Mellon Bank, N.A. v. U.S.
| Decision Date | 18 June 1985 |
| Docket Number | No. 84-3541,84-3541 |
| Citation | 762 F.2d 283 |
| Parties | -6481, 85-1 USTC P 13,615 MELLON BANK, N.A. and Robert B. Reed, Jr., Executors of the Estate of A. Leon Davis a/k/a Austin L. Davis, Deceased v. UNITED STATES of America, Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
J. Alan Johnson, U.S. Atty., Pittsburgh, Pa., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Robert A. Bernstein, Douglas G. Coulter (argued), Attys., Tax Div., Dept. of Justice, Washington, D.C., for appellant.
William McC. Houston, John F. Meck (argued), Houston, Houston & Donnelly, Pittsburgh, Pa., for appellees.
Before ALDISERT, Chief Judge, and SLOVITER and STAPLETON *, Circuit Judges.
We must determine whether a bequest to a nonprofit cemetery was deductible for estate tax purposes as a bequest to an organization operating exclusively for "charitable" purposes under section 2055(a)(2) of the Internal Revenue Code.
The pertinent facts are not disputed. A. Leon Davis died testate on December 6, 1976. His will provided that the residue of his estate was to be distributed to the Verona Cemetery, Oakmont, Pennsylvania, of which $30,000 was to be applied to the erection of a new utility building, with the balance to go to the cemetery's endowment fund. Davis' executors filed a Federal Estate Tax return for the estate, paid the tax and then filed a claim asserting a charitable deduction of $370,901.74 (the total amount distributed to the Verona Cemetery), and claiming a tax refund of $97,557.15, plus interest. The Internal Revenue Service disallowed the charitable deduction and denied the claim for a refund. After exhausting administrative remedies, the executors filed this action for a refund. All facts were stipulated. The government and the estate filed cross-motions for summary judgment, and the district court granted summary judgment for the estate, 590 F.Supp. 160. The government appeals.
The Verona Cemetery Association was established by nearby residents in 1881 as a non-stock, nonprofit corporation for the purpose of providing burial space to any person regardless of religion or race. It is not owned by or affiliated with any religious group or governmental unit. The cemetery consists of approximately 8.5 acres, most of which are used for 8,490 burial plots, all of which have been or soon will be sold. There are also some general utility buildings, a nondenominational chapel, and a centrally located Civil War Memorial, at which public Memorial Day services are held annually.
The cemetery receives revenues from the following sources: sale of grave sites; grave openings; an endowment charge of $150.00 per grave site for deposit in the Endowment Fund; annual mowing charges for grave sites on which no endowment charge was imposed at the time of sale; charges for headstone foundations; two privately established trusts which generate approximately $400.00 a year; a small charge for burial of cremation ashes; and a $10.00 deed and endowment charge when a lot owner conveys directly to a third party. The early history of the cemetery's treatment of indigents is unknown. In recent years, there has been no established practice either authorizing or denying free or reduced rate services for indigents, and no request for such services has been made. The cemetery has, on occasion, provided grave openings and not been paid due to an alleged lack of funds. The cemetery has been found to be an exempt organization for Federal Income Tax purposes, state sales tax, and county and local real estate taxes, and also qualifies as a charitable organization for purposes of the Pennsylvania Inheritance Tax Act.
The pertinent provision of the Internal Revenue Code of 1954 allows a deduction from the taxable estate of bequests:
to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, ... no part of the net earnings of which inures to the benefit of any private stockholder or individual, which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in ... any political campaign on behalf of any candidate for public office
26 U.S.C. Sec. 2055(a)(2) (1982). The sole question on appeal, as below, is whether the cemetery is a "corporation organized and operated exclusively for ... charitable ... purposes."
The district court held that the bequest to the Verona Cemetery did qualify for a deduction under Sec. 2055(a)(2). The court recognized that the weight of case precedent favored the government, but stated that language in the Supreme Court's recent decision in Bob Jones University v. United States, 461 U.S. 574, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983), required reevaluation of that view. There, the Supreme Court, in considering the tax status of a university as a charitable institution under an income tax provision, 26 U.S.C. Sec. 501(c)(3) (1982), stated that in order for an organization to be entitled to tax-exempt status it must meet "certain common-law standards of charity", that is, it "must serve a public purpose and not be contrary to established public policy." Id. at 586, 103 S.Ct. at 2026.
The district court read this language expansively stating that the "contemporary view of 'charity' considers the benefit to the community as a whole." The court then stated, "The maintenance of cemetery facilities by cemetery associations benefits the community both through its aesthetic effects and by the performance of a necessary social task." Additionally, the court noted that if the cemetery were to become insolvent, the burden of maintaining it could fall on the borough. Pa.Stat.Ann. tit. 53, Sec. 47804 (Purdon 1966). Therefore, the district court concluded that public nonprofit cemeteries are charitable organizations because of the important social function they perform and the concurrent lessening of the burden of the public fisc.
Although the executors argue that the Bob Jones University case requires that we construe the word "charitable" by looking to the common law concept of charity, we believe we are not free to do so in light of the framework of the Internal Revenue Code, and its treatment of "charitable" organizations.
Section 501(c)(3), the provision at issue in the Bob Jones University case, deals with those organizations that are exempt from taxation for income tax purposes. Deductibility of contributions made to such organizations is covered in section 170 which provides that a taxpayer who makes contributions to the organizations covered by section 501(c)(3) may deduct those contributions for income tax purposes. Thus, "charitable" organizations are exempt from taxation under section 501(c)(3) and contributions to "charitable" organizations are deductible from the taxpayer's income under section 170(c)(2)(B).
Other subsections of those statutory sections provide explicitly for nonprofit cemeteries, thus suggesting that such organizations are not encompassed within the meaning of "charitable" organizations. Section 501(c)(13) provides separately for exemption from income tax for:
[c]emetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
26 U.S.C. Sec. 501(c)(13) (1982). This exemption has been independent from that for "charitable" organizations since 1913. See The Tariff Act of 1913, ch. 16, 38 Stat. 114, 172; Revenue Act of 1921, ch. 136, 42 Stat. 227, 253.
There was no specific provision for deduction for income tax purposes of contributions to cemetery companies until 1954. At that time, as part of a general revision of the Internal Revenue Code, section 170(c)(5) was added to permit deduction of contributions to cemetery companies meeting the same description as set forth in Sec. 501(c)(13). The Senate Report on the 1954 Code stated that this amendment "extend[ed] the deduction for charitable contributions beyond those allowed under present law to contributions made to nonprofit cemetery and burial companies." Senate Finance Comm., Report on Internal Revenue Code of 1954, 83d Cong., 2d Sess. reprinted in 1954 U.S.Code Cong. & Ad.News 4621, 4660 (emphasis added).
In contrast to the legislative treatment of cemetery companies for income tax purposes, the estate tax provision dealing with deductions to "charitable" organizations, 26 U.S.C. Sec. 2055(a)(2), was never specifically "extended" to cover cemetery companies. Thus, it is implausible to construe section 2055(a)(2) to cover a situation which required an amendment to an almost identical parallel provision in the income tax sections to reach that result. Congress' inaction with respect to the estate tax provision is particularly probative given the established case law prior to 1954 denying a deduction for contribution to cemeteries for estate tax purposes. See Gund's Estate v. Commissioner, 113 F.2d 61 (6th Cir.), cert. denied, 311 U.S. 696, 61 S.Ct. 134, 85 L.Ed. 451 (1940); Wilber National Bank v. Commissioner, 17 B.T.A. 654 (1929). See also Craig v. Commissioner, 11 B.T.A. 193 (1928) (); Schuster v. Nichols, 20 F.2d 179 (D.Mass.1927) (same).
As one court has noted, the absence of a counterpart of income tax section 501(c)(13):
illustrates if anything, an intent by Congress not to include as an estate tax exemption, the exemption set out in Section 501(c)(13) to estate tax situations. Cf. Hopkins v. Grimshaw, 165 U.S. 342, 353, 17...
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