On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil No. 82-1939).
Aldisert, Chief Judge, Sloviter and Stapleton,*fn* Circuit Judges.
We must determine whether a bequest to a nonprofit cemetery was deductible for estate tax purposes as a bequest to an organization operating exclusively for "charitable" purposes under section 2055(a)(2) of the Internal Revenue Code.
The pertinent facts are not disputed. A. Leon Davis died testate on December 6, 1976. His will provided that the residue of his estate was to be distributed to the Verona Cemetery, Oakmont, Pennsylvania, of which $30,000 was to be applied to the erection of a new utility building, with the balance to go to the cemetery's endowment fund. Davis' executors filed a Federal Estate Tax return for the estate, paid the tax, and then filed a claim asserting a charitable deduction of $370,901.74 (the total amount distributed to the Verona Cemetery), and claiming a tax refund of $97,557.15, plus interest. The internal Revenue Service disallowed the charitable deduction and denied the claim for a refund. After exhausting administrative remedies, the executors filed this action for a refund. All facts were stipulated. The government and the estate filed cross-motions for summary judgment, and the district court granted summary judgment for the estate. The government appeals.
The Verona Cemetery Association was established by nearby residents in 1881 as a non-stock, nonprofit corporation for the purpose of providing burial space to any person regardless of religion or race. It is not owned by or affiliated with any religious group or governmental unit. The cemetery consists of approximately 8.5 acres, most of which are used for 8,490 burial plots, all of which have been or soon will be sold. There are also some general utility buildings, a nondenominational chapel, and a centrally located Civil War Memorial, at which public Memorial Day services are held annually.
The cemetery receives revenues from the following sources: sale of grave sites; grave openings; an endowment charge of $150.00 per grave site for deposit in the Endowment Fund; annual mowing charges for grave sites on which no endowment charge was imposed at the time of sale; charges for headstone foundations; two privately established trusts which generate approximately $400.00 a year; a small charge for burial of cremation ashes; and a $10.00 deed and endowment charge when a lot owner conveys directly to a third party. The early history of the cemetery's treatment of indigents is unknown. In recent years, there has been no established practice either authorizing or denying free or reduced rate services for indigents, and no request for such services has been made. The cemetery has, on occasion, provided grave openings and not been paid due to an alleged lack of funds. The cemetery has been found to be an exempt organization for Federal Income Tax purposes, state sales tax, and county and local real estate taxes, and also qualifies a a charitable organization for purposes of the Pennsylvania Inheritance Tax Act.
The pertinent provision of the Internal Revenue Code of 1954 allows a deduction from the taxable estate of bequests:
to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, . . . no part of the net earnings of which inures to the benefit of any private stockholder or individual, which is not disqualified for tax exemption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene in ... any political campaign on behalf of any candidate for public office.
26 U.S.C. § 2055(a)(2) (1982). The sole question on appeal, as below, is whether the cemetery is a "corporation organized and operated exclusively for ...charitable...purposes."
The district court held that the bequest to the Verona Cemetery did qualify for a deduction under § 2055(a)(2). The court recognized that the weight of case precedent favored the government, but stated that language in the Supreme Court's recent decision in Bob Jones University v. United States, 461 U.S. 574, 76 L. Ed. 2d 157, 103 S. Ct. 2017 (1983), required reevaluation of that view. There, the Supreme Court, in considering the tax status of a university as a charitable institution under an income tax provision, 26 U.S.C. § 501(c)(3) (1982), stated that in order for an organization to be entitled to tax-exempt status it must meet "certain common-law standards of charity", that is, it "must serve a public purpose and not be contrary to established public policy." Id. at 586.
The district court read this language expansively stating that the "contemporary view of 'charity' considers the benefit to the community as a whole." The court then stated, "The maintenance of cemetery facilities by cemetery associations benefits the community both through its aesthetic effects and by the performance of a necessary social task." Additionally, the court noted that if the cemetery were to become insolvent, the burden of maintaining it could fall on the borough. Pa. Stat. Ann. tit. 53, § 47804 (Purdon 1966). Therefore, the district court concluded that public nonprofit cemeteries are charitable organizations because of the important social function they perform and the concurrent lessening of the burden of the public fisc.
Although the executors argue that the Bob Jones University case requires that we construe the word "charitable" by looking to the common law concept of charity, we believe we are not free to do so in light of the framework of the Internal Revenue Code, and its treatment of "charitable" organizations.
Section 501(c)(3), the provision at issue in the Bob Jones University case, deals with those organizations that are exempt from taxation for income tax purposes. Deductibility of contributions made to such organizations is covered in section 170 which provides that a taxpayer who makes contributions to the organizations covered by section 501(c)(3) may deduct those contributions for income tax purposes. Thus, "charitable" organizations are exempt from taxation under section ...