GARDENS OF FAITH, INC. v. Commissioner, Docket No. 1362-62
| Decision Date | 30 June 1964 |
| Docket Number | 1363-62.,Docket No. 1362-62 |
| Citation | 1964 TC Memo 178,23 TCM (CCH) 1045 |
| Parties | Gardens of Faith, Inc. v. Commissioner. Raymond F. Cushing and Kathryne R. Cushing v. Commissioner. |
| Court | U.S. Tax Court |
John Y. Merrell, Shoreham Bldg., Washington, D. C., for the petitioners. Stuart E. Seigel for the respondent.
In these consolidated proceedings respondent determined deficiencies in petitioners' Federal income taxes in the amounts and for the years as follows:
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Year or
Docket No. Petitioner Fiscal Year Deficiency
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1362-62 Gardens of Faith, Inc......................... May 31, 1958 $69,723.16
" " " " " May 31, 1959 60,718.56
" " " " " May 31, 1960 52,458.54
1363-62 Raymond F. and Kathryne R. Cushing............ 1957 12,767.86
" " " " " " " 1958 15,412.34
" " " " " " " 1959 25,687.51
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In addition to the above deficiencies, respondent claimed in an amended answer additional deficiencies against Raymond F. and Kathryne R. Cushing in the amounts of $20,951.14, $21,873.42, and $15,766.50 for the years 1957, 1958, and 1959, respectively, pursuant to section 6214(a) of the Internal Revenue Code of 1954.1
Several of the issues raised in the pleadings have been settled by the parties and will be given effect in Rule 50 computations. The only issue presented for our decision in Docket No. 1362-62 is whether the respondent erred in disallowing deductions claimed by Gardens of Faith, Inc., in each of the fiscal years in issue for amounts paid upon its certificates of indebtedness and claimed to represent the cost of land sold. The remaining issues are raised in Docket No. 1363-62. The first is whether the respondent erred in determining that the amounts received by petitioners in each of the years in issue with respect to certificates of indebtedness issued by Gardens of Faith, Inc., constituted dividends taxable as ordinary income, and not, as petitioners contend, amounts received in exchange for the certificates of indebtedness to be first treated as a recovery of cost and then as long-term caiptal gain pursuant to section 1232. A similar issue is presented for our decision with respect to amounts received by petitioners in each of the years in issue on certificates of indebtedness issued by another cemetery corporation. Evergreen Memorial Gardens, Inc. The final issue presented for our decision is whether certain cemetery lots sold by petitioners in 1957 in still another cemetery, Belair Memorial Gardens, Inc., were held by them for sale to customers in the ordinary course of their trade or business so that the gain therefrom constitutes ordinary income as determined by respondent, or whether such gain constitutes long-term capital gain from the sale or exchange of capital assets as claimed by petitioners. The amount of a deduction for medical expense claimed in petitioners' 1957 return was reduced by respondent as a result of his other determinations. The proper amount of petitioners' medical expense deduction for 1957 is dependent upon our decision on the issues presented herein and will be computed under Rule 50.
Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated into and made a part of our Findings by this reference.
Petitioner, Gardens of Faith, Inc., sometimes hereinafter referred to as Gardens, is a corporation organized on May 10, 1957, under the laws of the State of Maryland to engage in the cemetery business. Its principal office is located in Baltimore, Maryland. Gardens filed its Federal corporation income tax returns for the fiscal years ended May 31, 1958, 1959, and 1960 with the district director of internal revenue at Baltimore, Maryland. It filed its income tax returns on the accrual method of accounting, except as to certain sales of burial lots which were reported on the installment method of accounting.
Petitioner, Raymond F. Cushing, sometimes hereinafter referred to as Cushing, and his wife, petitioner Kathryne R. Cushing, somtimes hereinafter referred to as Kathryne, reside at Kingsville, Baltimore County, Maryland. They filed joint Federal income tax returns on the cash method of accounting for the calendar years 1957, 1958, and 1959 with the district director of internal revenue at Baltimore, Maryland.
Cushing has been in the cemetery business for approximately 25 years. Since 1945 he has been a cemetery owner and operator, and at the time of trial herein he had a proprietary interest in four cemeteries. Prior to 1945 he was employed by various cemetery companies as a salesman of cemetery lots. Cushing's first venture as a cemetery owner and operator consisted of a small unzoned tract of approximately 6½ acres which he and his wife purchased, developed, and operated as a partnership. The venture was incorporated in 1947 and was from that time known as Belair Memorial Gardens, Inc. It will sometimes hereinafter be referred to as Belair. Cushing and his wife have owned all the stock of Belair from the time of its incorporation.
Belair is not a big venture but it has been a profitable one. Sales of lots by Belair were made in excess of the amount of such sales anticipated by Cushing. Several purchases of adjoining land resulted in the cemetery's expansion from approximately 6½ acres to approximately 40 acres. The acquisition of the additional parcels of land required all of Belair's financial resources and as a result it could not pay Cushing the salary it owned him in the years 1950 and 1953. Cushing accepted certain cemetery lots from Belair in these years in lieu of cash for his salary. At the time Cushing acquired these cemetery lots it was his intention that Belair would reacquire them from him for ultimate sale to its customers. These lots were resold, in bulk, by Cushing to Belair in May 1957 at a gain of $12,100. Cushing resold them to Belair in order to raise capital he needed for other cemetery ventures which shall be discussed in detail in these Findings. Cushing never owned nor sold cemetery lots on his own account other than the sale of the lots to Belair in May 1957. On his 1957 return Cushing reported the gain from the sale of the lots to Belair as long-term capital gain. Respondent determined that Cushing's gain constituted ordinary income from the sale of property held by Cushing primarily for sale to customers in the ordinary course of his trade or business.
Cushing perceived that there was a need for a large memorial park-type cemetery in the Baltimore area. He was therefore interested in acquiring a tract of land in that area upon which he could develop a cemetery that would be beautiful and one of the better cemeteries in the East. In 1949 Cushing considered acquiring for this purpose an undeveloped cemetery located in Baltimore County and known as Kenwood Memorial Park Cemetery, sometimes hereinafter referred to as Kenwood. Cushing had been unsuccessful in obtaining the appropriate zoning for other tracts of land he was interested in acquiring for the purpose of developing into a cemetery. Kenwood was approximately a 100-acre tract dedicated to cemetery purposes prior to the advent of zoning. No interments were made there although approximately 1,650 lots were sold to a small group of people. When Cushing examined Kenwood in 1949 it had no improvements and it was being used as a playground for children. Title to Kenwood was not merchantable in Cushing's opinion, because the previous sale of lots had to be honored and the purchasers would have to be located, and because Kenwood had become insolvent and was involved in litigation among stockholders, trustees, and lot owners.
While Cushing was seeking ways and means to finance the purchase of Kenwood and waiting for the termination of the litigation affecting its title, he participated in the organization of a cemetery in Carroll County, Maryland, known as Evergreen Memorial Gardens, Inc., sometimes hereinafter referred to as Evergreen. Evergreen is a corporation organized on November 7, 1955, under the laws of the State of Maryland with its principal offices in Finksburg, Maryland. It is not a petitioner in the instant case.
Cushing undertook the Evergreen venture with two other principals, Nelson E. Walrath, sometimes hereinafter referred to as Walrath, and Harrison J. Chubb, sometimes hereinafter referred to as Chubb. Cushing was to handle the development and maintenance of the property, Walrath was to raise capital, and Chubb was to be sales director.
Due to the nature of cemetery operations, it is difficult to borrow funds from lending institutions or to raise finances by selling corporate stock. Walrath introduced Cushing to an attorney in New York and an accountant in New Jersey, John De Wyn Gaert, sometimes hereinafter referred to as De Wyn Gaert, who explained to Cushing a method of financing the purchase of cemetery property through the issuance of certificates of indebtedness. Cushing was advised that the cemetery could acquire land upon the issuance of certificates of indebtedness, and that the cemetery would not have to pay for its land until it made sales. The amount of payments to be made to the certificate holders would be a percentage of the sales price, and hence would be based upon the success...
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