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Taxation of Perpetual Care Trust Funds

Posted by Atty. Harvey I. Lapin on October 1, 2013

Over the years since the enactment of the tax laws applicable to corporations in 1909 there have been disputes between the IRS and taxpayers concerning various issues involving the legal status of Perpetual Cemetery Care Funds (“PC Funds”) under state laws and the relationship with taxable and non taxable entities. Most of these issues were discussed in a recent court case between Michigan Memorial Park, Inc. v. the United States, 2013 WL 93338 (E. D. Michigan, S. D., January 8, 2013). This case is reviewed in detail in a recent article by the author in the Cemetery & Funeral Business and Legal Guide (”Guide”) that dealt with the taxation of PC Funds and the treatment of PC Funds under the Bankruptcy Laws. See subscription information to the Guide below.

  If a PC Fund is established by or is connected to a taxable cemetery, the IRS and the courts have determined the PC Fund will also be taxable. See Rev. Rul. 64-217, 1964-2 C.B. 153. If a PC Fund is established by or is connected to a tax-exempt cemetery, the PC Fund will also be tax-exempt under Section 501 (c) (13) of the Internal Revenue Code. See Revenue Ruling 58-90, C.B. 1958-1, 15. It is important in that situation that the PC Fund also obtains a tax-exempt determination letter from the IRS.

  The Court during its discussion of the various issue indicated the following tax rules are applicable to PC Funds:

1.      PC Funds are separate taxable entities and are taxed as trusts under the applicable provisions of the Code. Deposits made by the cemetery corporation to the PC Fund required by state law or contract with a space owner are deductible by the cemetery corporation, are not income to the PC Fund and become the principal of the PC Fund.

2.      A PC Fund should file a return on Form 1041 and pay taxes on income that is not distributed to beneficiaries or to pay the legal obligations of the beneficiaries. Accordingly if capital gain income is retained in the PC Trust it will be taxable at the trust level. Income distributed to beneficiaries has the same character as the income received by the PC Fund. Accordingly, if a beneficiary receives dividend income it will be considered as that type of income for tax purposes.

3.      The distributions from a PC Fund to a cemetery corporation for the maintenance of the cemetery are for the services to be provided to space owners. Accordingly, the cemetery corporation is not the beneficiary of a PC Fund. Since this distribution is not to a beneficiary or for the satisfaction of a legal obligation of a beneficiary it would normally not be deductible by the PC Fund. However, at the behest of the Industry, Congress added Section 642 (i) to the Code to add a limited deduction to the PC Fund of $5.00 per space sold to alleviate this problem.

4.      Since the distribution by the PC Fund to the cemetery corporation is not to the beneficiary or to pay a legal obligation of the beneficiary, the character of the income is not the same as received by the PC Fund. Accordingly, the cemetery corporation cannot use the dividend-received deduction to exclude any of the income received from the PC Fund. Instead the income received by the cemetery corporation is considered received for the maintenance services to be provided and is fully taxable. However, the cemetery corporation can deduct from this income the costs involved in providing the maintenance services that is typically for most cemeteries in excess of the income received from the PC Fund.

  This summary is for informational purposes and readers that have specific issues or problems should consult with their own professional advisors.


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