Angelus Funeral Home v. Comm'r of Internal Revenue

Decision Date17 January 1967
Docket NumberDocket no. 4217-64.
Citation47 T.C. 391
PartiesANGELUS FUNERAL HOME, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Leo Branton, Jr., for the petitioner.

Richard Fishman, for the respondent.

Petitioner funeral home collected funds from prospective customers under two forms of written contracts each denominated ‘Pre-need Funeral Plan Agreement.’ The earlier (in point of time) form effectively created a trust but the later form contract did not, since under its terms petitioner could, at its option, use the amounts which were paid in for purposes beneficial to it. Held, only the amounts paid under the later form of contract are taxable income to petitioner when received. Held further, that the computation of petitioner's taxable income for 1959 was made under a method of accounting which was not different from the method employed from the preceding taxable year and consequently respondent's determination under sec. 481 of the 1954 Code, which made certain adjustments as to petitioner's taxable income for 1959, is not sustained.

FORRESTER, Judge:

The respondent has determined deficiencies in the petitioner's income tax as follows:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦1959  ¦$13,907.77   ¦
                +------+-------------¦
                ¦1960  ¦11,427.51    ¦
                +------+-------------¦
                ¦1961  ¦10,852.00    ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦      ¦36,187.28    ¦
                +--------------------+
                

Several issues have been settled by the parties leaving for our determination the following:

(1) Whether this petitioner must include as income in the respective year of receipt, moneys paid to it under two forms of written instruments, each denominated ‘Pre-Need Funeral Plan Agreement’; and

(2) Whether respondent was correct in determining that amounts received under the earlier of such forms of agreement during the years 1954 through 1958, but omitted from income in such years, should be the basis for an adjustment to petitioner's income tax liability for the year 1959 under the provisions of section 481 of the Code.1

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioner is a California corporation, and the principal business of which was providing funeral and burial services. During the years in issue and at least as far back as calendar year 1954 it filed its income tax returns with the district director of internal revenue at Los Angeles, Calif., on a calendar year, accrual basis.

During the years in issue petitioner entered into written contracts with certain individuals which contracts were designated, and bore the heading, ‘Pre-Need Funeral Plan Agreement’ (hereinafter sometimes referred to as contracts).

Beginning in 1954 and continuing through August 1961 the form of written agreement which was used provided in pertinent part that the applicant (customer) agreed to pay petitioner the total sum of X dollars, said obligation to be discharged by a relatively small down-payment upon the signing of the contract followed by additional payments of relatively small amounts each month thereafter until the total sum had been paid in full. Petitioner agreed that upon proof of the applicant's death it would apply the total amount theretofore paid toward the cost of applicant's funeral according to applicant's instructions which were given at the same time the contract was signed. The contract provided further that if the applicant died at any place where it was not practicable for petitioner to conduct his funeral service that petitioner would transmit said total amount theretofore paid under the contract to any reputable funeral home which was selected to conduct the funeral service:. The contract also provided:

4. The Parties agree that all sums paid by Applicant to ANGELUS shall be held by ANGELUS in irrevocable trust for the uses and purposes herein set forth and set forth in Funeral and Interment Instructions No.— .

5. ANGELUS agrees that it will deposit all sums paid to it under this Agreement in a bank, trust company or savings and loan association and that it will not thereafter withdraw such sums, or any portion thereof, except for the uses and purposes herein set forth; provided that ANGELUS may at its discretion withdraw such sums for the purpose of re-deposit in some other bank, trust company or savings and loan association.

6. The Parties agree that in consideration of the services performed and to be performed in the collection, custody and conservation of the sums paid to it by Applicant all interest earned on such sums shall accrue to, and shall become the property of, and payable to ANGELUS, as and when earned.

In about September 1961 petitioner stopped using the form which is described immediately above and began using a form which contained provisions which were identical except for the following:

The total amount paid under the contract by the applicant in any given calendar year was called the ‘Annual Payment’ and—

5. ANGELUS may, at its option (a) deposit all or any portion of the sums paid to it under this Agreement in one or more banks, trust companies or savings and loan associations, or (b) at any time before or after such deposit thereof, use all or any portion of such sums as collateral or payment for (i) the costs of any capital improvement to then existing mortuary facilities belonging to ANGELUS, and (ii) the acquisition and improvement of real property.

6. In consideration for its right to use the amounts paid hereunder by Applicant in the manner herein provided, ANGELUS agrees to pay to Applicant on or before the 31st day of December of each year an amount equal to ten per cent (10%) of the Annual Payment (as above defined) made by Applicant during such year.

During and after September 1961 some undetermined number of the applicants who had entered into a ‘Pre-Need Funeral Plan Agreement’ with petitioner prior to that time elected to and did sign the new form of agreement in order to be entitled to the payments of 10 percent therein provided for.

During all of the 3 years in issue and for some time prior thereto petitioner maintained a general checking bank account. In addition thereto it maintained a special checking account (designated a clearing account) at Bank of American, and four savings accounts, each in a different savings and loan company, which savings accounts were designated as trustee accounts.

As petitioner collected amounts under the contracts during the years in issue it deposited them in the clearing account and credited a liability account on its books which was designated ‘Pre-Arranged Funeral Liability.’ Thereafter at irregular intervals most of these funds were transferred into one or more of the four trustee savings accounts.

Petitioner did not reflect the amounts collected on the contracts as income in the year the payments were received but returned income from the contracts only when it provided the funeral and burial services upon the death of a particular individual. It did so by debiting the ‘Pre-Arranged Funeral Liability’ account on its books and crediting earning income. Petitioner also reported as income the interest on the four savings accounts as such interest became due and such amounts are not in dispute.

Commencing in 1959 and for the remainder of the years in issue John L. Hill, the president and the owner of all of petitioner's stock, personally supervised the operation of petitioner's pre-need funeral plan program and the handling of its funds. Prior to that time these responsibilities had been handled by petitioner's treasurer. Hill, on assuming such responsibilities, discovered that some of the pre-need funds had been deposited in petitioner's general checking account instead of in its special clearing account or any of the trustee savings accounts. Upon making such discovery Hill ordered that such funds be immediately segregated and this was accomplished by means of a check drawn on petitioner's general account and transferring such funds to its trustee savings accounts.

As of January 1, 1959, the balances in the four savings accounts and the clearing account totaled $15,609.16, while the ending balance of petitioner's ‘Pre-Arranged Funeral Liability’ account at December 31, 1958, was $24,706.07. Balances of such liability account and the totals in the clearing and savings accounts at the end of each of the years in issue were as follows:

+--------------------------------------------+
                ¦             ¦Prearranged  ¦Total clearing  ¦
                +-------------+-------------+----------------¦
                ¦             ¦funeral      ¦and savings     ¦
                +-------------+-------------+----------------¦
                ¦Date         ¦liability    ¦accounts        ¦
                +-------------+-------------+----------------¦
                ¦             ¦             ¦                ¦
                +-------------+-------------+----------------¦
                ¦Dec. 31, 1959¦$30,936.41   ¦$34,100.99      ¦
                +-------------+-------------+----------------¦
                ¦Dec. 31, 1960¦39,501.16    ¦40,535.56       ¦
                +-------------+-------------+----------------¦
                ¦Dec. 31, 1961¦51,297.77    ¦53,172.68       ¦
                +--------------------------------------------+
                

During the 3 years in issue there were certain transfers from the clearing account to petitioner's general checking account, but during each of such years the total of such transfers was less than the total amount which petitioner declared as income from performances under the contracts plus interest earned on the four savings accounts.

Petitioner was not obligated to refund any moneys collected pursuant to the terms of the contracts but nevertheless it voluntarily refunded the following sums during the years in issue: 1959— $538.09, 1960— $899.85, and 1961— $742.73.

Respondent determined that petitioner's receipts under the contracts for the years in issue were taxable income which it had failed to include in its returns in the respective...

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