Ever since its organization, plaintiff's officers and managers have been compensated for their services. Its operations have always been under the management and control of the board of managers through the officers. The shareholders are entitled to vote in proportion to their holdings and to hold office in the corporation, whereas the owners of burial rights have no voice in the company's affairs, nor have they ever received any distribution or dividends from moneys received by the plaintiff for burial rights or otherwise. Sometimes the distributions to shareholders are denominated on the books as "dividends" and sometimes as "distributions". On August 24, 1934, for the first time, by-laws were adopted. Upon the sale of burial rights to a purchaser, the company's practice has always been to deliver to the purchaser a deed therefor upon receipt of the full payment specified, and approximately ten per cent of the amount received has been set apart to form a permanent fund for perpetual care of the cemetery premises. It does not appear from the stipulation how much money has been set apart in the contingent fund, nor what use has been made of this fund. Neither does it appear, other than by an interpretation of the declaration of trust of 1881, who would be entitled to participate in the surplus in the event of the dissolution of the company.
From the foregoing facts, is the plaintiff entitled to exemption from taxation?
The pertinent statute reads as follows:
"The following organizations shall be exempt from taxation under this title [chapter] --
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"(5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual." Revenue Act of 1928, part of Sec. 103.
In the case of May Kimball Smith v. Commissioner of Internal Revenue, 3 Cir., 1933, 69 F.2d 911, one of the shareholders of the plaintiff in the case at bar sought to have the distribution made to her in the year 1929 declared non-taxable as income from dividends, on the ground that it was a deferred payment for the sale of land to the plaintiff. The plaintiff here was not a party to the Smith case and many of the facts agreed upon in the stipulation here did not appear in the recital of facts contained in the Court's opinion in that case. However, a consideration of the additional facts does not substantially change the general picture presented of the company's operations, and therefore I regard the decision in the Smith case as controlling, rendered as it was by the Circuit Court of Appeals of this Circuit. It is argued that the holding in the Smith case that plaintiff here is taxable as a corporation is a mere dictum which should be given no weight in the Court's consideration of the instant case. Even if I should agree with this argument, I still regard the decision as sound. The test in this Court is whether the shareholders or trustees, or both combined, carry on business for profit. Little Four Oil Company v. Lewellyn, 3 Cir., 1929, 35 F.2d 149, and see Willis et al. v. Commissioner of Internal Revenue, 9 Cir., 1932, 58 F.2d 121.
Plaintiff seeks to bring this case within the rule announced in Commissioner of Internal Revenue v. Kensico Cemetery, 2 Cir., 1938, 96 F.2d 594, 595. In that case, land was acquired by a cemetery company under an agreement authorized by a specific statute, which provided that a cometery might purchase land for burial purposes under an agreement to pay as the purchase price instead of a fixed sum "any specified share or portion not exceeding one-half the proceeds of all sales of lots or plots made from such lands." Laws N.Y. 1853, c. 122, § 1. The Kensico Cemetery agreed to pay one-half the proceeds of all lots sales when and as the lots were sold as the purchase price for the land. These payments were not contingent in any manner upon the operations of the company. It was held that holders of land distribution shares in the Kensico Cemetery were creditors of the company; that payments distributed to them on their shares were part payments for land sold to the cemetery; and it appearing in that case that no part of the net earnings inured to the benefit of any private shareholder or individual, it was held that the cemetery was exempt from taxation.
In the instant case, the plaintiff paid the entire consideration for the purchase of the original boundary of land when the deed was delivered to it in 1869, and it has since paid for additional land as acquired. The distributions to the shareholders are not based upon a fixed percentage of the sale price of lots, to be paid regardless of whether the cemetery may be operating at a profit or a loss; but on the other hand, these distributions are to be made out of surplus funds remaining after setting apart the portion of moneys received which is required for the maintenance of the permanent fund and a discretionary sum to the contingent fund, and the payment of expenses.
Being of opinion that the plaintiff is not exempt from taxation as a cemetery company under the provisions of Sec. 103(5) of the Revenue Act of 1928, I therefore deny the plaintiff's motion for summary judgment. As stated, the defendant's motion will likewise be denied and the cases will proceed for a determination of what, if any, over-payments have been made. An order may be entered in accordance with this opinion.
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