Petition for a Writ of Certiorari — Angelus Funeral Home v. Commissioner

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UPREMA, COURT. 0, | on

. i weit MAY <4 1969

- Supreme Caurt of the United Ne ale ne

aoe Term 1965

| No a 5

2 F

_ ANGELUS FUNERAL HomMgE, a corporation, | ;

a, % Petitioner, .

ee ey ee,

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

Petition for a Writ of Certiorari to the United

States Court of Appeals for the Ninth Circuit.

ps )

———.

Leo BRANTON, Jr., 3

3450 Wilshire Boulevard, ;

Suite 1107

Los Angeles, Calif. . 90005,

WIL.iaM B. MurrisH,

3175 West Sixth Street,

e Suite 203,

Los Angeles, Calif. 90005;

Attorneys for Petitioner.

Parker & Son, Inc., Law Printers, Los Angeles. Phone 685-9790 ,

SUBJECT INDEX -

ae ee Page

‘Opinions Below .......... dias Br " eae hie ¥

Jurisdiction’ '........-c0csccsececccceeeoe-- Oe at ae “2

Question Presented as si ccemunsavsipepeecaianes CeO er

Statute Involved ........ | TEER OE ER RO, LIOR ONE 3 2:

Statement ET CONE nine Seiabpbeites ena ©

Summary of Argument ...... : pid end eassnn aceanieetainaaipaanttton e..

‘ Argument: Reasons for Granting the Writ =<... i

: See

_ The Decision Below Creates Conflict Between. the *

Circuits and Divisions and Ambiguities in the

Tax, Law in Holding Taxable-as Income to (-

“Petitioner at the Time of Receipt and While ~

Held as Intérim Deposits, the Deposit-Moneys

Paid at Bar Despite (A) the Circumstance

That the Deposits Were Conditional and Con-

tingent in Nature and Left Their Character as

Income Versus Returnable Deposits "Unknown

and Indeterminable During the Deposit Peri-

od, and (B) the Further Circumstance That

the Contingent Obligation to Repay Was Rein-

forced by a Requirement That the Interim De-

posits Be Held im Unamendable, Written —

STO ceca sen VEAY Seeder PNT NO ROLONET OE

(A). The Circumstance ‘of Contingent Holding

(B) Ph@ Reinforcing Circumstance of a Re-. ae

“quired Trist-Holding 200... -

——— wise esionnedial tar yoxtedansinesnssopusieeanctsindacaige Sa

: , ee li, * ‘ \ .

Dr | II. eae

The Decision Below Creates Further Conflict Be-

tween the Circuits and Division as to Basic |

Tax-Law Theory ‘by Erroneously Extending

This Court’s Decisions in Schlude v. Cominis- |

sioner, American Automobile Association v.

United States, and Automobile Club of Michi-

gan v. Commissioner to the Trust-Held Interim

- Deposits at Bar Despite (A) the Trust-En-_

forteable Restrictions Upon Use of Such De-

posits During the Interim Holding Thereof and

the Conditional: Nature of the Deposit. Contract

and the Continuingly-Contingent - Obligation of

Petitioner Thereunder to Account for and Re- °

pay the Deposit Moneys, and (B) the Circum-

stance That the Deposits at Bar Relate in Sub-_

. Santial Part to Future Sales of* Goods (Cas-

kets), Not Merely to Future Performance of

-Services, and During the Interim Deposit Peri-

od the Identity of the Goods to Be Sold, the

Price for the Sale and the Cost of the Goods

Sold Cannot Be Known.or Determined .......... 27

Conclusion PEE IS Sine ee a emer ssgiewtaelles ee ee oad

Appendix. A. Tax Court Opinion Below ........../. Acl.

Appendix B. Court of Appeals Opinion Below .. B-1

Appendix C. NUE = TAI psc ncn C-1

Appendix D. Pré,1961 Agreement Form’ ........ D-1

Appendix E. ‘1961 Agreement Form ............... sien eek

: iii.

- TABLE OF AUTHORITIES CITED

o~ _ 9 a

‘American Automobile Association v. United States,

5 -$6F US. G87 cz... 11, 27, 28, 29; 30, 32, 33, 34, 35

Astor Holding Co. v. Commissioner, 135 F. 2d 47 .. 13

Atlantic Refrigerating Company, BT. A. Mem.,

Cases oe

1942. (P. H.) par. 42,382" iow cigecnceeeeuen .

Automobile Club 6f Michigan v. Commissioner, 357 ~

; US. ae re a 11, 28, 29, 30, 32, 33, 34,35:

Bregrerton: Tacoma Stages © v. Squire, 96 F. Supp.

<5 TERSY NRL ROD terete NORE aE OC EO NCE my @e..

Clinton Hotel Realty Corp. NV. Commissioner, 128 F.

20 966 «....:%: VSR REL aac OO oe OO aN l7, 22, £0

“Commissioner ‘v. Dill Co., 204 | foe: es baer 15

aan v. L¥on, SPM FO 13

Commissioner’ v. Riss, 374 F. 2d 161 .....,..... Go 17

Consolidated-Hammer Dry Plate & Film Co." ¥.

| Commissioner, 317’ F, 2d 829 ...... 18, 0, "22, 32, 33

Farrara v. Commiséioner, 44 T.C. 189‘ Sante 31, 33

Fifth and York Co. v. United States, 234 F. Supp.

“f 42] dihteciia aes aaiadenan i eairoane utah bpsdiaiiitya wh cadainwsi aang acatites 1 ie 31, 33, 34°

beige Life Insurance Co. v. United States, 399

ay SREP eee oer ee eee SIL eee adh ST 30°

‘Garber, Inc..v. Commissioner, 51 T.C. No. 7 2326 |

i eile ETO See AUT 31, 32

Hagen Advertising Displays, Inc. v. Commissioner, ~

ge IE ce - 32, 34

‘ Harcum v. United States, 164 F. ‘Supp. 630 caleales 17

Hunter v. Comniissioner, 140 By 2d 954 cise... 15

Kitchin v. Commissioner, 340.F. 2d 895 ................. 15

oe. oa

/ Page

~ Mantell v. Commissioner, 17: TEC 1643... 16

_ Modernaire Interiors, Inc., 1968 T.C.M. No. 252 :

oe a RE Oe ODA ESOS SEE SSPE TO 31, 33,° 34.

North Kieeiten Oil ee Vv. Burnet, 286 U.S. 417 .. 15 |

Parkchester Beach Club Corp. ‘vv. ea secant 335

| SCR ee nD

Renwick - v. United | States, 87 F F. 2d 123 rae 13 Bs

er v. Commissioner, 372 US. 128 .... 11, 27, 28

slonsiensalseentie Siasnleahcaicionin eee 29, 30, 82, 32, 33, 34, 35

Summit Coal Co. v. . Commissigiier, 18 B.T.A. °983

Pn te NU roca eee 18, 22, 32, 33

United Statés v; aA ston Ry. Corp., 37 F. 2d 670 .. 12.

~ United States v. Williams, 395 F. 2d 508 ioe Seat 31

Veenstra & De Haan Coal Co. v. Commissioner, nN 1

TA. Bee cs eee - 19, Zi, 24/ 32, 33

Virginia Iron Coal and Coke Co. v. Commissioner, ’

99 F. 2d 919, ‘cert. den. 307 U.S. 630. 2.00220 15

Warren Service Corp. v. Commissioner, 110 F. 2d

; 723 eeeeeees Bas eeeneeycbdseeecestesconescbetasuuceetwcces eteeuccicivécenccccucs 16

Watkins v. United States, 287 F. 2d 932 cee oe

Be ONES Me eM MRE aR hacdicisbatieumiinketueGiniaes: aaa

; Wootliiwn Park Cemetery Co. v. Commissioner, 16

~ SI ORO insalied alsprcndatiapectabccaction 20, 21, 22, 24; 32, 33

Z : a Rules - . -. / |

Revenue Ruling 67-47, 1967-1. C. B. 9, 10-11 ...... 16

f “>. Statutes pe

Internal Revenue Act of 1954, Sec. 61 saci 2

Internal Revenue Act, Sec. 446(b) PSE

United States Code, Title 26, Sec. 61 Be Me oN eee y

e@ *

; Vv. ree

acs oe 7 Page

United States Code, Title 26, Sec. 446(b) - een ae

United States Code, Title 28, Sec. 1254(1) en tay Dae

| | Textbooks = - |

34 American Bar Association Journal- (1968), ee

yt ME SU cL pcencedicscsecanitin are oan 35

‘2 Mertens, Law of Federal Income Taxation, ‘P. :

MEE sownieatrivilgpanateinatipliteeminincheltakseninks Sipicebaddpuineseiann 16

* 37 New York University Law Theretee (1962), PP.

ae aE |” geecmiennrckiecme se decercimrosnaire atc mI Dens OO 34

25 New York University” Tax Institute (1967 % PP.

19 South Carolina ‘Law Review (1967),. pp. ‘176, ;

a ER ecstnneencatailpsdanspiciclacokanaanepeasionnaadiannmnantatieatoas 35

* 24 Tax Baw Review sam pp. 375, 380-381, ~/

| RR ca Ee RaRC AR mee ae 34 |

°21 University of mi_ Law Review (1967), pp. :

‘R66, 872, 877,. 884 ..........- ss ssbictsncealon xinesbiduubers 34, 35 -

eee niversity of Southern California Tax Institute

, (1967), pp. 357, 368-369 . nesssevdncssenessnecenes 34°

24 Wash. & Lee Law Review (1967), pp. 291, ~

293-295 . dsiasiiasiaioniiancahibbanihsae aba or

-11 Wayne Liv Review (1965), PP. 482, 488 .... 34, 35

> P Py x

xi °

: ~.

IN _.

Supreme Court of the United “States

. Citable ‘on. 1968

UG. cntianaies

ANGELUs F'uNERAL HoME?a corporation,

q eo *,*

: 68 Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

cae Respondent.

Petition for a Writ of Certiorari to the United

States Court of Appeals for the Ninth Circuit.

*~#*!.. Petitioner prays jthat a writ of certiorari’ issue to

. review the judgment of the United States Court of

Appeals for the Ninth Cifcuit, entered‘in the above-

entitled case on February 10, 1969.

- Opinions Below.

The within cause was a petition in the United States

Court of Appeals for the Ninth’ Circuit [I T. R. 52

.et seq.*| to review ‘a judgment of the Tax Court ad-

werse to the petitioner. [I T. R. 28 et seg.] The opin-

ion of the Tax Court .is reported in. 47 T.C. 391, and .

a copy thereof is attached hereto as Appendix A. The

opinion ef the United States Court of Appeals for the

Ninth Circuit, affirming the decision of the Tax Court,

is not yet reported; a copy thereof is attached hereto as

Appendix B. y .

*Signifying Volume I of .the ‘Transcript of Record, pages

. 52 et seq.

is. y

Lelie:

Jurisdiction.

The judgment of the Court of Appeals for the Ninth

Circuit was entered on February 10, 1969 [I T. R.

‘Supp.*] A timely petition for rehearing _ was filed on

February 24, 1969, and an order denying the said reti-@

tion for rehearing was made and entered February af,

1969. [I T. R. Supp.] ; :

The jurisdiction of this Court is invoked under 28

US.C., Section 1254(1). eA

Question Presented. ;

The question-presented' in the instant case is whether

certain deposited sums deposited with the taxpayer’

under certain pre-need funeral services, agreements

(identified herein as the “1961 agreeiment-form’’),

where such sums during an interim period until each

depccitor’s “death were subject to conditions and con-

_ tingencies rendering. unknown and_ indeterminable~

whether thessame would ultimately be income or ~be

refundable/ and where during such interim the funds

were required to be held under .a written, enforceable

trust, permitting only. limited powers of investment in

trust as herein described; ‘were taxable to the taxpayer

as income at the time of. receipt and while held in such

interim trust holdings. .

| Statute Involved.

The statutory provibion involved in the instant cause

is Settion 61 of the Internal Revenue Act of 1954, 26 -

U.S.C., Section 61. A copy of said statute is attached

hereto as Appendix C.

*Signifying the Supplement to Volume I of the nie

of Record- incorporating the proceedings in the Court of Ap-

peals; petitioner’s copy of this Supplement carries no pagina-

tion.

aes

s -

Statement of the Case.

Petitioner is a California corporation located in the

City and County of Los Angeles and is and ‘at all time

material herein has been engaged there in the business

of furnishing funeral and burial’services and, concurrent

therewith, selling: caskets. [I T. R. .23 (stipn.); 28

(fdg.)*.] Petitioner reports its income on a calendar

year and on an accrual basis. [Il T. R. 28, 30 (fdg.).]

The sole question at bar is the taxability as income to

petitioner at the time of receipt of deposits paid to it

under certain “Pre-Need Funeral Plan Agreements”,

and specifically the deposits made under what is herein

designated as the “1961 agreement-form.”” eR

Many of the members of the community served by

petitioner have been persons of small means. [II T. R.

23-25**; I T.R. 28, 30 (fdg.)] As a regular part

of its businesssince approximately 1954 Angelus has

encouraged such persons toeenter into its “Pre-Need

Funeral Plan Agreements” which require only small—

even nominal—down payments, and which provide there-

after for only voluntary subsequent payments, but which

serve at least to record a plan and agreement for the

depositor’s funeral and casket. [Jd.]

These agreements were in two forms, an original

form herein identified as the “pre-1961 agreement-

*The facts in the instant case are virtually without contest

and as set forth herein are taken almost entirely (except where

_ noted) from two concurrent sources: (1) -The Tax Court's

“Findings of Fact”, appearing, in Volume I of the: Transcript

of Record at pages 28 et seq., and identified herein in citations

as: “(fdg.)”, and (2) the “Stipulation of Fgcts” filed by the

parties in the Tax Court and appearing in Volume I of the Tran-

script of Record at pages 23 et scq., and identified herein as:

“(stipn.)”.

“Ts Volume II of the Transgript of Record, pages

23-25.

—4t-

- form”, a truecopy of which appears in the Record as

Petitioner’s Exhibit 10 [I T.. R. 59 et seq.] and a.copy

of which is also attached hereto as Appendix D, and

-.an amended form identified herein as the “1961 agree-

ment-form’, a true copy of which appears in the Record

as Petitioner’s Exhibit 11- [I T. R63 et seq.] and

a copy of which is also attached hereto as Appendix E.

In all respects save one, which will be stated hereafter,

these agreement-forms were (in stibstance) identical.

As stated, the down payments and subsequent volun-

tary periodic payments under these deposit _agreements

were small. The Tax Court found that the agreements

‘called for .“small down payments” followed thereafter

by “small amounts each month.” [I T, R. 28, 30 (fdg.).]

The representative sample of such agreements appear-

ing as Petitioner’s Exhibit. 10 provided for a down

payment of but $2.00 and for a monthly payment there-

after of $5.00, upon an agreement projecting a funeral

and casket of a total cost of $465.00. |

The agreements obligated Angelus to hold the de-

posits “in irrevocable trust” until the depositor’s death

and then, in the absence of stated ‘contractual and eco- -

‘nomic contingencies hereafter discussed, to apply the

deposited” sums to the furnishing of funeral services

and a casket “of the reasonable value equal to” the de-

posited money at time of death. [Exhibits 10 and 11,

supra, pars. 2 and 4.]|

After the initial down payrhent, all subsequent-pay-

_ ments under the agreements were made expressly volun-

tary and unenforceable. The agreements provided in

paragraph 3: ; |

“3. The parties agree that nothing herein con-

tained shall be construed to vest in ANGELUS

the right to sue for or otherwise demand payment

of any sum payable by-Applicant under the terms

hereof which is not voluntarily paid by him.” —

—Petr’s Ex. 11, par. 2, emphasis added; cf.

Petr’s Ex. 10, par. 3. °

As Petitioner’s president, Mr. John +. Hill, testi-

fied in uncontradicted testimony, ‘ ‘many of these’ pre-

need deposit agreements “are ‘one dollar deposited, resi-

due to come at some date, if and when.” [II T. R. 24.]

| Although the agreements gave the depositors during

their lifetime. no express right to withdraw part or

the whole of the moneys deposited, since all of the pay-

ments provided’for were voluntary and the. whole pro-

gram depended upon voluntariness for its success, it

was the uncontradicted testimony of Mr. Hill that re-

quests for withdrawals were frequently made because’

of “hardships, illness . . . [or] rent”, and all such re-

quests were unvaryingly honored. [II T. R. 25.]

The contract terms provided one express contingency

requiring refund. Paragraph 7 of the agreements pro-

vided that if a_depositor should die oufside of Los

Angeles County | and in a place where it would not be

geographically “practicable for ANGEI:US to conduct '

funeral services for, the Applicant”, the deposited sum

would be pavable at the request of the depositor’s heirs

to any other funeral company the heirs might designate.

Even apart from this, since the modest deposits and

. payments, often left so small a sum paid in at_the time

of death that in the absence of willingness by the heirs

to add further contributions performance by Angelus

rendering a funeral and casket “of the reasonable value”

of the deposited amount wouJd profit no one, including

> 1K

re aN

—

. Angelus, it was the unvarying practice of Angelus to

refund the deposited sum to the heirs sMould they pre-

fer another funeral director, and request a transfer

of the moneys. According to the uncontradicted testi-

mony of Mr. Hill this was never “at any time’\ re-

fused. [II T. R. 24-25.] The Tax Court found that

petitioner “voluntarily refunded” each year under the

agreements something approximating 7 to 10 per cent

of the amounts. paid in under such agreements. in such

year; in 1960, for example,’ it refunded $899.85 under

such agreements while receiving deposits thereunder of

$8,565.00. [I T. R. 28, 35 (fdg:).] a |

Under the pre-1961 agreement-form Angelus. was re-

quired during the interim between deposit and. the death

of -the depositor to “deposit ‘all sums paid to it” under

the deposit agreement “in a bank, trust company, or

savings and loan association: and . . . not thereafter

[to]. withdraw such sums, or an€\portion thereof” ex-

cept’ for either performance or refund under the agree-

ment. [Petr’s:‘Ex. 10, supra, par. 5.] Under paragraph

6, the pre-1961 agreements awarded to Angelus all in-

terest earned upon such deposits as “compensation” for

“the collection, custody and conservation of the sums”

so paid to it and held by it in trust. [Petr’s Ex. 10, par.

6.]

In September 1961 and thereafter the. pre-need fu-"

neral deposit agreements were altered in a single respect.

Under the new 1961 agreement-form then established

‘and thereafter followed, afthough all other terms re-

mained identical to the pre-1961 agreement-form and

although all deposits were still identically required to

“aie, 4 $ b] ces 4 bP]

be held until the depositor’s death “in irrevocable trust’’,

a change was made in the provision requiring the de-

CR galt

, sect

e angen ay

posited funds to be held only in bank accounts. That

provision .was altered to give Angelus an ‘option to

either continue to place the deposit moneys in bank de-

posits as before or—still subject to “irrevocable trust”

—to invest. the same in “any capital improvement to.

then existing mortuary facilities belonging’ to ANGE-

LUS ... for] the acquisition and improvement of

real property.”e[ Petr’s Ex. 11, supra, par. 5.]

To the extent that the foregoing provisign in the

. 1961 agreement-form gave Angélus a power for a ‘par-

tially selfish use, it was compensated for by a payment

by Angelus of a form of interest. Under pargraph 6

of the 1961 agreement-form, in ‘consideration for the

foregoing right to place interim moneys in trust iff im-

Proven to its mortuary facilities or in reak proper-

ty, AngeMs agreed to pay each depositor under stich

agreement each year ten per cent of the amounts depos-

ited by such depositor in such year. As the Tax Court

found, these interest payments by Angelus proved

-an. inducement ‘which persuaded. numerous applicants

holding deposits under the pre-1961 form °of agree-

ments to cancel those agreements and substitute agree-

ments under the new 1961 agreement-form. [I T. R.

28, 32 (fdg.) ; 47 T. C. at p. 393.) -

One final circumstance remains to be stated. Under

both the pre-1961 and the 1961 agreement-forms per-_

formance by Angelus called for the sale of a casket

concurrent with the perforfmance of the funeral serv-

ices provided for, the whole to be in combination “of ~

the reasonable value equal to” the amount of deposited

money at the time of death, or in such greater amount

as the relatives might agree upon after death. [ Petr’ S

Exs. 10 and 11, par. 2.]- The uncontradicted ” testi-

mony of petitioner’s president, Mr. Hills was that one-

half of the moneys available was allotted to the casket

_ purchase if no specific casket or price was agreed upon.

[II T. R. 26-27.] Thus the deposit agreements called |

for a future sale of a c¥€ket for a price, and at a cost

to Angelus, unknown aud indeterminable until the time

of death. aya 3

The Tak Court fourfd that the moneys paid to Angelus

undgr the agreements made under the’ original pre-

1961 agreement-form were received by Angelus as “a

true trustee’, and that the interest thereunder awarded

to Angelus qn the interim funds held in the bank ac-

counts was but “the equivalent of a trustee’s fee”

(ving in mind the disproportionate amount of book

work for the small deposited sums involved), and, in

consequence, that the moneys on deposit were not tax-

able to Angelus as income so long as" held thus in

such interim trust. [I T. R. 28, 36-41; Appendix A,

infra.]| The Court of Appeals, as to this ruling, con-

curred and affirmed. [I T. R. Supp; Jessperae B, m-

fra.] © ,

As to the deposit agreements deaiwt under the 1961-

agreement form, the Tax Court found that although

_ the interim moneys held by Angelus thereufder., were

~ still expressly required until the death of an affected

- depositor to be held “in irrevocable trust” [Petr’s Ex.

11, par. 4] and although the 1961 @sreements were

otherwise in all respects identical to the prior agree-

ments in terms and form, the single change under the

1961 agreement-form in the powers granted Angelus

_ respecting the interim deposits ‘to add :thereto a power:

to invest the deposited trust moneys—although in trust

and as a merely interim investment only, not an in-

vestment in fee—in mortuary improvements or in the

ri * ‘

acquisition of rk seins Oe Ex. 11, par. 5],

o “effectively destroy[ed]” the “custodial or trust”

nature ef the interim moneys as to give them in’ sub-

stance to Angelus subject to “no. restraint nor limita-

tion” at all, ‘and, in consequence, such interim moneys

became taxable to Angelus as income at the time first

received. [f T. R. 28, 41-45; Appendix A, iifra.] -.

The Court of Appeals <tivaek but ‘without , joining

in the Tax Court’s assertion that the investment power

granted by the 1961 agreement-form destreyed under”

trust-law the trust nature and character of the written

instrument. It found that “notwithstanding [assumed]

power .[in] the beneficiaries . . . to enforce the trust

_ terms under state law”, Angelus should be taxed upon

tlie deposited moneys under the 1961 agreement-form

‘at the time of receipt because of the extent of “the

economic benefit to Angelus” granted thereunder. [I

T. R. Supp; Appendix B, mfra.]

) Ne S

‘Summary of Argument. |

Petitioner submits that under tax fundamentals and

long-accepted precedents the deposits paid Angelus un-

der the 1961-agreement-form, and held by it thereunder

in trust until a depssitor’s death, were not taxable in-_

come at the time ‘of such payment or interim holder be- =»:

cause of two controlling considerations, and that the

Court below has created conflict between the circuits

and uncertainties and ambiguities in the basic tax law:

in its opinion ruling otherwise.

Firstly," the deposited moneys: during the~ interim

holding and until a depositor’s death were held by An-

gelus subject to conditions and contingencies of such a

nature and consequence asyto render it unknown and _

indeterminable during the interim holding whether the

haan

~ 7)

tah aa OR nee

- deposited moneys would ultimately become income or

not, and éstablished -prior precedents have ruled that

wherever moneys are paid @ taxpayer under premises

so chafacterized by conditions or contingencies during

an interim period as to make it unknown: whether the

sums concerned will ‘ultimately be income or not, ‘or

if income, whether ordinary* income or capital gains,

the moneys. thus received are not taxable as income to

“the taxpayer until the.point in time at which the tax-

able, nature of the sums becomes know n or determin-

able. The considerations of contingency involved at

bar’ were that either (a)* the depositor in a given ~

case might die outside Los Angeles County’ and where

it Would not be .geogfaphicalky “practicable” for An-

gelus to provide funeral services, in which event by,

the express condition of paragraph 7 7 of the 1961 agree-

-ment-form [Petr’s Ex. 11, par. 7] the deposit’ became -

repayable to the designee of the depositér’s heirs, or

_ (b) the depositor during life ‘might refuse, to continue

payments (w hich were expressly unenforceable) or

might request a :partial or total withdrawal’ of his de-

_ posit (which requests were necessarily honored because

of the dependency of the program’ and. each “deposit”

_upon voluntariness for success), or (c) the heirs after

death might prefer a different funeral director and re-_

quest a transfer of the deposit funds ‘to such new: di-

rector (which requests were likewise unvaryingly hon-

ored by forcé of the voluntariness of the program and

’ the specific circumstance that in many cases the amount

‘ paid in at death would be so small that to insist upon

performance of the contract and the rendering by An-

* gelus ‘of funeral services and . the sale of a casket “of

the reasonable value equal to” in. combination the

v’

’

4 Jena

oe ii

* 0 an

amount paid in at ‘death, without a further” agreement

and cgutribution by the heirs, would profit no one, in-

cluding Angelus).

Secondly, the deposited. moneys, during the interim _

‘holder until a depositor’s death were expressly required

to-be held under written, ‘enforceable terms of trust so

— limiting Angelus’ freedom of user ‘and,‘so negating on~

its ‘part any “claim of right” in -fée, as to undergird

‘ and reinforce importantly the contingent obligations to

_ account for and pay ‘back the deposited sums above dis-

cussed, and thereby to emphasize the nontaxability of

the deposited moneys as income during the period of

the interint trust: ./

Finally, petitioner calls attention to the circumstance

that .the Court below, -in disallowing the pricr lower-

cotirt precedents urged by petitioner, found contr rolling

at bar “this Court’s decisions in the trilogy of ‘cases,

Schlude v. Commissioner, (1963) .372 U.S. 128; Ameri-

_can Automobile: Association v. United States, ( 1961)

367: US. 687; and Automobile Club of Michigan v.

Commissioner, (1957. ) 357 U.S. 180. The decision below

thereby bring’s into square issue the questions, hereto-

fore,much debated and mooted, whether those decisions

reach “¢ a) to advance payments characterized by con-

tingency as herein ‘described and/or by a holding. in

trust imposing - substantial restrictions on use during

interim holder, or (b) to advance deposits ypon future’

sales ef goods at prices, and under costs to the taxpaye er

unknown and i eternfi nable in advance. 7

Petitioner submits it would be in the public interest

for this Court to allow certiorari to review-aid deter-

mine the conflicts and ‘questions of law presented herein

as above described. -

’ ee )

ARGUMENT: REASONS FOR GRANTING ©

TH wae

“E ;

The Decision. Below Creates Conflict Between the

Circuits agd Divisions and Ambiguities in the

Tax ‘Law in Holding Taxable as Income to

Petitioner at the Time of Receipt and While

Held as Interim Deposits, the Deposit-Moneys

Paid at Bar Despite (A) the,Cirgumstance That

, the Deposits Were Conditional d Contingent -

in Nature.and Left Their Character as Income

Versus Returnable Deposits Unknown and In-

determinable During the Deposit Period, and

(B) the Further Circumstance That the Contin-

‘gent Obligation to Repay Was Reinforced by a

Requirement That the ¢nterim Deposits Be Held

in Unameridable, W#iggem Trust..>

The instant case ‘raists’ anew troublesom# divisions

and uncertainties in the income-tax law as to, the

“when” and “how” of taxing as income advance mon-

eys deposited with a taxpayer in connection with agree-

ments for future consideration. < a“ eae

- Where the future eénsideration has been contractually

sure to occur, and. the deposit has been subject to-no

substantial contingencies either of circumstance or of

contract provisions and the advantte payments ~ have

been unrestricféd as to use, the decisions have largely—

and increasingly—held the payments taxable as- income

at the tinte of receipt. In illustration, advance deposits

of rent, though contractually applicable only to a fu-

ture month or. year, are uniformly held taxable as in-

come at*the time of deposit, and this, whether the tax-

yer accounts on agcash or an accrual basis. ‘(United

‘v. Boston Ry. Corp. (C.A. 1, 1930) 37 F. 2d

‘

ls gel

670; Renwick v. United States (C.A. 7, 1937) 87

F, 2d 123; Commissioner v. Lyon (C.A. 9, 1938) 97

F. 2d 70; Astor Holding Co. v. Commissioner (C.A.

5, 1943) 135 F. 2d 47, 48.)

However, where the contract and the rendition of

the future consideration have been conditional, or sub-

_ ject to contingencies, the interim deposits have

ruled by fign prior precedents—hitherto seemingly we

established—providing that wherever montys are paid

to a taxpayer in premises so characterized by condi-

tions or contingencies (whether of contract powers, or

of acts or events) as to make it unknown and indeter-

minable during an interim period whether the moneys

will ultimately become taxable as income or not, or if

taxable so whether as ordinary income or capital ‘gains, |

the moneys during such interim period are not tax-

able to'the taxpayer as “income”. And particularly has

this been indicated as to contracts for the future sale

of goods. ,

Moreover, while the above mentioned prior precedents

establish that the interim deposits in such premises

are not taxable as income even where the interim period

is of substantial duration and.notwithstanding that the

taxpayer during such period may hold the sums free

of any restriction as to use, ;in principle under these

precedents and under tax fundamentals generally, the

nontaxability as income of stich interim moneys is

made particularly plain where the “conditional” contin-

gent obligation to repay the ‘sums concerned—which

conditional obligation to repay creates the consequence

of nontaxability after the fashion of the absolute duty

to repay in the premises of a loan—is reinforced by °

‘ a requirement that the interim sums be held in trust.

er a

—

The opinion of the Court of Appeals below creates

conflict with these prior precedents and tax principles,

and renders uncertain the applicable law.

(A) ae Circumstance of Contingent Holding. 4

Considering first the factor Simply of a “contingent

holding of advance deposits, a number of categories -

of prior precedents attest that where interim moneys

are so characterized by conditions or contingencies as

to make it unknown and indeterminable during the pe-

riod of interim holding whether the moneys will ultimate-

ly be/income to the holder or not, or if income, whether

ordinary income or capital gains, the affected sums

during such period of uncertainty and contingency are

not. taxable to the holder as income. Such precedents

soul Yost cases dealing with certain option deposits,

with certain lease-security deposits, and with certain -

contract advance payments, as is developed below.

(1) The first category of prior precedents in con- _

flict with the decisions below deals with certain option-

deposits whereunder the money paid for a purchase-

option right, though forfeitable if the option is not

exercised, is applicable against the agreed purchase price

if the option is exercised. In such cases it is uniformly

recognized and held that the seller receives no taxable

income at.the time of payment or, during his interim

holding or use of the option money, because until the’

option is either exercised or suffered. to lapse it cannot |

be told whether his receipt of it will be income to him

or not, or if income, whether ordinary income or capital

_ gains. If the option lapses the option money will forth-

with accrue to him as ordinary income, but if the. op-

tion is exercised there will be no income at all in the

eo.

ow] 5, ,

‘absence of a gain, and if a gain occurs it must still be

ascertained whether such will be ordinary: income. or

capital gains. (Virginia Iron, Coal and Coke Co. v.

Commissioner (C.A. 4, 1938) 99 F. 2d.919, 921-922,

cert. den. 307 U.S. 630; Commissioner v. Dill. Co.

(C.A. 3, 1961) 294 F. 2d 291, 298-301; Kitchin v.

Commissioner (C.A. 4, 1965) 340 F. 2d 895, 897-900;

Hunter v. Commissioner (C.A. 5, 1944)-140 F. 2d

954.) ~

As the Court in the Virginia Coal Co. case aptly

stated:

‘cé

. It was impossible to determine [at the time .

of payment] whether [the option moneys] were

taxable or not. In the event the sale should be

.completed, the payrnents became return of capital,

taxable only if a profit should be realized wn the

sale. Should the option be surrendered it would. then

become certain, for the first time, that the payments

constituted taxable income. Thus it will be readily -

seen that it was impossible to.tax these payments

_ in the year in which they were made.”

—99 F. 2d 919, 921, emphasis added.

As the Court in the Kitchin case observed. the “claim

of right” doctrine (North American Oil Co. v. Bur-

net, (1932) 286 U.S. 417) cannot vavdil the Commis-

sioner dcscaconnsy

. that doctrine, does not apply ... . where the

. de the proceeds is uncertain, as it is in’

the present case, so fhat it remains undetermined”

throughout the taxable year in which they are

accrued whether the payments will be income at all.

De Guire v. Higgins, 159 F. 2d 921, 924 (2 Cir.),

cert. denied, 331 U. S. 858 (1947).” '

—340 F. 2d 895, 900, emphasis added. |

aa oe

(2) A second category of precedents conflicting

with the decision below deals with certain lease-security

deposits where the advance déposits secure covenants

other than, or in addition to, merely the promise to

pay rent. In such cases if the deposit is returnable if

no covenant-breach occurs, the deposit cannot be taxed

a’s income when paid down, nor during the period of

the lease, because for all that can be known during ——_

such period it may be required to be returned to the les- a

see in full at the end of the lease. (Warren Service

Corp. v. Commissioner (C.A. 2, 1940} 110 F. 2d 723,

\724:. Mantell v. Commissioner, (1952) 17 T.C. 1143,

1147-1149; Rev. Rul. 67- Ay, 1967-1 C.. B. 9, 10-11;

2 Mertens, Law of Federal Income Taxation 365.)

This is true, as the Warren decision makes clear, even

though the lessor has “unrestricted use” of the deposit

moneys during the period of the lease, and evep though

‘ the deposit be large in amount (there $125,000) and

even though the period of the lease may run for many

years (there 15 years). Throughout all such term the ?

deposit money “[is] not income . . . since the lessor

[is] under obligation to repay it” at the end of the

lease if no covenant is breached. (110 F. 2d 723, 724.)

Indeed, even if the:advance deposit secures. the rent

for the last month or year of the lease, so long as it

secures also other covenants as well and is applicable

as forfeited“ ddmagés in the event of breaches thereof,

‘” it remains not taxable as income to Whe lessor during

~ the life of. the lease, because even in such premises its -

_ income versus nonincome nature remains subject to con- a e

tingency and in abeyance during the lease period. Even

in such a case it cannot be known during the leasehold

term whether the deposited sum will ultimately become

: maisonette

oe oe a

rent and thus accrue as ordinary income, or will be-

come taxable or nontaxable damages for a covenant-_

breach causing injury sane destruction of, the lease-

hold premises or to related\lessor rights and interests.

Thus its taxable nature is uncertain, and during the

period of yncertainty it is not income despite freedom

from restriction as to use. (Clinton Hotel Realty Corp.

v. Commussionér, (C.A. 5, 1942) 128 F. 2d 968, 969-

940; Commissioner v. Riss, (C.A. 8, 1967) .374 F.

2d 161, 171-172; Harcum\v. United States, (E.D. Va.,

1958) 164 F. Supp. 650, 651.) = .

As the. Court of Appeals for the Fifth Circuit de-

clared in the-Clinton Hotel decision, the underlying basis

of nontaxability in these contingent lease-security de-

posit cases is fhe parallel which the contingent duty of

_ the lessor thereunder to account as to the deposited

sums bears to a borrower’s absolute duty to account

in the case of a Joan. Both the lessor, in such cases, and

a borrower, have free use of the money in the interim,

yet because both have obligations (at least contingent-

ly) to. account, they do not accrue “income”. Said the

Court in;the Clinton Hotel decision at page 969: .°

“[I]f [the advance lease deposit] was paid and re-

ceived as security, with no present right of claim

of ‘full ownership, it would not. be presently in-

come, although it was expected finally to be ap-

plied in payment of the jJast year’s rent if nothing

happened to prevent. Barker’s Estate v. Commis-

sioner, 13 B. T. A. 562: Warren Service Corp:

v. Commissioner, 2 Cir., 110 F. 2d 723. In’ the

latter situation, though the money is rightfully re-

“ceived, and if the parties so intend may be freely

; used, yet because of the acknowledged hability to

¢ .» ing there is none.” =

‘ . 128 F, 2d 968, 969, emphasis added.

~. —8—

(3) -A final category of prior precedents in conflict

with the decision below on thé*score here concerned deals

_with advance deposits paid under certain executory, con-

tingent and conditional contracts for performance of-

future services or for future sales of goods, where the ©

advance—payments either (a) have the character of

loan-de posits paid to aid the seller in the manufacture or. |

acquisition of the goods to be sold,.or (b) have the

‘character of reservation-deposits paid to insure priori- /

ty of right in ‘the payor to purchase scarce future |

goods should such.become available, or (c) have the

character of carnest-money deposits paid by the buys

to evidence serious intent under contracts where either

the buyer or the seller, or both, reserve a right of can-

cellation, ‘at any time before.actual consummation. In

all of these sub-categories of cases advance deposits -

have been held not taxable as income so long as either

the contingency of cancellation or of defeasance exists,

or the functional character . the deposit as a loan re-

mains\extant.

Examples of sub- category (a)—advance wile pay-

ments having the character of loan-deposits—are found

in two landmark, often-cited decisions, Consolidated-

" “Hammer Dry Plate & Film Co. % Commissioner, (C.A.

7, 1963) 317 F. 2d 829 and Seong Coal Co. v. Com-

missioner, (1930) 18 B.T.A. 983. In both of those de-

_cisions the goods ordered by the buyer strained seriously

the ability of the seller to perforth and the advance

moneys were paid to the seller to aid in financing his

performance, and “repayment” of the advances was. to

be made by way of credits against regular installment

payments the buyers in each case would owe as the pur-

chased goods became available for delivery. Because of

' . 7 7

~- ¥ \,

\ '

. ;

® -

} , —19— .

the continuing duty of the seller to account for and re-

* pay such advances, a duty owed above and beyond the

ordinary obligations a seller would: have respecting a

normal prepayment, these advances were held not tax-

able as income to the seller when received but taxable

so.only when “repaid” by way of the earned, credits -

allowed- against the buyer’s installment obligations as

the goods became available for delivery. The genuinly- :

| intended obligation by the seller i in both cases to account

for ‘and repay. the. advances in the manner of a Joan,

was held controlling. A parallel and illuminatWe decision

in the area of leases is found in Atlantic Refr igerating

Company, B-T.A. Mem., 1942 (P, H.) par. 42,382.

Examples of sub-category (b) above—advance sales

payments having the character of reservation-deposits

—include a familiar nonjudicial example which arises

constantly in sports playoff ticket sales, and the judi-

cial decision in one of the most widely-cited precedents

in the entire area here concerned, the decision of the

Tax Court in Veenstra & De Haan Coal Co. v. C om-

_ missioner, (1948) 11 T.C. 964.

The ticket sale example arises wherever a person pays

a deposit down upon a purchase of a late-ganie contest

in an athletic playoff series which may possibly be de-

cided in a lesser number of games. It is evident that

at the time of the original payment the deposits cannot

be genuine income because until, the contingency as to

the number- of contests which will be played is resolved,

the fact of a sale is in tetal _—

The Veenstra decision involves an actual illustration |

of the essential principle. In Veenstra a retaifer of coal

during wartime conditions of scarcity required his po-

tential customers to place deposits down upon orders

; —— |

for ffitiire possible purchases should the séfer be able

‘to acquire coal from wholesalers in the future. The

seller received ‘the deposits without restrictigns as to

use, but if the coal ultimately could not be obtained he

was obligated to refund the money, without interest,

to the depositor. The Tax Court, recognizing that the

seller in a classic “‘sellers’ market” of wartime scarcity

was simply forcing his would-be customers to pay de--

posits down as reservations upon possible future sales,

held the deposits were not taxable as income to the

seller during the interim occurring before delivery or

refund. “From the practical standpoint,” said the.Tax

Court “the deposits made with petitioner were equiva-__

-lent to a forced temporary advance by tlie customers

to petitioner’s working capital.” (11 T.C. 964, 968.)

Examples of sub-category (c) above—advance Soi

tract payments, having the character }f earnest-mgney

deposits where either the buyer or seller, or both, re- .

tains a right of cancellation—are found in Consolidated-

Hammer Dry Plate & Film Co. v. Commissioner, su-

pra; W oodlawin: Park Cemetery C 0. ‘U. Commissioner,

(1951) 16 T.*C. 1067; Watkins v. United States,

CA. 1, 1961) 287 F. 2d.932; and Bremerton-Tacoma -

Stages v. Squire, (W.D.: Wash. 1951) 96 F. Supp. 718.

In the Consolidated-Hammer decision the. Federal

Government was the purchaser.and the Tax Court, in

its opinion, observed that in addition to the features

' _ there present paralleling | the: ‘qualities of: a loan hereto-

* fore discussed, it was also true that the purchase con-.

tracts could be “tnilaterally al altered or cancelled” by the ©

. Government as the buyer. (21 T.C. Memo. 1992-97,

528, 533.) By force of thisefeature the Court of Ap-

peals declared: that thé seller’s right to retain any part

‘

—21— |

; &

of the advance payments concerned there was never

‘more than a “conditional or tentative” right, negating

taxability as present income. (317 F. 2d 829, 832. )

In the Woodlawn Park Cemetery Co. case advance

sJwere paid by purchasers upon contracts for

‘the future sale of mausoleum spaces in a mausoleum

proposed for construction. Both the purchasers and the

seller retained powers of cancellation; the séller was not

obligated: to constryct the mausoleum although it was

expected that he would, and the purchaser were not

required under certain conditions to complete the -pur-

chase even if the mausoleum were ‘constructed. The.

Tax Court characterized the suited payments as being

“purely executory” in nature, “mere contingent pay-

ments made pursuant to conditional agreements.” (16

T.C. 1067, 1078.) Relying upon the Veenstra decision,

the Tax Court held the transactions constituted “coti-

tingent contracts to Sell, not completed sales”, and held

that notwithstanding that the seller received the funds -

stitute taxable income at the time fhey were paid in nor

- without restriction as to use, the deposits did not con- :

until a future sale actually occurred. ‘(/d., at p. 1080. )

In Watkins v. United - States an independent: dis- .

tributor of industrial rubber, goods secured an order

from a purchaser for a, fuisive sale; in order “to guar-

antee delivery at the existing price’ the purchaser .

“prepaid the sales price.” (287 F. 2d 932, 935.) The

evidence showed that this purchaser ‘ ‘customarily can-

celled orders when his unpredictable season ended.”

(/d.). Relying: upon this power of cancellation and

upon the’ authority of the Veenstra and W oodlaxmn.

Park Cemetery Co. decisions, the Court of Appeals |

for the First Circuit -held the deposits constituted “no.

en > —22—

taxable income [to the seller | until there [should open} Be

a completed sale.”’ (Id. ) : |

In thé ‘By emerton-Tacama Stages decision the Naty

Department, to insure needed transportation for naval

-. personnel and employees in wartime conditions,‘ con-

tracted with: a bus company to hold buses available

for any transportation needs of-such personnel or em-

ployees ~ which might arise during a contract period,

and the Navy pre- -purchased large uns of bus tickets

.in advance by- paying a large advance deposit. It was

agreed that the deposit for any tickets not. ultimately

used would be Tetitfnable to the Navy at the end of the

contract period. It was held that such payments ‘did not °

constitute income to the bus company at the time & .

receipt but only as and when transportation . services

should actually be performed under a fickét so secured

: by the depositéd — -

(4) -[wo final circumstanees affect the case at bar

. of importance emphasizing the: nonincome character of

the deposit payments below under the foregoing” Sev eral.

lines of prior precedents. * ; ay

Firstly, insofar as those decisions have cde’ their

holdings on the parallel between the contingent obliga- ~

tion to account, for and repay the affected deposits

there involved and .the absolute obligation to account

for and repay which obtains in the cir¢umstances of .

loans (Clinton Hotel; Consolidated-Hammer Co.; Ve-

- enstra; Summit Coal Co.; and Woodlawn Park Come:

tery Co. cases), the’ payment of any form of interest,

where presgpt, has been notéd as of importance, , As

observed i in the Statement of the Case, just such a form

of interest was paid at bar. For the privilege of user *"

to £

Pex

.* = as a special xleposit, but might use it as a-general

deposit, for te was ,to account for $1,000 per year.

~23— ca k ecta

of the deposited funds in the limited, rhanner provided.’

sep

-in the 1961 agreement-form, Angelus paid the depositor ”

each year 10% of the moneys paid in by such depositor

during such year. Thus the quality of a loan‘ was evi- :

~ denced. Adverting on the significance of such a pro-

vision for interest, the Court of Appeals in the Glinton ~

” Hotel case involving a aa! deposit under a lease,

_ observed at page 970: o

_ “Tt was intended that the ice was not to hold it

as interest, in a credit against accruing rents. This

does not destroy. the. ‘character of the deposits: as.

security, bit the lessor’ s accountability for interest

as well as for’ the ,principal emphasizes that -char-

actér.” ae ,

Ghai F. 2d 968, 970, ‘cba added.”

ae, 5 ie,

wiudis 3 as also noted i in the Statement of the Case,.

the deposjt agreements ‘under the 1961 agreement-form

called for the sale of a casket concurrent with the fun-

eral. services to be rendered, the whole to be “of the

reasonable value’ equal to” the total deposit moneys paid

in at the time .of death, or to such amount plus any

further amount the heirs might agree to’ add, if any.

_ According to the urtcontradicted testimony, the value of

‘the casket was customarily fixed at one-half of the total

moneys. a\ ailable for performance by Angelus. Since

this sum c uld never be known. in advance, the deposit

agreements under the 1961 agreemént-form actually

called for future-sales of caskets for a salés-price, and

at a cost to Angelus, neither known nor determinable

at any time during the interim holding. In such prem-_

ises an income tax upon the deposits could. not escape

\ - < °

g i ie ke “ees, tien ie

~ -- a

: .

“@

‘

. 9% ~~ Pht,

as to one half of the funds the character of a tax _

upon gross réceipts, rather thar? gross income, for no =

provision could be made to exclude th return: of cap-

itakembodied in the costs of the goods sold. ‘Where such—

a feature has been present, the authorities heretofore

discussed have emphasized the impropriety “of taxing the

interim deposits concerned as “income” . (Veenstra &

-Be~Haan Coal Co., supra, 18 .T.C. 964, 967-968;

W, oodlawn Park Ce meter¥ To. v. Commissioner, supra,

16 T,C. 1067, 1080; Watkins v; United: States, supra,

287 F. 2d 932, 935.) -

‘(B) The Reinforcing Circumstahce of a Required

-Trust-Holding.

At bar the contingent obligation by ' Angelu€ to ac-

. count’ for and return to the depositor or his heirs the » |

interim deposit, moneys was importantly undergirded 4

‘and reinforcefl by the requirement that. the moneys be \J

"held during theieterim period until a depositor’s death

subject to a written, unamendable, enforceable trust?

[Petr’s Ex. il, pRh AR oe ‘

Even the Tax~€ourt and the Court of Nini in °

their’ decisions below recognized ‘as to the holdings un- —

der the pre-1961 agreement-form, whereunder the trust

moneys could be held only in trust bank accounts, that

a trust holding could negate,’ or reinforce negating, tax-

ability of the deposit moneys during their interim hold-- '

' ing. However,’ those courts ruled that the power in

Angelus under the, 1961 agreement- form to. invest—

still in trust—the deposit moneys in mortuary improve-" .”

ments or the acquisition of real property gave Angelus .

such selfish benefits as to destroy any tax immunity as ©

to the interim holdings under that agreement- -form.

—25—

This misapprehends the significance of the interim

trust holdings. The primary sighificance of the ‘trust’

holding during. the interim periods at bar was but to

reinforce the contingent obligations of Angelus to ac-

count for and repay the deposit moneys to a depositor

or his heirs when required soto do under the factors

of contingency heretofore treated. Since, as’ has been

already seen, most of thé prior precedents . heretofore

analyzed have held contingent deposit moneys not tax-

able as income during the interim period of contingency

_even Where the funds are completely unrestricted as

‘to use during such interim, it necessarily follows that

t principle, and by tax law fundamentals, a trust

holding of the interim ftinds can only strengthen such

tax immunity so far as it substantially restricts the

freedom of use of the interim deposits.

The trust-holding of the interim funds at bar has |

the purpose ‘of insuring Angelus’ capacity at any re-

quired time to either perform or repay, as may be re-

\ quited’ without such trust security the depositor would

have, only the business credit of Angelus upon which to

dé nd and an incapacity in- ‘Angelus or its, assignee to

perform or repay at a required time could affect the

depositor’s heirs at a moment of special need and dis-

advantage. The ttust-holding had the consequence of

erecting a law-enforceable limitation upon the use of the |

deposited moneys during the period preceding a déposi-

tor’s death, and this restriction upon use increases the

* force and significance of the contingent liabilities to

account and rgpay, ‘reinforcing thereby the nontaxability .

deriving from those contingent duties.

i) .

; o .

Created.

All of the foregoing prior precedents and principles of

tax law_were disallowed by the Court of, Appeals in its

decision below, the Court distinguishing the same with

no sufficient basis or cause. The option-deposit cases

the Court of Appeals disallowed as involving “a differ-

ent problem”; the lease-deposit cases because the de)

positors at bar “did not pay [the deposits] to Angelus

to secure .-. . performance of anything, even their obliga-

tion to die’; the loan-deposit cases’ because such were -

“so different in. ... facts as not to be analogous”; and

the sales cases because the obligation of Angelus “was

to furnish funeral services at a future time” (thereby

obscuring the“circumstance that by the agreement as

interpreted by its unvarying conduct Angelus was re-

quired also to include with the funeral services a con-

current sale of a casket reasonably proportionate to

the deposited moneys). The contention of the petition- -

er thatethe deposits were particularly protected from

.taxability because held in trust was disallowed because

only of the power in Angelus under the 1961 agree-

ment-form to invest the interim moneys in mortuary

improvements or in the acquisition of real propégty ;

no response was addressed either to the circumstance

that such trust powers would be guardedly supervised

by equity or to the circumstance that;such powers in

any event left. the deposit moneys still restricted by.

near- -absolute, if not. absolute, trust limitations as to

interim user, establishing. far clearer and stronger ac-

countability as to the contingent liability’ to account

for and repay the deposited funds than existed in any

of the lines of prior precedents relied upon: by petitioner.

\ pond J me

None of these “distinctions” is well founded and this —

Court should review and resolve the conflicts and un-

certainties. of law, created by the decision below as

abovedescribed. ;

| i II.

-The Decision Below Creates Further Conflict Be-

a ~™ tween the Circuits and Division as to Basic

: ‘Tax-Law Theory by Erroneously Extending’

‘ Phis Court’s Decisions in. Schlude v. Commis-

sioner, American Automobile Association v. :

United States, and Automobile Club of Michi-

gan v. Commissioner. to the Trust-Held Interim

Deposits at Bar Despite (A) the Trust-Enforce-

able Restrictions Upon Use of Stch Deposits

During the Interim Holding Thereof and the

Conditional Nature of the Deposit Contract and

the Continuingly-Contingent Obligation of Peti-

tioner Thereunder to Account for and Repay

Deposit Moneys, and (B) the Circumstance

hat the Deposits at Bar Relate in Substantial

Part to Future Sales of Goods (Caskets), Not

Merely to Future Performance of Services, and

During the Interim Deposit Period the Identity

of the Goods to Be Sold, the Pricé for the Sale

and the Cost of the Goods Sold Cannot Be

Known or Detérmined.

In distinguishing all of the precedents and principles

urged by petitioner as discussed heretofore, the Court

below found controlling authority in this Court’s de-

~ cisions in the trilogy of recent cases affecting account-

ing principles and the nondeferment of normal cash

prepayments received by accrual-accounting taxpayers,

Schlude v. Commissioner, (1963) 372 U.S. 128 [ here-

after: Schlude|], American Automobile Association v.

United States, (19@1):367 U.S. 687 [hereafter : Ameri-

—28--

can], and Automobile Club. of Michigan v. Commis-

sioner, (1957) 353-U.S. 180 [hereafter : Michigan].

Acknowledging that Schlude, American and Michi-

gan were not in se-in point at’ bar because involving

merely the time for accrual by accrual-basis taxpayers

of normal, ordinary cash prepayments, and the power

of the Commissioner under Section 446(b) of the In- -

ternal Revenue Act (26 U.S.C., Sec. 446(b)) to dis-

allow accounting “practices found to ‘not clearly reflect

income”, the Court below found those decisions none-—

theless controlling at bar because “the reasons there

given in support of [those judgments] are here per- |

suasive.” [I T. R. Supp.; Appendix B, infra. | :

In thus extending to the very different* premises in-

volved at’ bar the “reasoning” of the Schlude, American

‘and Michigan cages, the Court below brought into open,

direct conflict the’ question whether “those decisions ap-

/ ply in whole, in part, or “not at all, to ( a) prepayment

paid in trust and subject to substantial restrictions

upon use and/or to conditions or contingencies making

* it unknown and undeterminable during the period of. in-

terim trust holding whether the ‘moneys will ultimately

become income or not, or to (b) prepayments paid’ under

contracts fot the future sales of goods where the price

for which the goods will be sold, and the cost of the

goods to the seller, are not known nor determinable

during the interim period of prepayment.

Virtually all of the decisions of the lower.courts sub-

sequent to the Schlude, American and M iMigan cases”

applying or treating of the effect of those decisions _

have recognized the uncertainty as to the applicability

and/or effect of those precedent-making opinions upon

prepayments which fall into either one of the we

questioned areas just stated, and all such decisions have

_' consistently disting guished and left aside from any ex-

pressed statement or. ruling of law those mooted areas,

wherever possible.

_The decision below now brinys into square conflict

and challenge the questior? whether Schlude, American

and Michigan are applicable to either of those disputed

areas, and if applicable what’ rule of law they establish.

Resoltition of these questions and uncertainties by this

Court would be in the public interest. :

(A) As to the first point (catezoky (a) above) of

the two stated areas, it ‘is submitted that the Court

below clearly erred in éxtending the nondeferment ac-

counting rulecof *Schlude, American and Michigan to

_ the deposit moneys at. bar, the same being trust-Held, re-

gtricted-use, contingent-right interim deposit holdings,

and this Court should right the error decisively to

prevent increasing uncertainty and saaraaie. Si in the tax

law. ** oe .

This Court in Schlude carefiilly noted that the dance-

lesson prepayments there involved were received by the .

_ accrual-basis taxpayer there concerned “without

restriction as to use and without oblig gation of refund. af

(372 U.S. 128, 136, emphasis added.) At another

point in the same opinion, this Court further em-

phasized the distinction by observing that the prepaid

amounts there “were deposited in the [dance-studio’ s]

general bank account without segregation from its

other funds.” (/d., at p. 131, emphasis added.) »

Similarly in the Michigan case this Court noted

specifically that the prepaid automobile association dues

there concerned were “deposited in a general bank ac-

F count and [were] not segregated from generalfunds

ay,

AS ee

—30— ~‘

but [were] available and . . ..wsed for general corporate

purposes.” (353 U.S. 180, 188, emphasis added.)

Again, in the American. ald. this Court again specif-

ically noted that the prepaid automobile association ,

dués concerned there were likewise “deposited in the

Association’s bank accounts without restriction as to

their use for any of its corporate purposes.” (367 USS.

687, 690, emphasis added.)

eThe deliberate care thus manifested by this “Court .in

separating from its decisions inthe Schlude, American

and Michigan cases the area of prepayments. paid sub-

ject to restrictions as to use was noted carefully. by the

Jower courts in all subsequent decisions applying or

treating of the Schlude, American and Michigan cases.

Witness the deliberate care’ with which the subsequent

lower-court decisions listed below take note -that their

“premises and rulings, too, do not involve prepayments

subjécted to any restrictions upon use or requiring a.

holding in trust or as segregated funds:

Parkchest ter\Beach Club C orp. v. Commissioner,

(CA. 271964) 335 F. 2d 478, 480 (noting

that che prepayments. on renfal ls of athletic

*clubMlockers: involved: there were not paid or

required to be held as “trust funds” ‘but were

paid the taxpayer without limitatioris and the

' “taxpayer “had thé complete unrestricted use

of the advance payments and comingled them

with/its own funds.”’) ;

Franklin Life Insurance Co. v. United- States

(C.A. 7, 1968) 399 F.2d 757, 762 (observ-

ing that the prepayments. of interest ‘involved

there were. paid “without restriction upon

[their] use by the taxpayer.’’) ;

United States v. Williams, (CA. 4 1968) 395 F

2d 508, 510 (noting that the advance rental

payments involved there were found by it to

have been paid not “as a loan” but “without

restriction, as to [their] use” and*hence tax-

able under Schlude and A merican ) ;

Garber, Inc. v. Commissioner, ( 1969).’ *51 T.C.

No. 72, 2326, 2327 (noting pointedly that the:

prepay ments made under purchase orders for

custom-made fur coats involved there ‘ ‘were

received without restriction as to use or dis-

positiotw and were deposited in petitioner’s

regular bank account and intermingled with

other funds.”’) ; ;

Fifth and York Co. v. United Seanee: (W.D. Ky., ©

1964) 234 & Supp. 421, 422 (noting that the

prepayment thére concerned “went' into- plain-

tiff’s bank account and was used in the, regular , b

course of business.’’) ;

| Modernaire Interiors, Inc., ( 1968) 1968 SF od M.

No. 252 1459, 1460 (observing: that, the-pre-*

payments deposited with’ orders | ‘for cystom-

construefion of furniture concerned there “ ‘were

received without restfiction ~as “to ’ use or

disposition and were used by petitioner in the

ordinary course of its business.’’) ; as af

’ Farrara v. Commissioner, (1965) 44 T.C. 189,

190 (taking note that the cash deposits paid

there, under the suit lottery and_sales-order

plan there concertied were received by the tax*:

payer-seller under “no restrictions as to the

use of the receipts . . . [which] are comingled .

with other funds of the business.” ).,*

—32— .

Ot parallel significance and importance as indicating

that the Schlude, Ameri ican and Aichigan decisions are

to be, separated from, tax issues affecting prepayments

received and held in trust or subject to substantial re-

strictions as to use, or subject to conditional or con-

tingent obligations: to make repayment, is the further

circumstance that many of the lower-court décisi Tis

subsequent to the Schlude trilogy carefufly distinguish |

also‘ the major case-precedents favorable to and urged

by petitioner on such scores at bar, including notably»

the decisions in the V eenstra, Consolidated-Hamumer,

lYoodlawu, Watkins, and Summit cases, supra.* Wit- -

ness the discussion of, and the careful distinguishing

of, these judicial precedents in such post- scala de-

cisons as the following:

Hagen Advertising Displays, Inc. v. Connie.

sioner, (C.A. 6, 1969) 23 AFTR 2d 69-768,

- 69-711. ( distinguishing thé, Consolidated-Ham-

mer, Watkins, Woodlawn andKeenstra Cases »

as all involving deposits which.‘ ‘were received ©

either conditionally or pursuant to a ‘loan-

financing eee ae : i

—

Garber, Inv. v. Commissioner, supra, 51 T.C.

“! No. 72 7326, 2328 ° Sa cea the Veen-

stra decision) ; ay

*These- decisions areall discussed under Point I supra, and the

full citations. in the order here listed are: Veenstra & De Haan

. Coal Co. v. Commissioner, (1948) 11 T.C. 964; Consoltdated-

Hammer Rry Plate & “Film Co..v. Commissioner, (C. A. 7, 1963)

317 F. 2d 829; Woodlawn Park Cemetery Co. v. Commissioner,

fit 16 T.C. 1067; Watkins v. United States, (C. A. 1, 1961)’

_ 287 F. 2d 932; and Summit Coal Co. vw, “Commissioner, ( a

J8 B. T. A. 983.

33 a

Fifth and York Co. v. “United States, supra, -

234 F. Supp. 421, 423 (distinguishing the.

C onsolidated-Hamimer, Watkins, W oodlawn

and Veeustra decisions) ; .

Modernaire Interiors, Ine.; supra, 1968 T.C.M. %

No. 252 1459, 1461 (distinguishing the Veen- :

- stra, W oodlazen and_ Consolidated-Hammer

ot SS) 3 | ae

-@e ,

Farrara v.. C ommissioner, supra, 44 T.C. 189, °

192 . (distinguishing the Veenstra vie Saii-:

solidated-Hammer decisions).

eae SK oe Eee ;

4 ‘ Ee was

The foregoing éitstiogss not only doe plain that.”

advance deposits ‘characterized either by contingent ob: st

ligations to account for and refund the deposited moneys. ae

or by requirements for an interim holding ip trust, -or

by both, dre distinguishable, in the view of the lower

courts, from the Schlude, American and M ichigan rul-

‘ings, but indicate inferentially . that a contrary rule

should goverh these exceptions ‘and° they should -be, at

‘least within limits, ot taxable as income when initially °

“paid and while held subject to contingencies and/or

trust restrictions. :

| The question is of ‘importance as is evidenced i in 1 part

° by the number of ‘articles in legal periodicals which *

have mooted these very questions .and projected non-

taxability where the deposits are held*in trust or sub-

ject to substantial Fesriceots as to: use, or subject to

_ contingencies, or dre otherwise within ithe embrace

“* of the prior precedents éited by petitionés--and includ-

v ing notably the’)’censfra, C onsolidated-Efammer, W ood-

‘lawn, Watkins and Summit Coal Co. decisions. (See

for example, the following : Comment, — 24 Wash.

¥-

& Lee L. Rev. 291, 293-295; Comment, 1969, 24 Tax

L. Rev. 375, 380-381, 397-399, 402; Note, 1968, 46

Taxey 80, 83-84; Article, 1967, 19 U.S.C. Tax Itist.

357, B68-369; Article, 1967; 25 N-Y.U. Tax Inst. 577,

598, (603-606; Comment, 1967,\21 U. of Miami L. Rev.

866,/872, 877, 884; Comment, 1968, 37_N.Y.U. L- Rev.

137 | 142; Comment, 1965, 11 W ayne L. Rev. 482,.488.)

B) As noted in the Statement of the Case, the 1961

deposit agreement at bar involved not.only contracts for

future funeral services but. contracts as well for con-

current future sales of caskets reasonably proponti nate

in each’ instance’ to the’ deposited money availaBf at

death and the accompanying funeral. sertices to be per-

formed. . At the time of the deposits, and during

the“ interim holding thereof by petitioner before a de-

positor’s death, the price‘ of. the casket to be sold in any.

individual instance, and the -cost thereof, were not

known by petitioner nor determinable.

Despite contrary fu rulings by some lower courts ( Hagen

Advertising Displays, Inc. v. Comunissioner, supra, 23

AFTR 2d 69-768; 69-769, 69-772; Fifth and York Co.

v. United States, supra, 234 s, Supp. °421, 423-424;

Moderiaire Interiors Inc., supra, 1968 TCM No.. 252

1459, 1461- 1462), taxpayers and many’ cominentaries

have raised particularly serious questions as to whether

the nondeferment ruling of Schlude, Ameri ican and

Michigan reaches, or constitutionally even can. reach,

to contracts for future sales of goods, as distinguished

‘e

from services? where the cost of the. goods sold: are not ’

known and hence may rot be excluded from the impact_°

of the. tax. -¢ See, for example. the discussions in such —

"commentaries as the followi ing: Comment. 1969, 24 Tax."

L. Rev. 375 et seq. (entire article) ; Comment, 1968, :.

re 6 ‘ye

z ‘ :

cates.

Rev. 176, 187-190; Note, 1968, 54. ‘A.B.A. Journ. 84,

‘, 87-88; Comment, 1967, 21 'U. of Miami L. Rev. supra,

866; 875 ct seq.; Comment, 1962, 37 N.Y-U.L. Rev.,

supra, 137, 142; Comment, 1965, 11 basa L. Rev.

supra, 482, 488.) : '

8 igan.

Conclusion.

‘WHEREFORE, or\all of the reasons and upon all E

_of the considerations ‘set forth above, petitioner respect- .

Selle prays that a writ of certiorari issue in the within

‘case to review the decision of the av of a

below. .

LrEo BRANTON, Jr

» Wittram B. Murrisu,

Attorneys for Taxpayer-

Petitioner.

46 Pinks supra, 83, 84; Comment, 1967, 19 So. Car. ‘ }

fo, It would be in the public interest for this. Court to.

i set # rest the above uncertainties in the law as to the we

scope and consequence of Schlude, American and M ich-

“Respectfully submit ae S ie

» Sa

APPENDIX A.

See

(Tax Court Opinion Below.)

Angelus Funeral Home, Petitioner vy. Commissioner

of Internal Revenue, Respondent,

/» Docket No. 4217-64. Filed January 17, 1967.

~Leo Branton, Jr., tor the petitioner.

ic Uslunan, for the resp6ndent.

Forrester, Jade: The respondent has® determined

* * deficiencies in the petitioner’s incdme tax as followe:

. » ;

Yead | , ' Deficiency/

rig OPED E IS Lonthige ace ac a

196Q ........... Sd a a AQT.

BOGE ice Lp ierehvimecee 10,587 28

, be A 36,187.28

Several issues have been settled by the parties leaving

for our determination the following :

(1) Whether this petitioner must inglude as income

in the respective Year of receipt, moneys paid to it

under two forms of written, instruments, each denom-

inated “Pre-Need Funeral Plan Agreement”; and

(2) Whether respondent was correct in determining

that amounts received under the earlier of such forms

of agreement during. the years 1954 through 1958, but -

omitted from income. in such years, should be the basis

for an adjustment to petitioner’s income tax liability

for the-yéar 1959 under the provisions of section 481

of the Code.’ | .

, jAll Code telerences are to the Internal Revenue Code of 1954.

ss a

Findings of Fact. .

Some of the facts. — been stipulated and are so

found.

Petitioner is a California, corporation, the* principal

_ business of which was providing funeral and burial

services. During the years in issue and at least as far

back as calendar year 1954 it filed its income tax returns

with the district director of ‘ititernal reyenue at Los

Angeles, Calif., on a calendar year, accrual basis.

During the years in issue petitioner éntered. into writ-

ten contracts with certain individuals which contracts

were designated, and bore. the heading, ‘ ‘Pre-Need Fun-’

erat] Plan Agreement” (hereinafter sometimes referreé

to as $ contracts). aa ;

Beginning in 1954 and continuing on August

1961 the form of written agreement which was used -

provided in pertinent part that the applicant (customer) ~~

“agreed to pay petitioner total sum’ of X dollars,

said obligation to be ischarged by a relativ ely smail

downpayment upon /the signing - “of the contract fol-

lowed by additional payments of relatively small amounts

each month thereafter. until. the total sum had been

paid in full. Petitioner agreed that upon: proof. of: thé

applicant’ s death it would apply the total amount there-

tofore paid toward the cost of applicant’s ftfheral ac-

cording to applicant’s instructions which were given at

-the same time the contract was signed. The contract

~ provided further that if the applicant died at any place

where it was not practicable for petitioner to conduct

his funeral service that petitioner would transmit said

‘total amount ehretofore paid undef the contract to any

reputable funeral home w hich was selected to conduct

the funeral service. The contract also provided: ;

—A-3— ;

4. The Parties agree that all sums paid by Ap-

plicant to ANGELUS shall be. held by ANGELUS

in irrevocable trust for the uses and purposes herein,

set forth and set forth in Funeral and Internment .

Instructions No.—.

5. ANGELUS agrees that it will Peer all sums

paid to it under this Agreement in a bank, trust

company or savings and loan association and that it,

will not thereafter withdraw such sums, or any por-

tion thertef, except for the uses and purposes herein —

‘set forth; provided that ANGELUS may at its dis- C/

cretioh withdraw such sums.for the* purpose of re-

deposit in some other bank, trust cOmpany or sav-

ings and loan association. cay

6. The Parties agree that in consideration of the

_services performed and to be performed in the col-

lection, custody and conservation of the sums paid

to it by Applicant all interest earned on such sums

shall accrue to, and shall become the property of,

and payable to ANGELUS, as and when earned.

In about September 1961 petitioner stopped using .the

form which is described immediately above and. began

using a form which contained provisions which ‘were

identical except for the following : nee, abs

he total amount’ ‘paid under the contract aw the ap-

‘plicesit 3 in any given calendar, year was called the “An-

nual Payment” and— "1 ' .

5. ANGELUS may, at its optidm (a) deposit all -

or any portion of the sums paid to it under -\ ee °

Agretfient in one or. more banks; ‘trust companies \

or savings’ and loan associations, or (b) at any time x

‘ before or after such deposit thereof, _use all or any |

—<A-4— °

portion of such sums as collateral or payment for

_ (i) the costs of any capital improvement to: then

existing mortuary facilities belonging to AN GELUS,

and (ii) the acquisition and improvement of - real

property.

6. dn consideration for its right to use the amounts

paid hereunder by Applicant in thé’ manner herein

provided, ANGELUS agrees to pay to Applicant on

or before the 31st day of December’ of each year an —

amount equal to ten per cent (10%) of the Annual

Payment (as above defined) made by Applicant

\» during such year. a . :

During and after September 1961 some undetermined

umber of the applicants who had entered, intoa “Pre-

Neca Funeral PJan Agreement” w ith petitioner prior

_ to that time elected to and did sign the hew form of

agreement’ in order to be entitled to the payments of

10 percent therein provided for. .

During all of the 3 years in issue and*fgr some time

‘prior thereto petitioner maintained a general checking

bank account. In addition thereto. it. maintained a spe-

cial checking account (designated a clearjng account)

at Bank of Ametica, and four sayings accounts, each

in a different say ings and loan company, which savings

accounts were designated as trustee aceounts.

As petittoner Collected amounts under the contracts

during the\years in issue it deposited then» in. the clear-

ing account and credited a liability account on its books. -

which was designated “Pre-Arranged Funeral Liabil-

ity.” Thereafter at irregular intervals most of these "Yar 4

funds were transferred into one or more of the four

trustee savings accounts.

Petitioner did not reflect the amounts collected on the

* contracts as income in the year the Payments’ were re-

ceived but returned j income from the contracts only when

it provided the funeral and burial services upon the death

of a particular individual. It did ‘so by debiting the

“Pre-Arranged F uneral Liability” account on, its books

and crediting earned income. Petitioner also reported ‘as.

income the interest on the four. Savings accounts as

such interest became due and such amounts are not in

dispute.

‘

Commencing in 1959 and for the remainder of the

years in issue John L.’ Hil, the president and the owner

_ of all petitioner’s stock, personally supervised the oper-—

ation of petitioner’s pre-need funeral plan program and

the handling of its funds. Prior to that time these re-

sponsibilities had been handled by petitioner’s treasurer. » °

Hill, on assuming such responsibilities, discovered that

some of the pre-need funds had been deposited in pe-

titioner’s general checking account instead of in its spe-

cial, clearing account or any of the trustee savings ac-

counts. Upon making such discovery Hill ordered that

such funds be immediately segregated and this was ac-

complished by means of a check drawn on petit; oner’s

general account and traisferring such funds to its trus-

.tee sav ings accounts.

As of January 1, 1959, the balances ‘in, the four*sav-

ings accounts and the clearing account totaled $15,-

NG ae ; amas seb ;

609.16, while thé ending balance of petitioner’ s “Pre-

Arranged Funeral Liability” account at December 31,

1958, was $24, 706. 07. Balances -of such liability ac-

count and the totals in the clearing and savings ac-

coints at the end of each of the years in issue were

as follows: eae :

Ss Prearranged ‘ ' Total clearing

_ funeral and savings

Date at liability accounts

ek A, F0 $30,936.41 $34,100.99

Dec. 31, 1960......... saceetsinaciee SOL: * AOSEI56"

"Dec. 31, 196) scat sects 51,297.27 83,272.68

During the 3 years in issue there were certain trans-

fers from the clearing account to petitioner’s general

checking account, but during each of such years the

total. of such transfers was less than.the total amount

which petitioner declared as income from. performances

under the contracts: plus interest earned on the four

savings accounts. ; | |

céllected pursuant to the terms fof the céntracts but

during «the years inj issue: 1959—$538.09, 1960—

sana and 1961—$742.73.

Respondent. detetmined that petitioner’s receipts un-

_ der the contracts for the years .in issue were taxable .

income which it had failed to include in its returns in

the respective amounts of: 1959-—$6,230.34, 1960—

$8,.565.00,? and 1961—$11, 796.61. Respondent further

- defermined that petitioner similarly ‘recéivéd’and failed

to report the amount of $24,705.82* during the years _

°The stipulation indicates that this figure should be $8,564.75.

3The stipulation indicates that this figure should be $24,706.07.

’ -

etitioner was. not obligated to refund any moneys ;

evertheless it voluntarily refunded the following sums _

‘“

many Ye, oe

under’ the provisions of section 481 of the Code be-

came a part‘of petitioner’s income tax deficiency for the

year 1959 i in accordance with sant segtion 481,

"s* ehh Oplaien.:

Respondent’ S entire arguinent under the first issue

has as its foundation the conclusion that neither form

‘of “Pre-Need Funeral Plan Agreement” employed by

petitioner imposed any limitation upon petitioner’ Ss right

and power to-consider and use payments made under tlie

contracts as and for its own property as soon as they

were receiv ed. |

We observe at the outset that in out giew there are

great and material differences between the form of

coritratt which petitioner employed until Septeniber

1961 (referred to, hereinafter as the earlier form)

and the form of contract used by petitioner after that

daté (referred _ to hereinafter as the later form), We

shall consider the two forms of contract in chronological :

order. :

On careful analysis of all of the: ‘facts of eetord we

" are satisfied -that until September , 1961, when petitioner

changed the form of its written contract, it was a true

trustee. and had not otherwi ise received, nor had any

ht to use, the moneys spaid in by its pre-need ap- _

jcc : € in

The earlier form contract Was : written, instrument.

On its face it created:an irrevocable trust in haec verba

_.and even dictated the forms of depositories to Be. used

. by petitioner for the funds. It provided, that a readily

ascertainable amount—the interest earned onydey ;Osits—

be paid to petittoner. We. look ss this as the ulv valent as

of a trustée’s fee. : a

” - ’

. v

. .

- ae | = a: ~s

& 2 “

_ ae am

. ps .

Px :

% 6 e “N ey

2 ve: / r ; aay NA: ees 4a

It is true that some benefit was bound to flow te pe-

titioner ‘under this arrangement in that it had secured

to itself the right to perform applicant’s’-funeral at.

_someé time in the future. on- condition that the applicant

_their trust. character. It is clear, from the facts of the —

arrangement under. the earlier form of. contract, that ap-.

had not moved away 4n the meantime. We observe that

corporate trustees_of funded: irrevocable deferred-pay-

a& : 4 : = ‘ ] e

ment trusts habitually secure a similar present benefit,

_ without being considered to be in receipt of jncome (or,

in receipt ‘of ‘anything ) in their entity as opposed ‘to

plicants were true beneficiaries of the’ trusts which

ary benefit accrued to. petitioner is of no moment.

were created. The fact that some incidental and second-

Respondent protests that petitioner had unrestricted

control of the funds and unfettered use of them; how-

ever, respondent has ‘stipulated that. during each of the

‘years in issue, the totals of thre tranS$fers to petitioner’s

general checking accoutit w ere less than the totals from.

form of contract: Of similar import was John L.. Hill’s

performances | under the contracts plus .interest earned

on the’ savings accounts. Of course, this is not conclu-

sive: *but. it does ‘tend ta prove that petitioner ‘did con-

Sider itself bound by the.express provisions of the earlier

action in immediately restoring petitioner ’s-tfustee saiv-

| ings’ acconnts ‘to their’ proper Jevel in 1959 when he dis-

“covered that funds. had been improperly, deposited in

petitioner’ S general account. , a :

‘Respondent. also protests that, ane the contracts,

and in fact... “There was a complete’ absence sf an in-

dependent trustee * eR TE responderit * were relying

~ upon uhrestricted de facto“use of, the- funds by peti-

tioner for its own purposes .this argument would be

8 : a? -

1 os

—_

meaningful, for that would tend to show that as a prac-~

tical matter there was no trust” But the facts aré other- -

wise as is demonstrated by the stipulation, supra, that

the “trust” funds were held ifviolate. |

We have heretofore considered qitite ‘similar. factual

situations in the’ cases of Seven-Up (o., 14 T.C. 965,

acq. 1950-2 C.B.* 45 rand Broadcast Measurement Bu-

reat, Inc.’ 16.T.C. 988. In Seven-Up Co. the petitioner

manufactured and sold 7-Up. extract. to. various fran-

chised bottling companies from which it received a spe-

-cified sum per gallon. of extract to be spent for national

advertising of the product. The amounts received

" were commingled and deposited by ‘petitioner in its reg- ,

ular business checking/ accounts’ but it did segregate

and earmark such funils on its books. Such a: program

was she bodes efit to the manufacturer as well —-

as- to” the bo tlers* for in theory the busines of each

.would be incr éased. Respondent’s arguments there, as in

the instant»case, were that the funds had been. received —

- and accrued by the manufacturer in each taxable year

under a’ claim of right and without restriction as to use.

Such arguments emphasized the commingling of the ~

funds with manufacturers’ biSiness receipts. In sus-

taining the manufacturer’s position we said, page 978:

The commingling | of the unexpended portions of the

bottlers’ contributions An. several bank accounts with

receipts from sel ae business did not destroy

their identity as Arust funds. 54 Am. Jur. 199. Pe-

titioner had on:hand at all times cash and securities

in excess of the amount of the unexpended funds

and its books showed precisely the amounts _con-

~ tributed and‘ ‘tmexpended. As custodian of “the funds

and agent for the bottlers, petitioner was obligated’

to expend them for national advertising, and any di- .

~ version for corporate or other purposes might be en-

—— by the bottlers by a suit in equity. See Portland

> Cremation Assn. # Commissioner, 31 Fed. (2d)

* 843; Charlton v. Chevr olet Motor Co., supra.

“In Broadcast Measurement Bureau, Inc., supra, the --

petitioner engaged in the compilation and distribution

of nationwide surveys measuring radio station and net-

work audiences according to a ‘uniform standard. ‘Ror

_ this purpose it collected subscriptign fees from indbvid-

_ ual stations and networks, all of which -were not ex-

pended during the year of. receipt. Respondent’s., posi-

tion was the same as it had“been in Seven-Up Co..and ~

is in the instant case.’ In sustaining the taxpayer’s po- °

sition we said, page 997: ae is

We are convinced that the subscription ‘fees to,

‘Study No. 1 which petitioner* received in the fiscal 8

- year ended June 30, 1946, were impressed with a

» trust upon their receipt to expend them solely to meet

the. costs of ‘Study No. 1 so that they constituted

a trust fund in its hands rather than income...Wheth-

i aoe trust existed with regard to the subscription

fees received by BMB in the fiscal year ended June

30, 1946, depends upon the intent of .the’ ‘parties.

_ No express words of trust were used, but none are

necessary. Hibbard, Spencer, Bartlett & Co., 5 B.T.A.

.- 464. Close analysis of the subscription contracts en-

tered into between petitio#fer and: subscribing sta- .

tions and networks, the understanding of the .par-

ties with regard to these contracts, and the per.form-

ance of. petitioner in execution: of these contracts

persuades .us that the parties* intended «that BMB

- \ :

- . &.

~*~

ie é‘ Be

7 ; A - oO th

receive the rh fees in, trust for the: ‘sub-_

scribers to carry 0 tudy No. 1. We find a rea-

sonable certainty as to the property,- the objects and

the beneficiarie in such situation no particular

e beneficiaries, and in su a Dp

form of w ords is necessary .to create a trust. Chica gor

Mikeaukee & St. Paul Railway Co. v. Des Moines

Union Railway Co., 254 U.S. 196. [EmpHasis. sup- .

“plied. ]

Further, in answer to teepiudents objection that my

funds had. never been segregated and that there was

. _ therefore no trust res, we said at page 1001: yy

Petitioner’s books showed the total amount of ‘such

fees it rgceived and the unexpended ‘balance. thereof

at all times. Any improper .use of the unexpended

_ balance of these fees. by their custodian could have:

béen enjoined by the subscribers to Study No. I by

a suit in- equity. Portland Cremation Absitiation Vv.

Commissioner, 31 F.2d 843.

~The facts of the instant ‘case are more favorable to

ml sbetitioner than are the facts. of either Seven- Up Co.

‘or Br oadcast Measurement ‘Bureau, Inc., in that An-

- earlier form, ‘of contract as a custodian. or trustee with .

gelus did’ segregate the funds into a special clearing

account and four trustee savings _ accounts, and, in the

instant fase, express words of trust Jere nei which.

circumstance was not present in. Broadcast M os

Bureau, Inc. Also, see and compare Mutual Tel. Co.*%

United: States, 204 F. 2d 160 (C.A.9, 1953).

We conclude from all of the above that petitioner ,

received the payments as they were made. under ‘the

*—A-12—

no rights of use“as to the funds as such* and conse-

"quently that’ it was not -in receipt of income as the

payments were made. It follows that in the year. 19%9

petitioner’s taxable income was not computed under a

thethod of accounting any different from the method

* under which its taxable income for the preceding year

had been computed and therefore respondent’s deter-

mination ender section 481 must also fail. :

We turn now to the later form of contract which pe-

titioner started using yin September 1961 and_ under

which petitioner had the right t0, at its option (a)

deposit the amounts paid in as thergtofore, or (b) “at

any time before or after such deposit thereof, use all

or any portion of such sums as collateral or payment...

for (i) the costs of any capital improvemet to then

existing mortuary facilities belonging to Angelus, and

(ii) thesacquisition arid improvement,of real property.”

It seems quite Gear to us that whereas the earlier

form of contract created a custodial or-trust -arfange-

ment, that the above-quoted language from the later °*

form of contract effectivelf destroys any ‘such possibil-

ity as to it, for this language imposes no restraint nor

limitation upon petitioner’s right to use the funds as

they are paid in, the only limitation being upon’ the

manner or purpose of such use. We observe further

that the permitted purposes (improvement of facilities

and acquisition and aeaprovement of land) were both of

*Petitioner’s receipts of interest from the trustee savings ac-

counts were returned as income and such amounts are not in

dispute. z °

—A-13— ,

- ,Y

| sole benefit to the petitioner and of no cenceivable ben-

efit to the applicants.

It is patent that-'the title. ‘to! such improvements and

to such land’ would be in petitioner the same as title

values ee thereto wottld be properly carried as

-an asset On petitioner’s balance sheets and subject to |

claims of petitioner’s géneral creditors. Such funds

therefore would have lost all character of trust funds

_ and alkethat remained between petitioner and its appli-

cant would be a unilateral contractual obligation for

" petitioner to perform, or have performed, the funeral

at applicant’s death.

Nor do we think the situation is altered by the cir-

cumstance that petitioner had not in fact acted under

the (b) option above at any time during 1961. Peti-

tioner had the right to do so “at any time before or

fter such deposit, 2 (emphasis supplied) and it is this.

Pb to use for: its own benefit at any time which ef-

fectively prevents the arrangement from being a trust. *

Trust funds must be impressed with the - prescribed

duties and obligations when received. It ,is unimportant

that a reserve be set up or that a f res be later

segregated by the recipient of the funds. The mere

statement of such a course of action demonstrates that

the recipient received such funds with no fetters upon

its use of them, and then volffntarily and unilaterally

chose do create the reserve or segregate the trust res. Of

ioe. such funds were income to’ such a recipient

when the money was received.

eee 5 tags

Permitted total invasion’ of. corpus or res by a pur-

ported trustee, at any time, and for thé sole benefit of

@ such purported trustee (even though it be a restricted

form of benefit)’ is simply another way of saying that

something» of value has passed to the purported trustee

-_ now in return for his eieeael promise to act at a

* specified time | in - the future. Such an arrangement is

not a trust, and the purported trustee is simply a con-

tracting party. What had been a segregation of the’

’ ~ : P , :

funds under. the earlier form of contract became mere

window-dressing under the later form of contract.

A comparable situation was dealt with in Mutual —

Tel. Co. v. United States, supra, where the funds were

.originally received without any rights of use for that

taxpayer’s benefit, and therefore such funds were ‘not °

income to it at that time; but later, under an order of

the supervising Commission, the taxpayer was given

permission to use the funds for one restricted and spe-

cified purpose which was.of benefit to it. Permission

for: as use—the establishment of a retirement system

for its employees—was properly held to make the“funds

taxable-income to the telephone” company at -that—time.-

It seems obvious to us that petitioner’s receipts under.

the ter form of contract are. subject to. the full force

of such ‘decisions as Schlude v. Commissioner,” 372

U.S. 128 (1963) ; American Automobile Assn. v. Uiiited.

States, 367 U.S. 687 (1961); Automobile Club v. Com-.'

missioner, 353 U.S. 180 (1952), and similar cases, and

we so hold. Current receipts ‘from the later ‘form of

—A-15— ,

contract wer® fully danas to vase’ as they week

received. een

Since both forms of contract were used by this pe-

titioner in 196] it is necessary for us to allocate the .

total 1961 receipts ef $11,796.61 between the earlier

and the; later forms of contract,. but unfortunately. the”

petitioner has made no attempt to. do-so. The- record

shows only that the changeover occurred in September

1961 but the allocation cannot’ be made strictly upon

the basis of the percentage -of time in that. year that

each frm was used because there is io showing of the

relative amounts of activity before and after the change-

over, and in addition the record does show that during °

and safter September 1961 some undetermined number

of the applicants who had already - signed the earlier

form of contract, elected to and did sign the later form. ,

In this situation. ‘We must simply make the best es-

timate which we can, bearing heavily against the pe-

titioner because the inexactitude of the record is of its

_making. Cohan v,. Commissioner, 39 F. 2d 540 (C.A.

2, 1930). Consequently, we conclude and hold that one-

half of the 1961 receipts were under the earlier form of

contract and one-half under the later form.

Decision will, be entered under Rule 50.

” . APPENDIX B.

Comm of Appeals Opinion Below.) :

"United States Court of Appeals, for the Ninth Cir-

cuit.

~ Angelus Funeral Home, Petitioner; vs. Commissioner

: of Internal Revenue, Respondent. No. 22, 118- ,

On Petition to. Review a ae ‘ak the ir ax Court

-of the United States. 3s ea

- Before: DUNIWAY and ELY, — is Judges and

TAYLOR,* District Judge.

DUNIWAY, Circuit Judge: |

_ Taxpayer-Petitioner Angelus Funeral Home seeks re-

view of a decision of the ‘Tax Court, 47 T.C. 391

(1967), ‘upholding the Commissioner’s: determination of

certain income tax deficiencies against it for the year -

1961. The sole ‘Question. raised is whether. Angelus .

must treat as inéome in“the year of receipt payments

_ made to it pursyant to a “pre-need funeral plan arranges

ment.” The Tax Court held that it must. We affirm.

Angelus is a California corporation engaged .in the

business of providing funeral and burial services. It

‘files its income tax returns on a calendar year, accrual

» baits. As a part of its’ business operations during the

years 1954 and continuing’ through 1961, Angelus en-

‘tered-into written -contracts with individuals. Each

| agreement, called a “Pre-Need Puneral’, Plan Agree-

‘<

*Honorable ‘Fred M. ’ Taylor, United States District Be for .

the District of Idaho, sitting by designation. ;

—— Bei y et

ment”, provided for payment by the individual of. a

small down payment at the signing of the contract,

and for voluntary payments of ddditional small amounts

each month until a set sum was reached. Angelus agreed

that when the: individual diéd it would apply the total

amount paid toward the cost of the’ individual’s funeral.

If the individual ‘died at a place where Angelus could

-not perform its services, Angelus was _ to trans{gr the

entire sum collected by it to a reputable funeral home

which would. provide the service. :

_ “During the years before ‘and including. the first

months of 1961, Angelus. used a form of agreement"

- ~—

which provided: — ha \

4. The Parties agree that all sums “usd ay Ap-.

plicant to ANGELUS shall be held by ANGE-

LUS in irrevocable trust for theNuses and’ .pur-.

~s , poses herein set forth. . A

5. ANGELUS agrees ea it will deposit all sums

paid to it under, this Agreement in a bank, trust -

company or savings and* loan association and

that it will.not thereafter withdraw such: sums,

or any portion thereof, except for the useg and

purposes herein set forth; provided that “AN-

GELUS may at its discretion withdraw such

¢ sums for the purpose ‘of redeposit in some-other

bank! trust company or savings and loan asso-

ciation... 2 |

Accordingly, Angelus could withdraw the funds only

upon proof of the death of the individual, and then —

culd: use the funds onlyto provide funeral services.

The interest earned on the: deposited money accrued to

Angelus ‘as. a. fee for handling and accounting for the

money... | } -

j —B-3— ;

~ “While Angelus. repotted ‘the interest received from

_ the savings accounts as income, it did not ‘reflect the

_ amounts paid to it under the agreements as income in

the year in which the payments were received. Rather,

it reported income from the contractual payments only

when. it was required to fulfill thecontractual obliga-

tions. . oer

Angelus changed its agreement in September of 1961. |

The new agreement ..was similar to the prior form,

including the langtiage of paragraph 4, quoted above,

: except that it provided that: cae |

5. ANGELUS may, at its option (a) deposit all or

any portion of the sums paid to it wnder this

»A\greement in one or more banks, trust compa-

nies or savings and loan associations, * or (b)

so at any time before or after Gich deposit thereof,

use all or any portion of such sufits. as collateral

or payment for (i) the costs of any capital im-

provement to then existing mortuary facilities

belonging to ANGELUS, and (ii) the acquisi-

tion and improvement of real property.

As consideration for the right to use the payments in >

the manner provided, Angelus agreed to pay the con-

cent of the funds paid by him to Angelus during that

year. Some individuals who had signed the older agree-

ments converted them to the new type in order to re-

ceive the ten percent payment. 3

The Tax Court found that Angelus was a “true

trustee” under the older form of agreement, and ‘that

it had fio right to use: the ‘money paid by the con- -

tracting individuals. It held that Angelus was not tax-

able in the year of receipt on the payments collected

under these agreements. This decision is not now ques-

tioned by the Commissioner. The Tax Court, however,

found that the form of agreement adopted by Angelus

in September of 1961 (gave. Angelus “extensive rights

' to the payments and thereby. ‘destroyed the trust ar-

rangement between the parties. It held that these pay-

ments were taxable as received by Angelus. Only An--

gelus now appeals. ue :

In assessing the 191 deficiency, the Commissioner

“did -not rely , and he does not now rely, on the power

given to him under 26 U.S.C. §446(b) to require a

taxpayer to compute taxable income under a method of

accounting that, id the Commissionef’s opinion, truly |

reflects income. Nor does Angelus assert that its “meth-

od of accounting” (26 U.S.C. § 446(a)) is correct and

should therefore be followed. In short, this case is. not

an accounting case. - 7 -

Angelus makes two claims: (1) that the payments

received under the 1961 agreement were received py it

in trust, and were therefore not income to it, and (2)

that even if>the payments were not received in trust,

they were analogous to certain other types of advance

paymeats that have been held ‘nog taxable when _re-

ceived, and that the payments received should therefore

be held nontaxable as being, in substance, borrowed

money. rer . | 7

1. -The trust. claim.

As a general proposition, payments received by. a

trustee expressly and solely for. the benefit of another

are not income to the trustee in his individual capacity.

Healy v. Commissioner, 1953, 345 U.S. 278, 282. The

BS ae

Commissioner argues that the’ 1961 pre-need agree-

_ ments set up a “triist facade” and questions the effec-

tiveness. of the 1961 agreements to constitute a trust.

But questions of trust validity are not before us in this

_ tax: case. This is not a situation in. which no funds

were paid into the “trust” ,-or where the: _ designated

_ trust funds were commingled with a trustee’s general

‘

ac®unts.! Rather® our task is to determine whetHer

the economic benefit to Angelus as trustee is .such that

Angeluy hould be taxable on receipt ‘of the payments;

notwit tanding: whatever power the beneficiaries, may

have to enforce the trust terms*under state law. Grace-

lazen Memorial Park v. United States, 3-.Cir., ‘1958, :

260 F.2d 328, 332)

Not every receipt of benefits by a trustee subjects’

_ him to taxation on payments to the trust. Trustees re-

ceive fees for-managing trusts without fear of taxation

“except as to the fee itself. The interest from the pre-

need funds. which Angelus received as a fee for-man-

gory. Also, a line of cases. involving cemetery -mainte- -

| nange or perpetual care trusts recognizes that while the

primary beneficiaries are the lot or niche purchasers, ‘the

cemetery | also benefits from ‘good maintenance of its.

“premises ; névertheless, if. the payinents into the trust

fund cannot be used for the corporate Purposes of the

trustee cemetery, they are shielded from taxation -de-

spite the incidental benefit to the cemetery.”

Parkchester Snes Club Corp.” v. sidisiasiioags 2 Cir., 1964,

335 F.2d 478, 480; Acacia Park Cemetery Ass'n v. Commissioner, :

7 Cir., 1933, 67 F.2d 700.

2Commissioner v. Cedar Park Cemetery Assn, 7 Cir., 1950, 183

F.2d 553; Portland Cremation Ass'n. v. Commissioner, 9 Cir.,

ran J \

”° —B6—

/ - But in contrast to the perpetual care trust cases,

- cemetery owners seeking exemption from taxation for

payments into trusts for future capital improvements

have ‘had very tough: sledding indeed. The court~in

Mount Vernon Gardens, Inc. v. Commissioner, 6 Tir.,

‘ 1962,-298 F.2d 712, summed up the cemetery owner’s

problem as follows:

- “But the creation of a trust into which a portion

. of the purchase price is paid is not in: and of >it-.

self sufficient to prevent the trust money from

being treated as income. . . . [T]he-decisive fea-

ture in each case is the terms and provisions of

the particular trust involved. The questions of con-

trol by, and inurement to the benefit of, the tax-

‘ payer, -are of prime importance. In [two prior |

‘cases the Court was of the opinion that the

trust funds were available under the terms of the

trust to promote future capital improvements in

the taxpayer’s property, was for the taxpayer’s

. benefit, and accordingly, was taxable income. ...

"(298 F.2d 716.)

The portion of the cemetery lot purchase price in

Mount Vernon which was allocablerto the “Development

-Trust Fund” on fourld to be a a of the cemetery’s

taxable i income.*

1929, 31 F.2d 843; Green Lawn Memorial Park, Inc. v. Mc-

Donald, M.D. Pa., 1958, 164 F. Supp. 438, 441, affirmed 3 Cir.,

1959, 262 F.2d 588; American Cemetery Co. v. United States,

D.Kan., 1928, 28 ‘F.2d 918; Troost Avenue,-Cemetery Co. v.

United ’ States, W.D. Mo., 1927, 21 F.2d, 194; cf. Oak Woods

Cemetery Ass'n United States, Y Cir., 1965, 345 F.2d 361;

Monte Vista Burial Park, Inc. v. “United States, 6 Cir., 1965,

340 F.2d 595. ° s

SLike results have been reached on simniler facts in Jefferson

Memorial Gardens, Inc. v. Commissioner, 5. Cir., 1968, 390 F.2d:

161; 167; Sherwood Memorial Gardens, Inc. v. Commissioner,

7 Cir., +1965, 350 F.2d 225; Gracelawn Memorial Park, Inc. v.

United S tates, 3 Cir., 1958, 260 F.2d 328; National Memorial

Park v. Commissioner, 4 Cir., 1944, 145 F.2d 1008. *.”

—B-7—

The capital i improv ement trust, cases are applicable by

analogy to the facts at hand. The 1961 form of An-

gelus’ pre- -need agreement gave Angelus the power to

‘use the funds whenever it wished, )subject only to limi-

éations of purpose, i.e., land acquisition or improvement

Pag mortuary facilities. These purposes would benefit

- Angelus, on the agreeing individuals who are benefi-

Ciaries. under the trusts. Further, all of the trust funds

are subject to. Angelus’ power. Thus, even assuming

that an equity court would enforce the trust terms, the _

absolute power to benefit itself inhering in Angelus’

‘position as trustee makes it liable for taxation on re-

- ceipt of the- “pre-need payments. The trust permits An-

gelus to benefit itself more than incidentally, and there- 4

fore the trust does not operate to shield Angelus from |

_taxatibn until Angelus acquires a completely unfettered

- control over the pre-need payments. °

Our decision in Portland Cremation Ass’n v. Com-

missiones, 9 Citr., 1929, 31 F.2d 843, does not hold

otherwise. There a trust was inferred from sale of ceme-

tery niches with an accompanying covenant that a per-

manent fund would be established that could only a

used for maintenance purposes. The court found that

could ‘invoke equitable remedies to prevent _

° ate purposes. In the present case, however, the in-

strument creating the trust grants specific powers to

‘ the trustee to use the funds for its own purposes, and

in an action to enforce the trust we presume that a

—B-8—:

court. would enforce these grants as it would any other

term of the trust.

2. The “borrowed money” analogy.

Angelus argues that three lines of dees support

its claim that the payments in question are not in-

-come when received, but are in the nature of borrowings.

Whether the lender is the individuals who pay or the

trust is not made clear. But in any event we do not

find these authorities persuasive.

The first line of cases deals with deposits by a ten-

ant of money to be held by a landlord as security for

the tenant’s performance -of a lease.* The analogy ‘is

not persuasive. The prospective, decedents certainly did

not pay the money to Angelus to secure their own per-

formance of anything, even their obligation to die. That

obligation was scarcely owing to “Angelus; - we need

not attempt to decide to what power, if any, it was owed.

The second line of cases deals with moneys paid to

sellers on account of the price of goods to be delivered

at a later date. One of them. Consolidated-Hammer

Dry Plate & Film Co. v. Commissioner, 7 Cir., 1963,

317 F.2d 829,-held that advance payments by the gov-

ernment to a small manufactuer-seller for the manu- |

facture and. sale of a large,custom-made camera had

the attributes of a financing arrangement in the nature

. 4Clinton Hotel Realty Corp. v. Commissioner, 5 Gir., 1942, 128

F.2d 968 is principally relied upon. Also cited are Commissioner

. wv. Riss, 8 Cir., 1967, 374 F.2d 161; Zaconick v. McKee, 5 Cir.,

1962, 310. F.2d 12 (bankruptcy proceeding) ; ems Service

Corp. v. Commissioner, 2 Cir., 1940, 110 F.2d 723. ie

—B-9—

_ Of a loan. .We do not quarrel with the decision. But

we find it so different in its facts as not to be analogous.

Summit Coal Co., 1930, 18 B.T.A. 983, ard Bremerton-

Tacoma Stages, Inc. v. Squire, W.D. Wash., 1951, 96

F.Supp. 718, are similar. Compare Van Wagoner v.

United States, 5 Cir., 1966, 368 F.2d 95: Astor Hold.

ing Co. v. Commissioner, 5 Cir, 1943, 135 F.2d 47,

which seem to us more closely analogous to the present

case.

Also relied upon are cases dealing with sales of goods

such as Vvenstra & DeHaan Coal Co.,. 1948, 14 T.C.

964, or of cemetery lots in areas not yet ‘developed,

Woodlawn Park Cemetery Co., 1951, 16 7A WOG7...’

Here, however, Angelus’ obligation was to furnish fu-

neral services at a future fime.> Under these circum-

stances, we think that the reasoning of the Supreme

Court in Schlude t v. Commissioner, 1963, 372 U.S. 128,

is applicable here. See also American Automobile Ass’n

v. United States, 1961, 367 U.S. 687, Automobile Club

of Michigan v. Commissioner, 1957, 353 U.S. 180. It

is true that those cases involved the power of the Com-

missioner under 26 U.S.C. § 446(b), while that power

is not in issue here. But the reasons there given in sup-

, port of the exercise of that power are here persuasive. —

Cf. Artnell Co. v. Commissioner, 7 Cir., 1968, 400

F.2d981- ied

Angeles refers to. an obligation to sell a casket, but that obli-

gation is contingent upon payment of the full cost of the “funeral

services,” and the contract refers to Angelus’ obligation to “use,”

not to “sell” a casket. ;

= = on

ee nt °

The third line of cases involves payments by a pro- /

spective buyer for an option to be applied to the price

if the option be later exercised.° Those cases, however,

involve a different problem. If: the option is allowed

to lapse, the inoney becomes ordinary income to the Op--

tionor; if the option is exercised, the money is received

as part of the price of a capital asset, taxable, if at

all, as capital gain. The taxpayer (optioner-seller ) can-,

not know which type of income he has when he re-

ceives the payments. No such uncertainty as, to the

character of thé’money received is here involved.

We hold that the payments here involved were neither

loans nor sufficiently analogous to loans to be non-

taxable when received.

Aifirmed.

8Kitchin v. Commissioner, 4 Cir., 1965, 340 F.2d 895; Com-

missioner v. Dill Co., 3 Cir., 1961, 294 F.2d 291; Virginia Iron

Coal & Coke Co. v. Commissioner, 4 Cir., 1938, 99 F.2d 919.

: é

APPENDIX C.

(Statute Involved.)

Section 61 of the Internal Revenue Act of 1954,

as amended, 26 U.S.C. Settion 61, reads as follows:

~ § 61. Gross income defined

~ (a) General definition —Except as otherwise pro-

vided in this subtitle, gross income means all income

from whatever source derived, including (but not lim-

ited to) the following items:

(1) Compensation for services, including fees,

commissions, and similar items;

.(2) Gross income derived from business ;

(3) Gains derived from dealings i in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends; -

(8) Alimony and separate maintenance. payments ;

(9; Annuities; -

(10) Income from life insurance and. ‘ ttowment

cantracts ;

(11) Pensions;

(12) Income from djectiaége of indebtedness: ;

(13) Distributive share of partnership gross in-

come;

(14) Income in respect of-a decedent ; and

- (15) Income from an interest in an estate or trust.

(b) Cross references.—

For items specifically included in gross income,

see part II (sec. 71 and following). For itsm spe-

cifically excluded from gross income, see part III

(sec. 101 and*following).

Aug. 16, 1954, c. 736, 68A Stat. 17.

(

Pare ts

aig

_ APPENDIX D.’ |

(Pre-1961 Agreemerit-Form.) -

(Petitioner’s Exhibit 10. )y

“ ANGELUS PRE-NEED FUNERAL PLAN

AGREEMENT.

"This is ‘an Agreement between ..............:sssseseseceeeesee:

-’ who is called Applicant, and ANGELUS FUNERAL

HQME, which is called ANGELUS, and is entered into

between the Parties in order to effectuate the terms of

ANGELUS PRE-NEED PLAN Funeral and Inter-

ment Instructions No. P 161, dated June 12, 1959.

FOR AND IN CONSIDERATION of the mutual

covenants and promises herein contained, and contained

in. Funerai and Interment Instructions No. P 161, the

Parties agree as follows:

‘1. The Applicant agrees to pay to ANGELUS the

total sum of $465.00, to be paid as follows: $2.00

upon the signing of this Agreement, receipt of which is

hereby acknowledged, and the stim of $5.00 or more —

_ per month on the 12th day of each month hereafter

beginning on July 12th, 1959 until the said sum is

paid in full. Applicant agrees that. he will not assign

‘said sum or any portion thereof without the written

consént of ANGELUS, and that any attempted as-

- signment of said sum or any portion thereof without

“such written consent shall be void.

' 2. ANGELUS agrees that upon seont of death of

the Applicant, it will apply the sum theretofore: paid

by Applicant.toward the Total Cost of Funeral Serv-

ices as that term is defined in Funeral and Interment

Instructions No. P 161; that it will provide funeral”

services of the reasonable value of the sum theretofore

paid to it and that it will otherwise fully and faithfully

a a

follow all directions ie in said Instructions and

do and perform all things therein directed to be done

and performed. |

3. The Parties agree that nothing ‘herein iil

shall be construed to vest in ANGELUS the right to

sue for or otherwise demand payment of any” sum

- “agreed to be paid by Applicant hereunder which is un-

_ paid at the date of his death, and further that neither

' the heirs nor the personal representatives of the Ap-

plicant shall make or assert any demand for funeral

services for Applicant of a value in excess of the

amount actually paid hereunder by Applicant; provided

that nothing herein contained ‘shall be deemed to limit

the right of ANGELUS and such heirs or personal

representatives to contract for funeral serwites, in any

‘amount in excess of the” Total Cost of Funeral Serv-

ices, or the amount paid on account thereof, that may be

mutually agreed upon between them.

. 4 The Parties agree that all sums paid Sy Appli-

cant: to ANGELUS shall be held by ANGELUS in

irrevocable trust ‘for the uses and purposes herein set

forth and set forth in Funeral and Interment Instruc-

tions No. P 161.

paid to it under this Agreement in a bank, trust com-

pany.or savings and 4oan association.and that it will

not thereafter withdraw such sums, or any portion

‘thereof, except for the uses and purposes herein set .

forth; provided that ANGELUS may at its discretion

‘withdraw such sums for the purpose of re-deposit in

some other bank, trust eerany or savings and loan

association.

. 8

6. The Parties agree that in consideration of the

services performed and to be performed in the collec-

tion, tustody and conservation of the surhs paid to it

“by Applicant all ,interest earned on such. sums shall

accrue to, and shall’ become the property of, and pay-

able to ANGELUS, as and when earned.

._ 7. The Parties agree that in the event Applicant

- dies:in any city, county, state or territory in which it

is not practicable for ANGELUS to cénduct funeral -

services for the Applicant, that ANGELUS will, upon

the written request of any heir, executor, administrator,

devisee or legatee of the Applicant, pay such sums as

_ gnay have come into its hands‘ by virtue of this Agree-

ment, to any reputable funeral horhe selected by the per-

son making the request for such ‘payment ; provided

that such payment shall relieve ANGELUS of all

further responsibility under the terms of this Agree-

ment and. provided further that ANGELUS. shall be

the sole and exclusive judge of whether. or not it is

practicable for-it to conduct such funeral services.

8. The Parties agree ‘that ANGELUS may at its

discretion assign the benefits of this Agreement. or

this Agreement itself, together with Funeral and In-

terment Instructions No. P 161, to any person, firm or

corporation it may select; provided that such assign-

ment shall be conditioned upon a faithful performance

of the terms of this Agreement. — |

Dated: June 12th, 1959.

in —;.

Applicant

2. = ANGELUS FUNERAL HOME

By: ILLEGIBLE

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FUNERAL & INTERMENT INSTRUCTIONS.

.2 A

- APPENDIX E.

— (196r Agreement-Form.)

‘ (Petitioner’s Exhibit 11.)

‘of. .

m Pursuant to. the provisions of. Section 7100 ok the

‘Health and Safety Code of the State of California and

-for the purpose of relieving my survivors of the burdens

of making such decisions’ and arrangements, I here-

‘neral services :

‘ . that funeral services for me shall be conducted by,

ANG$LUS FUNERAL HOME, or its’ succes- -

sors or assigns. : | ns

2... I direct-that my funeral arrangements be* made in

accordance with the Pre-Need Funeral Plan Agree-

ment hereinafter set forth, and that the amount

_ of the “Total .Funeral Cost” as used in said Agree-

-_ ment, excluding the cost of a grave, shall be $..........

See | ee clothing and prefer tS inte

x color. pee x eae ss . XY

4. My preference -for cemetery arrangements is ‘as

TNS a cliwitioncrctobaas See Se eneaniacd

- 5. Fraternal oriaiieations to be notified: ......... eaerdatieeee

6 My church affiliation is al caaaci eae <

. A I would prefer ‘as clergyman Leiciuaankteincabcibancndsak are

8. I wish’ the following music . Sad cassisicd ibs pinctntepiticindess

9. Other instructions: or remarks: Lesnctalhnnncandiecdeed at Tn

DATED: sncaisupsa ened ole aie rc... Tea ) :

.- with execute the following instructions regarding my fu-

eh I direct that my remains shall be delivered to, and

Applicant * ”

—E-2— |

PRE-MEED FUNERAL PLAN AGREEMENT. |

Angelus Funeral Home (“Angelus”) Eo camaioes

-+e*

iil seiessesesseseseeeeeesteeee (“Applicant”) agree as follows:

Applicant agrees to pay to ANGELUS the amount

of the Total Funeral Cost set forth in the fores

going Instructions at times and in amounts as. fol-

lows: $.........--u... ...--. upon the execution hereof,

‘receipt of which, is * Bien by ANGELUS

hetecibiabes day of ‘each month

DOM INING 22-2. ak -nnoeeneesees , 19........, until the said

Total Funeral x is paid i in full. The total amount

paid by Appli in any given’ calendar year on

account. of\ the’ Tytal Funeral’Cost will herein be

called “Appual: y epee

Aeslicah it! will fally any faithfully comply with

Appilicant}s ‘foregoing. Instructions and will provide

fuingral, services. of the reasonable value eqifal to

- the: total pita theretofore paid by Applicant on

account _ of. the’ Tetal Funeral Cost. If the full

aimiont of the Total ‘Funeral Cost has been paid,

ANGELUS agrees to use casket number ............. |

TIE iia nmciihenctpesnin ly Wnveappeiies » IIE vcetietiins “

| or equivalent, for yh aserel

The Parties ,agree that nothing herein contained

‘shall be coristrued to vest if. ANGELUS the right

- to sue for or otherwise dentand paymenrit' of any

sum payable by Applicant under the terms hereof

which is not volttntarily paid by him, and further

that neither the heirs nor the personal representa-

tives of the Applicant shall make or assert any

d&nand upon ANGELUS to provide funeral serv-

ont Bi

ices for Applicant of a value in excess of the |

_ amount actually paid by Applicant under this

Agreement ; provided that nothing herein contained

shall be deemed to limit the right of ANGELUS

and such heirs or, personal representatives to con-

tract for funeral services\of a value in excess of

the amount paid hereunder by A

his death. /

All amounts. paid hergunde by Applicant shall be

-held by ANGELUS aes able trust for the

‘uses and purposes hergin provic ided, and in consid-

-eration of the services to be ‘performed hereunder

‘by ANGELUS, including the custody and con-

servation of the sums ‘paid to it by Applicant, it

is agreed that all income earned on the sums so

paid shall accrue to and shall become the property

of and pay able to ANGELUS, as and when earned.

‘ANGELUS may, at its option (a) deposit all or

any portion of the sums paid to’ it under this

Agreement in one or moré banks, trust companies

or savings and Joan associations, or (b) at any

time before or after such deposit thereof, use all

or any portion of such sums as collateral. or pay-

ment for (i) the costs of ‘any capital improvement

to thén existing mortuary facilities belonging to

ANGELUS, and ( ii) the acquisition and improve-

ment of real property. = \ :

In. consideration for its right to use the amounts

paid hereunder by Applicant in the manner herein

provided, ANGELUS agrees to pay to Applicant

on or before the 31st day. of December of each °

year an amount equal to-ten per cent (10%)-of *

the Annual Payment (as above defined) made by

—_— during such yest,

icant prior t0-—

Mae -—E-4— 2

It is agreed that if the Applicant dies in any city,

county, state or territory in which it is not prac-

ticable for ANGELUS to conduct funeral services

for the Applicant, that ANGELUS will, tpon the

written. request of the personal representative or .

any heir of.the Applicant, pay’such sums as may

have come into its hands by virtue of this Agree--

ment to any reputable funeral Home selected by

the person making the request for such pa&yment;

provided that such payment shall relieve ANGE-

LUS of all further responsibility under the terms

of this Agreement and provided further that AN-

GELUS shall be the sole and: exclusive judge of

whether or not it is practicable for it *q@ conduct

such funeral services.

Applicant agrees not to assign his interest here-

under without the written consent of ANGELUS,

and any assignment without such consent shall be—

void. ANGELUS, however, shall have the right to

assign its interest under this Agreement to any

person, firm or corporation provided such assign-

ment shall be conditioned upon the faithful per-

formance of this Agreement and the foregoing

Instructions by the assignee. )

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.