Mellon Bank, NA v. United States

• Citation: 590 F. Supp. 160
• Decision Date: 26 June 1984
• Docket Number: Civ. A. No. 82-1939.
• Parties: MELLON BANK, N.A., and Robert B. Reed, Jr., Executor of the Estate of A. Leon Davis, a/k/a Austin L. Davis, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

590 F. Supp. 160

MELLON BANK, N.A., and Robert B. Reed, Jr., Executor of the Estate of A. Leon Davis, a/k/a Austin L. Davis, Deceased, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. No. 82-1939.

United States District Court, W.D. Pennsylvania.

June 26, 1984.

John Meck, Pittsburgh, Pa., for plaintiffs.

Will E. McLeod, Tax Div., U.S. Dept. of Justice, Washington, D.C., Thomas A. Daley, Asst. U.S. Atty., Pittsburgh, Pa., for defendant.

MEMORANDUM

McCUNE, District Judge.

The issue before us on cross motions for summary judgment is whether or not the Verona Cemetery, a non-profit corporation, is a "corporation organized and operated exclusively for ... charitable ... purposes," under § 2055(a)(2) of the Internal Revenue Code of 1954, as amended.

The plaintiffs have exhausted their administrative remedies. We have jurisdiction pursuant to 28 U.S.C. § 1346.

Facts

The following facts have been stipulated to by the parties and are therefore not in dispute.

History of the Case

A. Leon Davis died testate on December 6, 1976. His last Will dated October 11, 1972, and a Codicil dated November 21, 1975, provided as follows:

All of the rest, residue and remainder of my estate I give, devise and bequeath to THE VERONA CEMETERY, Oakmont, Pennsylvania, with the sum of Thirty Thousand Dollars ($30,000.00) thereof to be applied toward the erection of a new utility building and the balance thereof to be added to its Endowment Fund.

On August 22, 1977, the plaintiffs timely filed a federal estate tax return for the Estate of A. Leon Davis and paid taxes owed in the amount of $96,808.16. A deficiency in the amount of $860.32 was subsequently paid on June 19, 1979.

On September 11, 1979, the plaintiffs filed a claim for a refund in the amount of $97,557.15, plus interest, based on a claim for a charitable deduction of $370,901.74. The Internal Revenue Service disallowed the charitable deduction in full and denied the claim for a refund.

The plaintiffs then filed the instant suit claiming that the denial of the deduction was improper and that the resulting Federal Estate Tax was erroneously assessed and collected.

Before addressing the merits of the plaintiffs' claim we will briefly review the history and physical characteristics of the Verona Cemetery based upon the stipulation.

History of the Verona Cemetery

In 1881, residents of the Borough of Verona and several other communities drafted Articles of Association for a public cemetery. The Association's stated purpose was the maintenance, without profit, of a public cemetery for the burial of the dead, without distinction or regard to sect.

Thereafter, the Court of Common Pleas of Allegheny County was petitioned by the Association's subscribers requesting that a corporation of the first class (non-profit) be established. A decree was entered on January 3, 1882, granting the Charter. The Charter and the rules and regulations have remained unchanged and are still in full force and effect.

The corporation was organized on a nonstock basis and none of the assets and no part of the net earnings of the cemetery have or may inure to the benefit of any private individual, corporation or lot owner. Persons of different races and religions have been buried in the cemetery without any restrictions or distinction whatsoever. The cemetery is operated by a Board of Managers who serve without compensation.

Description of the Cemetery

The cemetery itself occupies approximately 8.5 acres with approximately 8,490 burial plots, all of which have been or soon will be sold.

In the middle of the cemetery there is a circular grass plot where there is erected a flagpole and a monument to the local Civil War dead. On the outside of the circle is a platform erected by the Grand Army of the Republic. Upkeep of these monuments has been performed by employees of the Verona Cemetery without charge.

Annual community Memorial Day services are held each year from the platform. The community regards the Verona Cemetery as publicly owned.

There is also a building located on the grounds which contains a chapel, office and storage rooms. The chapel is used without charge by all religious denominations for funeral services. Prior to the erection of the chapel, the estates or families of decedents had to arrange at their own expense for the rental and erection of a temporary tent to provide shelter for such services.

It is not known whether the cemetery ever provided free, or at a reduced rate, cemetery lots or grave openings to indigents. The cemetery has had no established practice which either authorized or denied such free or reduced rate service to indigents, nor has it ever been requested to provide such services. On several occasions the cemetery has provided grave openings and subsequently has not been paid for this service, allegedly because of lack of funds.

Existing Tax Exemptions

Since July of 1941, the cemetery has been exempt from federal income taxes. The cemetery is also exempt from county and local real estate taxes. There is no realty transfer tax imposed on the sale of grave sites by the cemetery or in a later resale by a private owner. In 1979, the cemetery received a tax exemption for state sales tax. Finally, on November 18, 1982, Administrative Judge Zavarella of the Orphan's Court Division of the Court of Common Pleas of Allegheny County held that the bequest here in dispute was exempt from Pennsylvania Inheritance Tax under § 62 of the Pennsylvania Inheritance Tax Act because the Verona Cemetery was charitable.

Revenue of the Cemetery

The cemetery receives revenue from the following sources:

a) the sale of grave sites;

b) grave openings;

c) an endowment charge of $150.00 per grave site for deposit in the Endowment Fund;

d) annual mowing charges for grave sites on which no endowment charge was imposed at the time of sale;

e) charges for headstone foundations;

f) two privately established trusts which generate approximately $400.00 a year;

g) a small charge for burial of cremation ashes; and

h) a $10.00 deed and endowment charge where a lot owner conveys directly to a 3rd party.

Merits of Plaintiffs' Claim

While cognizant that the issue before us is not one of first impression and that the weight of authority as expressed in prior tax court and reviewing court decisions favors the defendant's position, we believe that the issue warrants reevaluation in light of the United States Supreme Court opinion in Bob Jones University v. United States, 461 U.S. 574, 103 S.Ct. 2017, 76 L.Ed.2d 157 (1983).

In Bob Jones University, the Supreme Court addressed the issue whether the university was entitled to a tax exemption under § 501(c)(3) of the Internal Revenue Code as a "corporation ... organized and operated for religious, charitable ... or educational purposes." The language of 501(c)(3) (defining charitable, religious and educational organizations exempt from income tax) is similar to that of § 170 (defining organizations, contributions to which may be deducted for income tax purposes) and § 2055(a)(2)¹ of the Code.

Recognizing the similarity between §§ 170 and 501(c)(3) the Court in Bob Jones University observed that since the two sections are closely related (both encourage the development of certain organizations through the grant of tax benefits) and since the language of the sections are in most respects identical, the Commissioner and the courts have applied many of the same standards in interpreting those sections.

The Court concluded that to the extent one section aids in ascertaining the meaning of the other, it is entitled to great weight. Bob Jones University, supra, 103 S.Ct. at 2026 n. 10, citing United States v. Stewart, 311 U.S. 60, 64-65, 61 S.Ct. 102, 105-106, 85 L.Ed. 40 (1940).

As applied to this case, the Court's discussion of the term "charitable" in the context of § 501(c)(3) is entitled to "great weight" in interpreting the nearly identical language of § 2055(a)(2).²

In Bob Jones University the Supreme Court opined that congress, in enacting § 170 and § 501(c)(3), "sought to provide tax benefits to charitable organizations, to encourage the development of private institutions that serve a useful public purpose or supplement or take the place of public institutions of the same kind." Bob Jones University, supra, 103 S.Ct. at 2026.

"Tax exemptions for certain institutions thought beneficial to the social order of the country as a whole, or to a particular community are deeply rooted in our history... The origins of such exemptions lie in the special privileges that have long been extended to charitable trusts." Id.

The Court further stated that when analyzing § 501(c)(3) within the framework of the Internal Revenue Code, the background of Congressional purposes "reveals unmistakable evidence that, underlying all relevant parts of the Code, is the intent that entitlement to tax exemptions depends on meeting certain common law standards of charity — namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy." Id.

Since the Congressional purposes underlying charitable exemptions are the same as those underlying the Code sections dealing with charitable deductions (encouragement of certain institutions through tax benefits) it follows that institutions under those sections dealing with charitable deductions must also meet common law standards of charity.

We thus turn to the common law and law of charitable trusts to determine whether a public non-profit cemetery is a corporation organized and operated exclusively for charitable purposes.

It has long been followed that a charitable use "may be applied to almost anything that tends to promote the well-being of social man." Ould v. Washington Hospital for Foundlings, 95 U.S. 303, 311, 24 L.Ed. 450 (1878).

Lord MacNaghten, in a restatement of the English law of charity, long recognized as a leading authority in...