Rev. Rul. 87-97

1987-2 C.B. 155, 1987-39 I.R.B. 14.

TRUSTS DISTRIBUTIONS BY A PERPETUAL CARE TRUST FUND

Published: September 28, 1987

Section 652. - Inclusion Of Amounts In Gross Income Of Beneficiary Of Trusts Distributing Current Income Only, 26 CFR 1.652(b)-1: Character of amounts

(Also Sections 61, 642, 662; 1.61-1, 1.642(i)-1, 1.662(a)-1.)

  Trusts distributions by a perpetual care trust fund. Funds distributed by a perpetual care trust fund to a cemetery corporation for the care and maintenance of gravesites are compensation for services taxable to the corporation under section61 of the Code and are not treated as trust distributions under section 61 of the Code.

ISSUE

  If a cemetery corporation receives from a cemetery perpetual care trust a distribution of funds for the care and maintenance of cemetery gravesites and these distributions meet the requirements of section 642(i) of the Internal Revenue Code, does the corporation receive those funds, for purposes of section 652 and section 662, in the capacity of beneficiary of the trust?

FACTS

  C, a taxable cemetery corporation, owns and operates a perpetual care cemetery in state X. Under the laws of state X, a cemetery company must set aside and deposit in a maintenance trust fund a stated percentage of the payments received from the sale of gravesites. For this purpose, C established T, a cemetery perpetual care fund trust that qualifies under section 642(i) of the Code.

  T invests its trust funds in various corporate and governmental securities, including governmental obligations whose interest payments are exempt from taxation under section 103 of the Code. During each taxable year, T distributes funds to C for the expenses incurred by C for the care and maintenance of cemetery gravesites.

LAW AND ANALYSIS

  Section 61(a) of the Code provides, in pertinent part, that gross income means all income from whatever source derived, including compensation for service and gross income derived from business.

  Section 642(i) of the Code provides that if certain conditions are met, a distribution by a cemetery perpetual care trust for the care and maintenance of gravesites shall be considered a distribution solely for purposes of sections 651 and 661, but only to the extent that the aggregate amount so distributed during a taxable year does not exceed the dollar limitation contained in section 642(i).

  Section 651(a) of the Code provides, generally, that in computing its taxable income a simple trust may take a deduction for income that is required to be distributed currently. Similarly, section 661(a) provides, generally, that a complex trust may take a deduction for income required to be distributed currently or for any other amounts properly paid or credited or required to be distributed in that taxable year.

  Sections 652(a) and 662(a) of the Code provide, in general, when and to what extent a beneficiary of a trust is required to include in its gross income the amounts that are required to be distributed by a trust described in section 651, or the amounts specified in section 661(a).

  Sections 652(b) and 662(b) of the Code provide, in general, that the amounts specified in sections 652(a) and 662(a) shall have the same character in the hands of the beneficiary as in the hands of the trust.

  Metairie Cemetery Association v. United States, 282 F.2d 225 (5th Cir. 1960), holds that a cemetery corporation is not a beneficiary of a cemetery perpetual care trust and that tax-exempt interest income distributed to the corporation by the trust for the maintenance of cemetery grounds in compensation for services in the hands of the corporation. Accord, Monte Vista Burial Park, Inc. v. United States, 340 F.2d 595 (6th Cir. 1965).

  In explaining section 642(i) of the Code, the Senate Finance Committee Report states that:

  Since the taxable cemetery company is not the beneficiary of the perpetual care fund trust, the bill does not change the treatment of the receipt of such amounts by the taxable cemetery company. Consequently, such an amount is to continue to be taxable to the cemetery company as ordinary income (sec. 61) and is not to be treated as a trust distribution in the hands of the cemetery company (secs. 652 and 662). For example, even though the perpetual care fund makes a distribution out of dividend income, tax-exempt interest, or long-term capital gains, the cemetery company is to include in income the total amount, without regard to the dividends received deduction, the exclusion of tax-exempt interest, and the deduction for half of long-term capital gains.

  S. Rep. No. 94-1317, 94th Cong., 2d Sess. 3 (1976), 1976-2 C.B. 553, 554-55.

  In the present situation, section 642(i) of the Code provides that the distributions by T, the trust fund, to C for the care and maintenance of gravesites are considered distributions by T to the extent provided in section 642(i) solely for purposes of sections 651 and 661. Under the holdings in Metairie and Monte Vista Burial Park, however, the funds distributed to C are not distributions to a trust beneficiary but, rather, are compensation for services rendered by C to the trust. The provisions of sections 651 and 661 that are applicable to the distribution apply only to T. The amounts distributed are not considered distributions for purposes of any other section of the Code, including sections 652 or 662. Therefore, the characterization provisions of sections 652(b) and 662(b) do not apply to the distribution made to C by T. Thus, for example, these distributions do not entitle C to an exclusion for tax-exempt income.

HOLDING

  Funds distributed by a perpetual care trust fund to a cemetery corporation for the care and maintenance of gravesites are compensation for services and are taxable to the corporation under section 61 of the Code. Therefore, since the trust distributions are not made to the cemetery corporation in its capacity as beneficiary, the provisions of sections 652(b) and 662(b) do not apply, and the funds distributed do not have the same character in the hands of the cemetery corporation as in the hands of the cemetery perpetual care fund trust.

Rev. Rul. 87-97, 1987-2 C.B. 155, 1987-39 I.R.B. 14