Mount Vernon Gardens, Inc. v. CIR

• Decision Date: 09 February 1962
• Docket Number: No. 14481.,14481.
• Citation: 298 F.2d 712
• Parties: MOUNT VERNON GARDENS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

298 F.2d 712 (1962)

MOUNT VERNON GARDENS, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 14481.

United States Court of Appeals Sixth Circuit.

February 9, 1962.

Charles W. Davis, Chicago, Ill. (John C. Walker, Chicago, Ill., Samuel H. Horne, Washington, D. C., on the brief), for petitioner.

Carolyn R. Just, Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Lee A. Jackson, Harry Baum, Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before MILLER, Chief Judge, O'SULLIVAN, Circuit Judge, and DARR, Senior District Judge.

SHACKELFORD MILLER, Jr., Chief Judge.

Petitioner, Mount Vernon Gardens, Inc., seeks a review of the decision of the Tax Court determining deficiencies in income taxes of the petitioner for the taxable years ended October 28, 1954, and October 27, 1955.

The facts, which for the most part are not in dispute, are as follows.

Petitioner is a cemetery corporation organized for profit in 1952 under the laws of Tennessee. It keeps its books and reports its income on the accrual basis. About December 1953 Vincent B. Rush & Associates, a partnership, hereinafter called "Associates," entered into a lengthy contract with petitioner, portions of which are summarized as follows.

Associates agreed to sell and the petitioner agreed to buy a 200-acre tract of land in Shelby County, Tennessee, owned by Associates and referred to therein as the Tract, upon certain terms and conditions as follows. Petitioner agreed to dedicate all of the Tract for a cemetery of the "memorial garden type" with each memorial garden to be not in excess of 4 acres in size, and the entire tract to be developed and designed in such manner as to provide for not less than 200,000 burial spaces.

Petitioner agreed to execute a trust indenture creating a trust to be known as the "Mount Vernon Gardens Perpetual Care Trust Fund" and to agree in writing with each purchaser of burial space to deposit in said perpetual care trust fund a specific amount, to be either $15.00 per burial space or the amount required by the laws of the state of Tennessee, whichever was greater.

Section 11 of the Agreement provided in part as follows:

"Section 11. The Company agrees that (i) it will execute a trust indenture with (a Memphis bank) * * * creating a trust to be known as the "Mount Vernon Gardens Development Trust Fund" and (ii) in respect of each sale of burial space, it will agree in writing with the purchaser of said burial space to deposit in said development trust fund a specific amount, which amount shall be not less than fifteen percent (15%) of the aggregate amount of said burial space.

* * * * * *

"The Company further agrees that the terms of said trust indenture shall provide that said development trust fund shall be expended solely for the physical development and improvement of the Tract, and that any amount not required for such purposes shall be distributed to and shall constitute a part of the principal of the Mount Vernon Gardens Perpetual Care Trust Fund."

Petitioner agreed to pay Associates 40% of the "basic factor in respect of each burial space sold by it" until 80% of the existent or potential burial spaces in the tract was sold, at which time all obligations of the petitioner to Associates under the contract would cease. The definitions of "basic factor" and other terms show that 40% of the basic factor was the equivalent of 30% of the aggregate amount with respect to the sale of burial space.

Associates retained a vendor's lien on the tract, with parcels to be released from the lien from time to time. In the event of a default petitioner agreed to reconvey so much of the Tract as remained subject to the vendor's lien, but until default and written notice thereof, petitioner was to have possession of the Tract.

In order to insure the development, improvement, maintenance and operation of a memorial garden cemetery of the highest standards and thereby insure the ultimate payment in full of all amounts payable to Associates, the petitioner agreed to employ a sufficient number of qualified and experienced key men to form and maintain a management competent to achieve such standards.

Other provisions of the contract required the deposit of all of petitioner's capital stock in escrow, to be sold, in case of default, to some qualified buyer who would carry out petitioner's obligations under the contract. It placed limitations on petitioner's incurring of indebtedness and on its encumbering or transferring its assets, and specified what would constitute events of default.

Pursuant to its contract, petitioner on April 5, 1954, entered into a trust agreement with The First National Bank of Memphis, Tennessee, as trustee, establishing the Mount Vernon Gardens Perpetual Care Trust Fund, into which would be deposited 25% of the aggregate sums payable by purchasers of burial space. This trust agreement provided that the income from the Fund be paid to petitioner for the permanent improvement, upkeep and beautification of its cemetery, and for no other purpose, and that it should never be used for the improvement or embellishment of unsold property to be offered for sale. It is not contended by the Commissioner that the payments made into this fund constituted taxable income, and such payments are not involved in this litigation.

Pursuant to its contract, petitioner on August 10, 1954, entered into a trust agreement with The First National Bank of Memphis, as trustee, establishing the Mount Vernon Gardens Development Trust Fund. The payments made by petitioner into this trust fund present the issue in the present case.

Under this trust agreement petitioner agreed to deposit in the Development Trust 15% of the sales price of the lots. It further provided:

"2. Amounts deposited with the Trustee * * * and any net income which may be earned thereon shall constitute the (development trust fund) and shall be held, administered and distributed as follows:

"(a) Upon the receipt of written instructions of the (petitioner) * * the Trustee shall from time to time engage the services of such persons, and purchase and pay for such chattels, goods, equipment and services, as the (petitioner) shall certify in said instructions as used, needed or required in the development, improvement and/or beautification of the cemetery property. If for reasons of convenience and economy, the (petitioner) shall at any time expend its own funds for said purposes, the Trustee shall reimburse the (petitioner) for the amount certified in said instructions as having been so expended."

This trust agreement also provided that upon certification by the petitioner to the trustee that development, improvement, and beautification of the cemetery had been completed or that any amount of the Development Fund was not required in the immediately foreseeable future, the amount in the Development Fund should be distributed to the Perpetual Care Fund. It also provided that payments made by the trustee should be made for the sole purpose of developing, improving, and beautifying the described cemetery land.

During the latter part of 1953 petitioner employed a landscape architect to prepare plans for the development of the cemetery. The cemetery was planned as a memorial garden type (as compared to a monument type) in which the entire tract was to be subdivided into a number of smaller parks or gardens. An initial garden was laid out from which sales of burial space could be made. Thereafter, other gardens were laid out and developed. During the period in question, the development of the cemetery included grading, installing underground drainage, building roads and walks, installing waterlines, and planting shrubbery. Payment for this sort of work was either by the trustee from the Trust Fund upon petitioner's order or directly to the creditor by the petitioner. If the petitioner paid, it would send a voucher to the trustee, who would then reimburse petitioner. Occasionally the trustee questioned the purpose of an expenditure, but normally payments to creditors or reimbursement to petitioner for such payments were automatic.

Petitioner began selling burial space in January 1954. Its sales policy was to sell about one-third of the available burial space in a garden, then discontinue sales from that garden and begin sales programs for other gardens. As burial spaces in gardens were sold, petitioner developed and improved the gardens in the manner indicated.

In connection with the sale of burial space, petitioner entered into a written Sale Agreement with the purchaser, under which it agreed to make deposits to the Development Trust Fund and the Perpetual Care Trust Fund in accordance with the allocation therein agreed upon. Most sales were made on the installment basis. The Sale Agreement specified the manner in which each payment received by the petitioner should be allocated among the Development Trust Fund, the Perpetual Care Trust Fund and petitioner, in accordance with its contract with Associates. All receipts allocable to the Development Trust Fund were promptly paid in full by petitioner to the trustee of the trust fund.

The landscape architect, who had previous experience with other cemeteries, gave a detailed estimate of the cost for the complete development of the cemetery, from the beginning to the end. The minimum development cost of a "first-class type of cemetery" was estimated to be $2,757,944.00. He estimated the maximum development cost at $3,984,962.40. He estimated that the Tract would yield only some 167,000 burial spaces, instead of the 200,000 originally planned. On this minimum basis he estimated an average development cost of $16.03 per burial space. There was no contradictory evidence on this phase of the case.

In its income tax returns for the years in question, petitioner did not include in its income 40% of the aggregate sums with respect to burial space sold during such taxable years. This...