax of petitioner, and additions to tax for failure to file income tax returns within the time prescribed by law, as follows:
| Year | Deficiency | 25% penalty | Total |
| 1933 | $492.83 | $123.21 | $616.04 |
| 1934 | 4,918.88 | 1,229.72 | 6,148.60 |
| 1935 | 1,803.88 | 450.97 | 2,254.85 |
| 1937 | 6,759.80 | 6,759.80 | |
| Total | 13,975.39 | 1,803.90 | 15,779.29 |
One issue relating to depreciation on furniture, fixtures, and equipment has been settled by stipulation of the parties.
The remaining issues are:
1. Is petitioner entitled to exemption from income tax under the provisions of section 103(5) of the Revenue Act of 1932 and section 101(5) of the Revenue Acts of 1934 and 1936?
2. Is petitioner, in computing its surtax for the year 1937, entitled to a credit under section 26(c)(1) of the Revenue Act of 1936 because of the provisions of a contract restricting the payment of dividends?
3. Is petitioner liable for delinquency penalties under section 291 of the Revenue Acts of 1932 and 1934 and section 406 of the Revenue*1029 Act of 1935, for failure to file timely returns for the calendar years 1933, 1934, and 1935?
The proceeding was submitted upon a stipulation of facts, oral testimony, and documentary evidence. We find the facts to be as stipulated, whether specifically set out in our findings or not.
*1092 FINDINGS OF FACT.
Petitioner was organized under the laws of the State of California on February 2, 1926, as a nonprofit cemetery corporation. It has its office at 1712 South Glendale Avenue, Glendale, California. Its Federal income tax returns for the years 1933, 1934, 1935, and 1937 were filed with the collector of internal revenue at Los Angeles, California.
In 1906 the Forest Lawn Cemetery Association (hereinafter referred to as the cemetery association) was organized under the laws of the State of California to establish and maintain a cemetery in a location now included in the city limits of Glendale, California. Its articles of incorporation provided that it should acquire lands, not exceeding 320 acres in extent, to be held and occupied exclusively as a cemetery for the burial of the human dead; that it should subdivide such lands into lots and plats and sell the lots*1030 to purchasers; and that it should apply any surplus arising from the sale of said lots and all other sources for the payment of the land and expenses of the corporation and for the improvement, embellishment, and preservation of the cemetery. The articles also provided that seven trustees, elected by the members of the association, should have the management of the affairs of the corporation, and that it should have no capital stock.
During the early years of its operation the cemetery association was not successful. In 1912, it was a small country cemetery of approximately 58 acres, eight miles from Los Angeles, and its sales during that year amounted to only $28,000. It was then purchasing its land from the Tropico Land & Improvement Co., paying therefor 50 percent of the selling price of the lots.
In 1912, the cemetery association engaged the services of Hubert Eaton, the present general manager of petitioner, in the capacity of sales agent for "before-need" sales of cemetery lots. Prior to hiss employment most of the sales of lots had been made at the time of death - "at need." Eaton received a commission of 50 percent of the "before-need" sales for the first year and*1031 40 percent thereafter, out of which he paid all of the selling expenses. Some increase in business resulted from "before-need" sales; but the income of the cemetery association for several years after Eaton's employment was not sufficient to permit it to liquidate its indebtedness to the land company and to a bank. Its operations finally came to a standstill when the land company refused to deed any more land until it should be compensated for land previously sold to the cemetery association.
In order to remedy this situation a new land company, the American Security & Fidelity Co., was organized in 1916. It acquired all of the assets of the Tropico Land & Improvement Co., paid the indebtedness of the cemetery association to the bank, and canceled the debt which the association owed to the land company. In 1917 and 1923 the new land company acquired additional lands and dedicated the major portion of such lands to cemetery purposes.
*1093 Sometime prior to 1919 Eaton instituted the "Memorial Park" plan of cometery development. The essence of this plan is to make the cemetery a place of beauty, attractive to the living, in addition to providing a safe depositary for*1032 the dead. To carry this plan into effect the Forest Lawn Memorial Park Association (predecessor of petitioner) was organized in 1919 as a nonprofit cemetery company. Every person who bought 200 square feet of ground in the cemetery became a member of the association. The activities formerly carried on by the cemetery association were divided. It continued in existence, received title to the land from the land company, executed deeds for interment rights to buyers of lots, retained the residuary title to the property, and handled the perpetual care fund. The Forest Lawn Memorial Park Association received from the cemetery association the income derived from the perpetual care fund, used it in the care of the cemetery property, and conducted the other activities formerly carried on the the cemetery association.
The above changes did not completely solve the problems of the cemetery. The Forest Lawn Memorial Park Association had so many members scattered throughout the world or buried in the cemetery that it was impossible to get a majority of them to attend a meeting or to give their consent to various corporate acts. In order to eliminate this difficulty, petitioner, Forest*1033 Lawn Memorial Park Association, Inc., was incorporated in 1926, under the laws of the State of California, the word "Inc." being added to the name of its predecessor to distinguish the two corporate entities. The number of members of petitioner was limited to 30. The purpose of this limitation was to enable the organizers to induce permanent local residents, who were property owners in the cemetery and willing to devote some of their time to the management of the park, to become members in order that it would be possible to get a quorum for the purpose of passing upon various corporate acts. The Forest Lawn Memorial Park Association transferred its assets, without consideration to petitioner. It was never dissolved, inasmuch as it was impossible to reach a majority of its members for a vote upon dissolution.
Petitioner's articles of incorporation provide that it shall have no capital stock and shall be operated without profit to any of its members; that the purposes for which it is formed are to own, operate, manage, and conduct Memorial Parks in Los Angeles County, California (the term, Memorial Park, being defined to include cemeteries, mausoleums, columbariums, crematories, *1034 and any and all methods, manners, and kinds and places of burials and interments of the human dead); to do all things necessary for, incident to, or convenient in, modern burials and processes of interring the human dead; to acquire, own, sell, and deal in lands for memorial parks; to acquire, operate, and manage crematories, mausoleums, columbariums and vaults; to provide for the perpetual care of any and all memorial park property; and:
*1094 (e) To engage in, conduct and deal generally with and in any and everything pertaining to or necessary or convenient for the preparation of bodies for burial, including the owning, operation and management of one or more mortuaries, and to do any and all things incidental, necessary or desirable thereto, including all forms of preservation, burial or cremation of bodies of deceased persons.
* * *
(h) To buy, manufacture, or otherwise acquire, to own, operate, deal in, use and manage, and to sell or otherwise convey, incinerary urns, burial boxes, burial vaults of steel, concrete and/or other material, grave markers, niche memorials, crypt memorials, foundations for markers, monuments, ornamental vases, books, booklets, post cards, *1035 flower vases, flowers, plants, trees, shrubs, and nursery and green house products of any and all kinds, including contracts for planting, improving and otherwise decorating grounds, buildings and/or other property, and particularly with and respecting those objects of art, including statuary and other objects useful, necessary or desirable for the artistic development, beautification, embellishment or improvement of any lands and/or buildings, whether located within or without any memorial park, and to own, lease, or otherwise acquire and hold, all necessary lands, plants, buildings and other property necessary therefor.
Petitioner's bylaws contain the following provision:
NET PROFITS: After the income and disbursements have been made in the manner herein described and there shall remain a net profit, such net profit may at the discretion of the Board of Directors be held and added to the surplus of this Association. In the event the Board of Directors deems it advisable that the profits be expended, such profits must be expended in the improvement of the property or for the benefit of this Association and cannot be disbursed to any individual or corporation.
The bylaws also*1036 provide that all persons who own property of a value of not less than $100 in Forest Lawn Memorial Park, who pay a membership fee of $10 and such annual dues as the board of directors prescribe, and who are duly elected to membership, shall be considered members. Termination of membership does not, in any case, entitle the member to participate in the assets of the corporation.
During the years 1933 to 1937, inclusive, petitioner had approximately 25 members, although about 900 lot owners owned sufficient property in Forest Lawn Memorial Park to qualify them for membership. No membership fees or dues have ever been paid by the members, and they receive no dividends, profit, or compensation other than the benefits that flow from the ownership of burial property, the same as all lot owners enjoy. During the taxable years no part of the net earnings of petitioner inured to the benefit of any private shareholder or individual.
The statutes of California in effect at the time of the organization of petitioner (Sec. 611, California Civil Code) authorized cemetery corporations either to issue bonds in connection with the acquisition of lands to be used for cemetery purposes and retire*1037 them out of the proceeds of sales, or to agree with the persons from whom such lands should be purchased, to pay as the purchase price thereof, any specified *1095 share or portion, not exceeding one-half, of the proceeds of the sales, payment to be made at such intervals as agreed upon. The cemetery association had adopted the latter method. It had contracted to pay the land company one-half of the gross proceeds from all sales of lots, plats, and graves (exclusive of sums collected for perpetual care) and 60 percent of the gross proceeds of all sales of niches, crypts, vaults, family sections, private mausoleums, and other mausoleum columbarium property (exclusive of sums collected for perpetual or special care). The cemetery association, with the consent of the land company, assigned all of its rights under the contract to petitioner except the right to manage and control the perpetual care fund, the right to receive the title to the land from the land company, and the right to retain the residuary fee in the lots after the interment rights had been deeded to the individual purchasers. Petitioner was to receive the income from the perpetual care fund in consideration*1038 for caring for the lands and other property in the cemetery and all moneys received by it from sales and other operations, except the portion which was to be paid over to the land company, were to be its exclusive property.
All land acquired from the land company is thoroughly improved and embellished, oftentimes with statuary. The land company, from 1926 to 1928, was the American Security & Fidelity Co. From 1928 to 1931, it was the Forest Lawn Properties Association, and from 1931 on, it has been the Forest Lawn Co. The American Security & Fidelity Corporation (hereinafter referred to as the holding company) owned all of the stock of the Forest Lawn Co. at all times here material.
The buildings erected in Forest Lawn Memorial Park have been built by the land company and petitioner pays rental either to the land company or to the holding company for the use of such buildings and the land on which they are erected. The rentals are fixed by the boards of directors of the corporations, and have been approximately 10 percent of the cost of the property rented, the lessors paying the taxes. The rental paid was fair and reasonable.
Petitioner made all contracts for the sale*1039 of its services and commodities with the ultimate buyers. In the agreement signed by a purchaser of commodities and services, petitioner agrees to execute and deliver, or cause to be executed and delivered, to the purchaser a good and sufficient certificate of ownership or deed conveying the interment rights in the cemetery property, and a certificate setting forth the amount to be deposited in the perpetual care fund in connection with the purchase of the property. The deeds and certificates of perpetual care were in each instance executed by the cemetery association.
The sale of lots by petitioner was, to some extent, dependent upon business referred to it by funeral directors. It refused to pay them *1096 any commissions. In August 1932, petitioner ascertained that 82 funeral directors, in and around Los Angeles, had purchased "anywhere from a few to 700 graves apiece" in a competing cemetery. About the same time, an open letter, signed by many of the funeral directors in Los Angeles County, was publicized, recommending the purchase of cemetery property in the competing cemetery. Petitioner concluded that the funeral directors had entered the cemetery business and*1040 were exerting their efforts toward diverting business from Forest Lawn to cemeteries in which they were financially interested or which would pay them commissions. These conditions caused petitioner to give consideration to the operation by it of a mortuary.
On October 20, 1932, the board of directors of petitioner adopted a resolution authorizing it to engage in the contemplated new activity. A license was applied for and received, and in November 1933 petitioner began the operation of a mortuary on the cemetery grounds. A building for that purpose was erected by the land company and leased to petitioner. It has been operated almost exclusively for interment in petitioner's cemetery. Occasionally, after a mortuary case has been received by petitioner, the relatives of the deceased decide to ship the body out of the state, or out of the city, and the burial will not be in Forest Lawn. The percentage of such cases is small.
The following table shows the income realized by petitioner from its sales of lots, mausoleum crypts, and other commodities and services during the years 1933 to 1937, inclusive:
| 1933 | 1934 | 1935 | |
| Property: | |||
| Land | $312,047.44 | $309,381.19 | $339,162.39 |
| Mausoleum | 250,497.55 | 306,220.50 | 519,759.60 |
| Total | 562,544.99 | 615,601.69 | 858,921.99 |
| Accessories and services: | |||
| Statuary and outdoor sarcophagi | (18,279.76) | 1,385.00 | 4,727.50 |
| Memorial tablets and vases | 90,560.77 | 100,646.38 | 116,150.64 |
| Interment and recording charges | 42,827.95 | 43,003.38 | 46,060.50 |
| Grave boxes and vaults | 24,078.00 | 27,515.45 | 33,397.50 |
| Cremations | 24,097.50 | 24,300.00 | 27,836.00 |
| Urns for cremated remains | 8,781.25 | 5,737.25 | 12,164.15 |
| Vaultage | 1,487.50 | 1,615.50 | 1,609.00 |
| Engraving on urns and vases | 1,241.61 | 726.30 | 1,448.10 |
| Flowers | 20,876.73 | 26,647.89 | 32,437.98 |
| Wedding services * | 6,254.09 | 6,825.00 | 7,800.00 |
| Organist fees | 1,755.00 | 1,705.00 | 2,590.50 |
| Booklets | 2,285.05 | 2,500.08 | 4,215.63 |
| Postcards and pictures | 472.30 | 599.40 | 774.76 |
| Miscellaneous | 568.17 | 918.21 | 843.68 |
| Total | 207,006.16 | 244,124.84 | 292,055.94 |
| Mortuary: Funeral services | 13,127.99 | 144,938.17 | 197,003.71 |
| Grand total | 782,679.14 | 1,004,664.70 | 1,374,981.64 |
| 1936 | 1937 | |
| Property: | ||
| Land | $446,036.62 | $471,028.95 |
| Mausoleum | 473,533.20 | 622,050.05 |
| Total | 919,569.82 | 1,093,079.00 |
| Accessories and services: | ||
| Statuary and outdoor sarcophagi | 29,120.00 | 5,232.85 |
| Memorial tablets and vases | 139,223.79 | 157,138.34 |
| Interment and recording charges | 50,276.00 | 53,335.50 |
| Grave boxes and vaults | 40,862.16 | 45,504.35 |
| Cremations | 33,925.00 | 40,993.50 |
| Urns for cremated remains | 17,211.50 | 13,367.50 |
| Vaultage | 1,048.50 | 1,058.24 |
| Engraving on urns and vases | 1,619.60 | 1,681.53 |
| Flowers | 41,448.96 | 53,036.38 |
| Wedding services * | 7,785.00 | 9,485.00 |
| Organist fees | 3,761.00 | 4,453.50 |
| Booklets | 4,393.89 | 5,085.47 |
| Postcards and pictures | 723.17 | 1,206.04 |
| Miscellaneous | 3,282.14 | 906.98 |
| Total | 374,680.71 | 392,485.18 |
| Mortuary: Funeral services | 307,881.33 | 412,683.04 |
| Grand total | 1,602,131.86 | 1,898,247.22 |
*1042 *1097 Petitioner is governed by a board of five directors elected by its members. During the years 1933 to 1937, inclusive, Eaton was general manager of petitioner. As such he was responsible for the operation of its several departments, including sales and maintenance. During these years petitioner had approximately 300 employees. Eaton originated the idea of memorial parks as cemeteries and has been the leading figure in the development and operation of Forest Lawn Memorial Park. Petitioner's sales are approximately twice as large as those of any other cemetery in the United States. About 55,000 persons own interment rights in the cemetery, which covers 300 acres. During the year 1940, 1,600,000 people visited Forest Laws to view its art treasures and buildings, especially a reproduction of a famous painting in stained glass. Eaton received a percentage of the sales and rentals for his services as general manager. From 1933 to 1937, inclusive, his commissions ranged from $24,000 to $60,000 per year.
During the taxable years petitioner had nine officials other than Eaton, who devoted their entire time to petitioner's business and received compensation commensurate*1043 with the value of their services.
On March 12, 1931, petitioner wrote to the collector of internal revenue at Los Angeles, California, transmitting evidence in support of its claim that it was entitled to exemption under the Federal income tax law. On April 13, 1931, the Deputy Commissioner of Internal Revenue, by direction of the Commissioner, acknowledged receipt of petitioner's letter and informed it that it purposes and activities were such as to bring it within the exemption provided in section 103(5) of the Revenue Act of 1928 and the corresponding provisions of prior revenue acts.
In 1934 the question whether petitioner was exempt from Federal taxation was again considered by the Bureau of Internal Revenue, and under date of October 8, 1935, the Commissioner ruled that petitioner was not exempt.
Further consideration of the question of exemption was requested by petitioner by letter dated March 18, 1936, and under date of August 12, 1936, the petitioner was notified by the Commissioner that the Bureau ruling of October 8, 1935, denying exemption, was affirmed.
Under date of November 3, 1936, petitioner again addressed the Commissioner upon the subject of exemption*1044 and upon the subject of the year in which nonexempt status would first be applicable. On March 9, 1937, petitioner was advised that in view of all of the circumstances:
* * * and in order to avoid subjecting the corporation to undue hardship, the ruling of October 8, 1935, as affirmed by ruling of August 5, 1936, holding that the corporation is not entitled to exemption under the provisions of Section *1098 103(5) of the Revenue Act of 1932 and corresponding provisions of prior revenue acts, will be applied, under the authority granted by Section 1108(a) of the Revenue Act of 1926 as amended by Section 506 of the Revenue Act of 1934, only to the year 1933 and subsequent years.
Further correspondence was addressed by the petitioner to the Commissioner under dates of October 11 and December 22, 1937, upon the subjects of (a) exemption; and (b) the years to which a nonexempt status would apply. These letters were concerned principally with the first years as to which the nonexempt status pertained.
Under date of December 23, 1937, the ruling of the Commissioner to the effect that a nonexempt status did not apply to the petitioner for the year 1933 and subsequent years*1045 was reaffirmed, and under date of January 8, 1938, petitioner was notified that prior rulings holding it to be not exempt from Federal taxation for the year 1933 and subsequent years were reaffirmed.
Petitioner filed Federal income tax returns and paid income taxes thereon, as follows:
| Year | Return filed | Tax and interest | Amount of | Amount of | Additional |
| paid | tax paid | interest paid | interest paid | ||
| 7-28-36 | |||||
| 1933 | 5-16-38 | ||||
| 1934 | 5-16-38 | 5-16-38 | $310.36 | $58.97 | $8.56 |
| 1935 | 5-16-38 | 5-16-38 | 3,946.96 | 513.10 | .64 |
For 1937, a tentative return was filed March 15, 1938, and an extension was granted to May 15, 1938. The return was filed May 16, 1938 (the 15th being Sunday), and a total tax of $3,699.49 was paid, no interest having been paid. The tax was paid on the following dates:
| 3-15-38 | $962.50 |
| 6-15-38 | 887.25 |
| 9-14-38 | 924.87 |
| 12-8-38 | 924.87 |
| Total | 3,699.49 |
All of the above taxes and interest were paid by petitioner within three years before the filing of the petition in this proceeding. The petition was filed on the 27th day of May 1940.
OPINION.
MELLOTT: Petitioner's first contention is that it is*1046 exempt from Federal income tax under the provisions of section 103(5) of the Revenue Act of 1932 and section 101(5) of the Revenue Acts of 1934 and 1936. These sections, which are identical in each act, provide that:
* * *
The following organizations shall be exempt from taxation under this title -
* * *
(5) *1099 Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual.
It has been held that the above section contains three statutory requisites for exemption, which are mutually independent, and that the presence of any of them creates an exemption. Commissioner v. Kensico Cemetery, 96 Fed.(2d) 594, affirming 35 B.T.A. 498">35 B.T.A. 498. Petitioner contends that it qualifies for exemption under each and all of them.
Petitioner's argument that it is a cemetery company owned and operated exclusively*1047 for the benefit of its members and hence within the first classification mentioned in the statute is not persuasive. The cemetery association (Forest Lawn Cemetery Association) probably qualifies under this provision, though whether it does or not is immaterial here. The provision was obviously intended to apply where individuals, by purchasing lots or rights of internment in a cemetery, thereby become entitled to membership in the association and to have a voice in its management. Under petitioner's articles of incorporation no one is eligible for membership unless he owns property in the park of a value of at least $100, pays a membership fee of $10 and such annual dues as the board of directors prescribe, and has been duly elected to membership. During the taxable years petitioner had approximately proximately 25 members, it having deliberately limited its membership to not more than 30 in order that it not be handicapped, as was its predecessor, when meetings of membership were desired for the purpose of transacting business. Petitioner's contention that its lot owners are its real members is also fallacious. They, at best, collectively constituted a reservoir from which*1048 members could be drawn.
The second requisite for exemption is much more favorable to petitioner. It provides for the exemption of cemetery companies which "are not operated for profit." Petitioner was organized in 1926 as a nonprofit cemetery corporation under the laws of California. The law permitting the organization of such corporations (sec. 593, Civil Code of California) prohibited the distribution of gains, profits, or dividends to the members thereof. Petitioner's articles of incorporation specifically provide that it shall be operated without profit to any of its members, and its bylaws state that its profits must be expended in the improvement of the cemetery property or for the benefit of the association and can not be disbursed to any individual or corporation. The general manager of petitioner and one of its members both testified it was understood, when petitioner was organized, that its members would receive no dividends or distributions of any kind, and that even upon petitioner's liquidation, its assets would not go to its members *1100 but would constitute a trust fund for the benefit of all the lot owners, to be used for the perpetual care and upkeep*1049 of the cemetery. The bylaw referred to above and the further provision that termination of membership should not entitle the member to participate in the assets of the corporation indicate that this understanding must, and will, be carried out.
Nor does the fact that petitioner derived some gain from its activities necessarily indicate that it is a cemetery company operated for profit. Obviously, it could not operate and maintain the large acreage devoted to cemetery purposes unless it realized some profit from its sales and services. On a number of occasions the courts and this Board have considered whether the conduct of certain activities at a profit justified the denial of an exemption which otherwise would have been allowed. Such activities have included use of properties by a corporation operated for religious, benevolent, scientific, and educational purposes to produce income through trading in wine, chocolate, and other articles, Trinidad v. Sagrada Orden de Predicadores,263 U.S. 578">263 U.S. 578; the conduct of an inn and the publication of books and periodicals, *1050 Unity School of Christianity,4 B.T.A. 61">4 B.T.A. 61; sale of oil to refineries, gas to distributing companies, farm products and water, and operation of a greenhouse and a cotton gin by an institution established for the care of orphans, Sand Springs Home,6 B.T.A. 198">6 B.T.A. 198; sale of ice and ice cream, Eugene Fruit Growers Association,37 B.T.A. 993">37 B.T.A. 993; publication and sale of a monthly magazine, American Society of Cinematographers, Inc.,42 B.T.A. 675">42 B.T.A. 675; and lease of grazing rights, Koon Kreek Klub v. Thomas, 108 Fed.(2d) 616. The profit realized from these activities was, in each instance, exempted from income tax, emphasis being placed upon the destination of the income rather than its source. Where it was found that a corporation was organized for the purpose of engaging in an activity exempted from income tax, profits realized were held to be exempt if they were used to advance or further the tax-exempt purpose. As the Supreme Court stated in Trinidad v. Sagrada Orden de Predicadores, supra, "Evidently the exemption is made in recognition of the benefit which the public derives from corporate*1051 activities of the class named, and is intended to aid them when not conducted for private gain." The predominant purpose for which petitioner was organized was to operate and maintain a cemetery for the interment of the dead. Any profits which it realized from any of its activities were used to advance and further this purpose, and, despite respondent's contention to the contrary, hereinafter discussed, no part of its net earnings inured to the benefit of any private individual or shareholder. It was, therefore, not operated for profit and is entitled to the claimed exemption.
Practically all of respondent's argument on brief is directed to the applicability of the third subdivision of the statute, which allows *1101 exemption to any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual. He contends that petitioner is not entitled to exemption under this provision because: (1) it engaged in several activities extraneous to the conduct of a nonprofit cemetery*1052 association; and (2) some of its profits inured to the benefit of private individuals. The activities listed as "extraneous" are the conduct of a mortuary, the sale of flowers, booklets, post cards, brochures, etc., and wedding services held in the two churches within the cemetery.
Petitioner urges that these activities are necessarily incident to its operation of a cemetery for burial purposes and cites several state court decisions. In State v. Lakewood Cemetery Association,93 Minn. 191">93 Minn. 191; 101 N.W. 161">101 N.W. 161, a corporation organized under the laws of Minnesota for the purpose of procuring and holding lands to be used exclusively as a public cemetery or place for the burial of the dead, conducted a greenhouse in the cemetery for the purpose of growing flowers and plants to be used in beautifying the grounds. Any surplus stock not necessary for such use was sold for the benefit of the association. The Supreme Court of Minnesota held that the conduct of the greenhouse was not a use of the cemetery for other than cemetery purposes, and that the sale of the surplus flowers was but an incident to the general management. This court also held in *1053 State v. Lakewood Cemetery,267 N.W. 510">267 N.W. 510, that the same cemetery association was acting within its corporate rights and powers in engaging in the manufacture and sale to its lot owners of wooden and concrete burial valuts at a profit. To the same effect see Dries v. Evans Cemetery Co.,109 Pa.Super. 498; 167 Atl. 237.
In Wing v. Forest Lawn Cemetery Association,15 Cal.(2d) 472; 101 Pac.(2d) 1099, an owner of burial space in Forest Lawn Memorial Park brought an action against petitioner, the cemetery association, and the land company to enjoin the operation of a funeral director's and embalming business on the premises of the cemetery. Section 608 of the Civil Code of California authorized corporations to acquire land to be held and occupied "exclusively as a cemetery for the burial of the dead." The Supreme Court of the State of California interpreted the quoted phrase as permitting a cemetery company to operate a mortuary in the cemetery grounds, pointing out that, while cemeteries have been and are now used primarily for the burial of the dead, portions of cemetery properties have been used*1054 for numerous other incidental purposes such as greenhouses, nurseries, chapels, administration buildings, tool houses, incinerators, storage for wooden and concrete vaults, and the manufacture of stone vaults, and that these and other practices had in many instances received judicial approbation. The court said:
*1102 Manifestly the operation of a mortuary where bodies are prepared for interment or cremation is a much closer and more intimate incident of burial than the activities above referred to. We therefore conclude that cemetery lands may be used for such purposes as are incident to the burial of the dead, so long as the rights of the lot owners in their own lots and their rights of egress and ingress thereto are not invaded.
The court also said:
* * * we do not find that the operation of a mortuary is inconsistent with the holding and occupying of land "exclusively as a cemetery for the burial of the dead."
Petitioner also calls our attention to two rulings issued by the respondent which seem to be contrary to the position which he now takes. In G.C.M. 20853, Cumulative Bulletin 1938-2, p. 166, he ruled that an association which operated a cemetery for*1055 the benefit of several churches was exempt from Federal income tax even though its income was derived from the sale of cemetery lots, wood and cement boxes, flowers, and from services rendered at funerals and in caring for the graves. In S. 991, Cumulative Bulletin No. 1 (1919), p. 198, he issued a similar ruling with respect to a cemetery company which manufactured and sold vaults, mausoleums, and other cemetery appliances and improvements, and also owned and operated greenhouses and conducted the business of florists. The latter ruling contains the statement that, "It seems clear that the greenhouse and florist business is but an incident of the cemetery."
In our opinion all of the activities of petitioner, which respondent describes as extraneous to the conduct of a nonprofit cemetery organization, were carried on as incidents of petitioner's principal function - the operation and maintenance of a cemetery for the burial of the dead. The cited cases and rulings strongly support this conclusion. It is true that some of the activities herein involved, such as the sale by petitioner of booklets, postcards, and pictures, and weddings held in the two churches within the cemetery*1056 without charge except for services, were not considered in the cases and rulings referred to above. It is clear, however, that they were engaged in by petitioner primarily for the purpose of advertising the cemetery and bringing to the attention of the public its beauty and desirability as a final resting place for the dead. If so, it seems that they were "necessarily incident" to the main purpose for which petitioner was created and hence within the ambit of the statute. (Sec. 103(5) and 101(5), supra. )
On brief respondent argues that the conduct of a mortuary, including as it does, all of the services normally rendered by an undertaker, is not a business exempt from income tax, and that to hold petitioner exempt from tax would be tantamount to exempting every individual or corporate entity engaged in the conduct of a mortuary or undertaking establishment. This argument is without merit. Exemption *1103 from tax under the statute could not be allowed to an undertaking establishment, the profits of which inure to the benefit of any private shareholder or individual. It can only be allowed to a cemetery association meeting the statutory requirements in recognition*1057 of the benefit which the public derives from its activities. Trinidad v. Sagrada Orden de Predicadores, supra.The statute recognizes that nonprofit organizations, operating and maintaining cemeteries for the burial of the dead, must of necessity be permitted to engage in activities necessarily incident to that purpose. The conduct of a mortuary in our judgment is such an activity. The fact that it is operated at a profit in competition with purely commercial ventures does not justify the denial of the exemption. "It is only when such profits or net income are used for private rather than public benefit that Congress has taxed them." Unity School of Christianity, supra.Our holding that petitioner is exempt from tax does not and can not result in the exemption of every individual or corporate entity engaged in the conduct of a mortuary or undertaking establishment any more than the holding of the Board in the last cited case, e.g., exempted inn keepers and publishers from tax.
Respondent's contention that the profits of petitioner inure to the benefit of a private individual seems to be bottomed largely upon the fact that Eaton received*1058 substantial fees and commissions for his services and also received dividends from, or profited by the accretion to, the capital of the land and holding companies. The fees and commissions received by Eaton constituted reasonable compensation for his services in connection with the management and development of one of the largest and most beautiful cemeteries in the United States. While it is true that the land company received 50 percent of the gross proceeds of sales of lots and 60 percent of the gross proceeds of sales of niches, crypts, vaults, and other mausoleum-columbarium property, there is no evidence to support respondent's statement on brief that the family of Eaton, through stock ownership, controlled either the land company or its parent company. Even if it be assumed that some of the stock of the parent or holding company was owned by Eaton and members of his family, though no showing to that effect has been made, and even if it be assumed that they benefited, as stockholders, from the profits which the land company realized from its transactions with petitioner, we do not think that this would justify a denial of the exemption to the petitioner. The statute requires*1059 only that no part of the "net earnings" of petitioner inure to the benefit of any private shareholder or individual. No part of petitioner's net earnings was distributed to the land company or to Eaton. The profits realized by the land company from its dealings with petitioner, and the profits realized by petitioner from its sales and other activities are two *1104 separate and distinct matters. The profits of the land company are taxable because they inure to the benefit of its stockholders. The net earnings realized by petitioner are not taxable because they do not inure to the benefit of any private shareholder or individual. Neither the compensation paid to Eaton nor the amounts paid to the land company formed any part of petitioner's net earnings. They were items which had to be deducted from its gross receipts in determining its net earnings. Cf. Commissioner v. Kensico Cemetery, supra.
While we prefer to rest our decision on the ground that petitioner is a cemetery company which is not operated for profit, and hence that it is exempt from tax under the second subdivision of the statute, we believe it also qualifies for exemption under the*1060 last subdivision. It follows that respondent erred in determining that petitioner was not exempt from Federal income tax.
Under issue two petitioner contends that it was prohibited by the provisions of a written contract executed by it prior to May 1, 1936, from paying dividends. Recognizing that its articles of incorporation do not constitute a written contract, it relies upon its membership certificates, which make each member, "subject to its articles of incorporation and bylaws and any and all amendments thereof * * *." This, it says, constitutes a written contract and entitles it to the credit specified in section 26(c)(1) of the Revenue Act of 1936. In issue three petitioner urges that its failure to file timely income tax returns was due to reasonable cause and not to willful neglect, and that it is not therefore liable for any addition to tax under the provisions of sections 291 of the Revenue Acts of 1932 and 1934, and section 406 of the Revenue Act of 1935. Having held that petitioner is exempt from tax, it is unnecessary to decide either issue two or issue three.
Decision will be entered under Rule 50.
Footnotes
*. The contract with the land company stated that it owned two churches located in the cemetery and that petitioner could permit their use for funerals, weddings and/or religious services without charge either to the association or to any person, organization or group who may use the same with permission of the association. ↩