Perry Funeral Home, Inc. v. Commissioner
| Decision Date | 16 December 2003 |
| Docket Number | Docket No. 14722-02. |
| Citation | 86 T.C.M. 713 |
| Parties | Perry Funeral Home, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Edward DeFranceschi, David Klemm, and Jason Bell, for the petitioner.
Louise R. Forbes, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies and penalty with respect to petitioner's Federal income taxes for the calendar years 1996 and 1997:
Year Deficiency Penalty I.R.C. Sec. 6662
1996 $1,044,037 $106,877.80
1997 1,817 -
After concessions by the parties, the principal issues for decision are:
(1) Whether payments received by petitioner under preneed funeral contracts are includable in gross income during the year of receipt or during the year in which the goods and services are provided by petitioner; and
(2) whether petitioner is liable for the section 6662 accuracy-related penalty.1
Some of the facts have been stipulated and are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference.
Petitioner is a funeral home located at all relevant times in New Bedford, Massachusetts. Petitioner began operations in 1963 as a partnership and was incorporated under the laws of the Commonwealth of Massachusetts on September 19, 1967. Brothers Thomas Perry and William Perry each own a 50-percent interest in petitioner and are funeral directors licensed by the Commonwealth of Massachusetts.
Prior to and during the years in issue, petitioner entered into preneed funeral contracts. Under these arrangements, the contract purchaser selected, on a prospective basis, the goods and services to be provided by petitioner at the contract beneficiary's death. Petitioner would designate the selected items and applicable charges on a written form.
If the resultant balance was then paid in advance of death, either in a lump sum or in installments, petitioner agreed to honor the contract at death as written, without additional cost to the purchaser or family. If the resultant balance was to be paid through the proceeds of an insurance policy or was left unfunded, the amount due would be recalculated in accordance with the prices in effect at the time of death.
The written form used by petitioner for these purposes was not specific to prearranged funerals and contained no express provisions regarding the use or refundability of amounts received thereunder. A handwritten notation that the contract was irrevocable was added to certain of the forms, allegedly for reasons related to Medicaid eligibility. Regardless of such language, however, it was petitioner's practice to indicate to purchasers that they had the right to cancel at any time and would receive their money back.2
The experience of petitioner has been that only a very small percentage of preneed contracts are in fact canceled. The record indicates that during the period from approximately 1997 through the time of trial in 2003, six contracts were canceled.3 The amounts paid thereon were refunded, and on certain occasions the refunds also included an interest component based on "kind of a guess" about prevailing rates.
During the years in issue, petitioner maintained a business checking account and the following investments: A Putnam Investments mutual fund account, a Merrill Lynch ready asset account, Fleet Financial shares, Massachusetts Savings Investments certificates of deposit, a BayBank money market account, a BayBrokerage account (for 1996 only), and a BayBank escrow account. Moneys received pursuant to preneed contracts were placed by petitioner in one of the investment vehicles. Upon petitioner's provision of goods and services at the death of a preneed contract beneficiary, an amount equal to the purchase price of the contract was transferred from the investment accounts to petitioner's checking account.
The BayBank escrow account is a compilation of accounts, opened before 1996, each in the name of an individual contract beneficiary. Petitioner's accountant advised establishment of the escrow account in the early 1990s. This account was used for the deposit of preneed receipts for a period prior to the years in issue, until the resultant administrative burden caused petitioner to discontinue the practice. The balance of the BayBank escrow account as of January 1, 1996, was $106,579.16, and those funds are not at issue in this proceeding. The investments other than the Baybank escrow account are held solely in petitioner's name and list petitioner's tax identification number.
Petitioner is an accrual basis taxpayer. For accounting purposes, petitioner records payments received pursuant to preneed contracts as liabilities under the designation prearranged funerals. Petitioner does not recognize as income payments recorded on its books and records as prearranged funerals until the tax year in which the goods and services are provided. Petitioner does recognize interest and dividend income earned on the investments, exclusive of the BayBank escrow account, into which the preneed funds are deposited.
Petitioner filed Forms 1120, U.S. Corporation Income Tax Return, for 1996, 1997, and 1998 consistent with the foregoing approach. Attached to each return is a Schedule L, Balance Sheets per Books. These Schedules L reflect as "Other investments" the following balances in petitioner's investment vehicles, including the BayBank escrow account:
Year As of Jan. 1 As of Dec. 31
1996 $2,270,655 $2,431,946
1997 2,431,946 2,515,217
1998 2,515,217 2,503,934
Also on the Schedules L, petitioner included in "Other current liabilities" the following amounts for prearranged funerals:
Year As of Jan. 1 As of Dec. 31
1996 $1,587,416 $1,612,272
1997 1,612,272 1,614,929
1998 1,614,929 1,543,284
Respondent on June 26, 2002, issued to petitioner the statutory notice of deficiency underlying the present litigation. Therein, respondent determined, inter alia, that moneys received under preneed contracts are to be characterized as income to petitioner in the year of receipt.
OPINIONIn general, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a). Section 7491, effective for court proceedings that arise in connection with examinations commencing after July 22, 1998, may operate, however, in specified circumstances to place the burden on the Commissioner. Internal Revenue Restructuring & Reform Act of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. With respect to factual issues and subject to enumerated limitations, section 7491(a) may shift the burden of proof to the Commissioner in instances where the taxpayer has introduced credible evidence. Concerning penalties and additions to tax, section 7491(c) places the burden of production on the Commissioner.
The record in this case is not explicit as to when the underlying examination began.4 As regards the substantive accounting issues, however, the Court finds it unnecessary to decide whether the burden should be shifted under section 7491(a). Few facts concerning how petitioner conducted the preneed transactions are in dispute. Given this circumstance, the record is not evenly weighted and is more than sufficient to render a decision on the merits based upon a preponderance of the evidence. With respect to the penalty, because respondent on brief assumes that section 7491(c) is applicable, the Court will do likewise.
After the trial in this case, petitioner filed a motion for the Court to take judicial notice of the consent judgment rendered in Commonwealth v. Deschene-Costa, C.A. No. C03-0647 (Mass. Super. Ct. June 4, 2003). The motion is made pursuant to rule 201 of the Federal Rules of Evidence, which provides in relevant part as follows:
Rule 201. Judicial Notice of Adjudicative Facts
(a) Scope of rule.—This rule governs only judicial notice of adjudicative facts.
(b) Kinds of facts.—A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.
This Court has previously noted that "under rule 201, records of a particular court in one proceeding commonly are the subject of judicial notice by the same and other courts in other proceedings", and "Also generally subject to judicial notice under rule 201 is the fact that a decision or judgment was entered in a case, that an opinion was filed, as well as the language of a particular opinion." Estate of Reis v. Commissioner [Dec. 43,482], 87 T.C. 1016, 1027 (1986).
In the judgment that is the subject of petitioner's motion, the defendant funeral home operator, when confronted by the Commonwealth of Massachusetts, consented to a permanent injunction and to payment of restitution for misuse of funeral trust funds. Commonwealth v. Deschene-Costa, supra. Respondent agrees that the Court may take judicial notice of the judgment under the above-quoted standards of rule 201 but questions the relevance of the material. Accordingly, the Court will take judicial notice of the existence and content of the judgment pursuant to rule 201 but will give it only such consideration as is warranted by its pertinence to the Court's analysis of petitioner's case.
The Internal Revenue Code imposes a Federal tax on the taxable income of every corporation. Sec. 11(a). Section 61(a) specifies that gross income for purposes of calculating such taxable income means "all income from whatever...
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