Brief for the Respondent in Opposition — Angelus Funeral Home v. Commissioner

i FE SUN OH wR th Oe

ou the Sap Court of the Gnited Sits

OCTOBER TERM, 1968

g a

No. 1434

ANGELUS FUNERAL H9ME, PETITIONER |

Re oa |

~ CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A W RIT OF CERTIORARI TO THE UNITED |

STATES COURT OF APPEALS FOR THE aaeialoes CIRCUIT

»

BRIEF FOR THE RESPONDENT IN OPPOSITION

¢

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OPINIONS BELOW v

The opinion of the Tax Court (Pet. A1-A15) is re-

ported at 47 T.C. 391. The opinion of the court of ap-,

" peals (Pet. B1-B10) is ‘reported at ce F. = 210.

+ JURISDICTION

The judgment of the court of appeals was entered

on February 10, 1969. Petitioner’s petition for rehear- )

ing was denied on February 27, 1969. The petition for

a writ of certiorari was filed on May 24, 1969. The _

jurisdiction of this Court is inv oked under 28 U.S. C.

|: 1254(1). :

’ QUESTION PRESENTED ors I,

- Whether prepayments received by the. petitioner .

corporation from customers under a ‘‘Pre-Need Fu-

353-874—96 ; (1) ;*

¥

(*

.

neral Plan Agreement’’, which authorized petitiqner

at its option to use the prepayments for its own bene--

fit, were inéludible in its gross income for the taxable

years in which received. > : ae

STATUTE INVOLVED .

The pertinent provisions of Govtions 61, 441, "446

and 451 of the Internal ! Revenue Code of 1954 are set

forth 1 in the Appendix, Inf ‘a, pp. 8-9.

STATEMENT

Petitioner, Angelus Funeral Home, is a California

corporation engaged in the business of providing fu-

neral. and burial services. It files its income tax re-

turns on a calendar year, accrual basis. As a part of

its business during the years 1954 and coritinuing

through 1961,-petitioner entered into written contracts.’

with individuals. Each agreement, called a ‘*Pre-Need |

Funeral Plan Agreement”, prov ided for < small down

payment at the signing of the contract, and for. volun-

tary payments%f additional small amounts each menth

until a set Sum was reached. Petitioner agreed that

when the individual ‘died it would apply the ‘total

amount paid toward, the’ cost of the individual’s fu-

neral. If the individual died at a place where peti-

tioner could not perform its services, petitioner was

sto transfer ‘the entire sum’ collected by ‘it to‘a repu-

table funeral home which would provide the service.

(Ret. A2, B1-B2.) =

The Saisie in issue were paid under a form of

peso tlio | in ‘September 1961 and thereafter,

which provided (paragraph 4) that petitioner would

hold the sums received ‘in irrevocable trust.”’ (Pet.

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peer oie: tak

A2-A3, B2-3.) However, the agreement vragen

‘vided (paragraph 5) that petitioner “at. its option,”’

bcs (Pet. A3—A4, B3)— : |

use all-or any portion of such sums as, collateral —

or payment for (1) the costs of any capital im-

te provement to then ex‘sting mortuary facilities

Pes belonging to ANG ELUS, and {iil the ‘acquisi-

tion and improv ement of real property.

petitioner’ agreed. (paragraph 6)” ‘to pay the contract-..

‘ing individual, at the end’ of cach year, ‘ten ‘percent of

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the funds paid during that ve: ar: Shine individuals

a

who had signed previous agreements converted them

to theynéw type in orde 1 to receive the ten pereent

payment. (Pet. A4, B3.) * Mes ea a :

Petitioner did not report the ainounts Sid: to it un-

der the agreements &’s income in the vear in which

the pityments were, received. Instead, it reported ‘the

income only: when it was required to fulfill its con-

tractual obligations (Pet. .A5, B3-B4). The Tax Court,

sustaining the Commissioner's det ermination, found

that the agreement petitioner had adopted in Septem-

,

f

-Asreonsideratioy for the right to use the payments,

ber. 196L gave it.an unvestri icted %ight to use the pay-

ments fer specified purposes beneficl al to it, and ae-

cordingly held that such payments were taxable’ in. the

years: receiyed (Pet. A12-A15). The court of appeals -

affirmed (Pet. B1-B10) A

1. An earlier agreement, not. ia-issue, did ‘not ‘contain para-

graphs: 5 and 6 of the agreement here in issue (Pet. (5, B2).

]

he Tax Court found that taxpayer was a trte trustee under

this earlier azreement, and that therefore” amounts received un

«der that agreement. were not taxable in the year of receipt (Pet.

A11-A12, B3-B4). The Commissioner did not appeal from the

x Court's decision. © bits ; i

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ARGUMENT A)

The decision below, affgmirig that of the Tax Court,

turns upon the construction of a :service contract be-

tween petitioner and its customers, aud is in accord

with established tax accounting pr inciples governing

the proper taxable year for reporting advance pay-~

ments received for services to be perforpied. There is

no conflict of Actisions, ay other occasion’ for further

yeview by this Court.

1. It is axiomatic that taxable income must be com-

puted on an annual (**taxable year’’) basis, and that

therefore a taxpaber (whether reporting on the cash

or accrual method of accounting) pho, receives income

without restriction as to its use must re port it in the

year received even though he may later be_requjred

to restore the income, Sections 441 and 451, Internal

Revenue Code of 1954, Appendix, infra, pp. 8-9; North

American Oilv. Burnet, 286 U.S. 417; Sec ugity Mills Co.

v. Commissioner, 321 U.S. 281; T Tnited States v. Lewis,

- | 340 U.S. 590; Healy v. Commissioner, 345 U.S. 278. it

is equally settled, as a corollary of the annual account-

ing rule, thet prepayments for future services or

goods, received w ithout restriction as to their use, are

reportable in the year of receipt notw ithstanding that

the recipient taxpayer is contractually obligated to per-

‘form the services or deliver the goods in a later year

in consideration for the prepay ments. American Auto-

mobile. ‘Assn. vy. United States, 367 US. 687 > Schlude

v. Commissioner, 372 US. 128; Hagen Advertising

Displays; Tne. v: Commissiqner, decided March 3, 1969 °

(69-1 U.S.T.C., par. 9254). Cf. Fiaiklin Life Insurance

ee

>

”

_ Co. vy. United States, 399 F. 2d 757 (CA, 7). certiorari

denied, 393 U.S. 1118. .

After analyzing the two types of funeral service

contracts (*‘Pre-Need Funeral Plan Agreement’’) be-

tween petitioner and its customers—those entered into

before September 1961 and those entered into after-

ward—the Tax Court concluded that prepayments un-

der the earlier type (not involved on this appeal) were

received and held in trust by petitioner for the benefit

of the customer until his death and hence were not

repertable in the year of receipt, but that prepayments

under the later type of agreement (here - involved)

were not so received and héld and therefore were re-

portable in the year of receipt. Petitioner’s contention

that the courts below erred ing ‘eating the later prepay-

ments as includible in petitioner’ s gross income for the

year of receipt disregards hoth tlie terms of the later

agreement and the controlling decisions, The later

~ agreement, as distinguished from the earlier one, im-

posed no restraint upon petitioner’s right*to use fhe

prepaid funds for designated purposes beneficial to it

(acquisition or improvement.of land and other facili-

ties) ; on the contrary, it expressly granted petitioner

the 4 option” to use the funds for such purposes.

(Parag ‘aphs 5-6; Pet. A3-A4, B3.) The mere recita-

tion elsewhere in the agreement that the funds were

to be held “‘in trust’? (paragraph 4) must be read in

conjunction with the broad option granted to use the

funds for petitioner’s own benefit; and when so read

® becomes clear, as both courts below pointed out, that

petitioner had the right to use the funds at any time

for its own benefit under the later ‘agreement. If any

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doubt otherwise existed regarding petitioner’s right

_to use the prepayments for its own benefit, it is dis-

‘pelled by petitioner’s obligation under the agreement

to pay its customers ten percent of the prepayments:

‘‘in consideration for its right to use”? the prepay-

ments. (Pet. A4, B3.)

2. The decision below is not in conflict, with any

other decision. Cases involving option payments appli-

cable against the purchase price if the option is exer-

cised, upon which petitioner chiefly relies (P ith, 15),

-present the question whether the option payment

is to be treated by the optionor as ordinary income

or as part of the capital - gain ‘on the sale—the de-

termination of <which must await the exercise or

nonexercise of ‘the option. The question here is not

whether an option payment represents ordinary in-

come or capital gain, but when (i.¢., in which taxable

vear) a prepayment of ordinary income under a serv-

ice contract must be reported. |

The ‘“‘security deposit’’ eases upon which petitioner

* also relies (Pet. 16-17), involve the receipt and\ de-

posit of monies in trust. They apply to the funds peti-

tioner received under the earlier (pre-September

1961) agreements, as to which thé Tax Court ruled in\

petitioner’s favor, not to the prepayments received

under the later and different agreements inivolved on

this appeal. As forthe “‘hborrowed money”’ cases re-

lied upon (Pet. 18-22), the assertion of conflict rests

upon the self-serving premise—contrary to the con-

current findings of both courts below—that the pre-

payments in question constituted loans from peti-

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7

\ tioner’s customers, rather than advance payments for

services. .

, CONCLUSION ©

The potion for a writ of savtiorati should be

denied. ©

Nias eoted iiiahtteds |

ERWIN N . GRISWOLD,

Bolicitor General.

. JOHNNIE M. WALTERS,

Assistant Attorney General.

' Harry Baum, | |

BENNET N. HOLLANDER,

Attorneys.

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JUNE, 1969.

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APPENDIX

Internal Revenue Code of 1954:

SEC. 61. Gross INCoME DEFINED. :

(a) General Definition.—Except“as otherwise

provided in this subtitle, gross income means

all income from whatever source derived, in-

eluding (but not: limited a the following

items: e |

(1) Compensation for services, — ineluding

fees, commissions, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property ;

* * * * *

[26 U.S.C. 1964 ed., See. 61.]

SEC. 441. PrErtop ror CoMPUTATION OF TAXABLE

TNCOME.

(a) Computation of Taxable Income.—Tax-

~ able income shall be computed on the basis of

the taxpayer’s taxable year.

(b) Taxable Year.—For purposes of this

subtitle, the term ‘taxable year’’ means—

(1). the taxpayer’s annual ace ounting period,

if it is a.calendar year or a fistal year; %

* * a: a" @ *.

[26 U.S:C. 441. ]

SEC. 446. Generat Rute FOR METHODS OF

ACCOUNTING

(a) General Rule.—Taxable income shall be

computed under the method of accounting on

the basis of which the taxpayer regularly com-

putes his income in keeping’ his books.

(b) Evrceptions.—If ho method of accounting

has been regularly used by the taxpayer, or if

the method usegl does not clearly reflect income,

the computation of taxable income shall be

made under such method as, in the opinion of

(8).

®

i)

‘5 >»

9 °

,

* the Secretary or his delegate, does clearly re-

flect income. , ¢

— (¢) Permissible’ Methods.—Subject to the

provisions of subsections (a) and (b), a tax-

payer may compute taxable income under any

of the following methods of accounting—

(1) the cash receipts and ‘ disbursements

method ; | |

(2) an accrual method; Me

(3) any other method permitted by this chap-

ter; or... ee a

(4) any combination of the foregoing meth-

ods permitted@tmder regulations prescribed by

the Secretary or his delegate. ;

ol % x * *

[26 U.S.C. 446.]

SEC. 451. Generat RuLE For TAxaBLE YEAR OF

INCLUSION,

(a) General Rule.—The amount of any item

of gross income shall be included in the gross

income for the taxable year in which received

~ ge by the taxpayer, unless, under the method of

accounting used in computing taxable income,

such amount is to be properly accounted for as

of a different period. :

* * 2°" # . * :

[26 U.S.C. 451.]

').S. GOVERNMENT PRINTING OFFICE: 1969