*3 C., respondent. D. by Mey Petitioner was formed Messrs. SIMPSON, Before COLEMAN and Bone, er, To Braverman and McCord.2 Judges, DAWKINS, Circuit District provide necessary cemetery, land for the Judge. acquired McCord two tracts of real estate conveyed petitioner.3 which he later DAWKINS, JR., BEN C. District exchange Judge: property, In McCord received 400 “certificates of indebted petition Presented here for review by petitioner en- upholding issued which of a ness” decision of the Tax Court Timely deficiency against follows: 1. were made assessments Total Assessment Tax Calendar Year Ended 31, $29,083.78 $29,083.78 December 14,825.53 14,825.53 December 6,937.37 6,937.37 December Deficiency $50,846.68

Total actually passing organ- we one of used in the In note that business. McCord paid $40,000 particular petitioner, Meyer, Jr., izers of Fred tract. actively engaged in the commercial 4. The term “certificates of indebtedness” cemetery business all over the United by petitioner was used to describe the years States seventen and is well securities issued to McCord and others. cemetery found, petitioner known in the trade. The Tax Court agreed, these securities did not evi- Only acquired by equity one of the tracts Mc- dence indebtedness but were inter- Cord and transferred ests the business. actually costs. to match revenues with od in the interest McCord to titled 40% disagreed, and refused Commissioner pursuant to The business proceeds from the until the antic- exclusions to allow these Some certificates. terms expenditures in- ipated issued were Meyer, certificates additional position was affirmed curred. This Bone and associates to relatives (That Court. Court’s decisions Tax petitioner received but Braverman Having officially reported.) any are any kind from no consideration us, merits before move to the facts wé persons. presented for decision. the issues purposes, income tax For certifi- due amounts treated I. However, of the land. cates as the cost Land the trans- Basis ruled that exchange pur- non-taxable was a action mentioned," previously As *4 (5) 112(b) Inter- of the to suant Section trans found that the land Commissioner Therefore Code of nal Revenue 112(b) by governed Section was action property used basis the the Code, (5)6 Revenue Internal of 1939 the transferor’s was the in business the petitioner’s decided and therefore $40,000. (McCord’s) This valu- or cost Although $40,000. land was basis the by was affirmed ation the Commissioner finding on this no there was by the Tax Court. ap Tax opinion, the Court issue in its parently Commissioner’s affirmed the activities, peti- part its business As of on remand reverse valuation. We grave grave spaces mark- tioner sold following reasons. question for the this whereby “pre-need” cus- on basis ers spaces purchase would tomers and/or 112 contends that Section Petitioner plan. “pay on now—use later” markers (b) inapplicable (5) of is the Code grave space contract was As sales each question in the to the transfer because executed, petitioner would exclude 15% by was of stock McCord amount received income, price from its of the sales “substantially proportion his not in to being portion of the treated as a this property prior in the ex- interest the to goods figure of cost of sold. The 15% change” by required This statute. the designated in contracts for was the transferring position is taken because in cemetery development. As future in use property the McCord 400 certifi- received grave executed, each marker contract was representing cates of indebtedness 40% petitioner would deduct manufactur- the issued, prior of the certificates whereas price type on er’s list for that of marker exchange of to the owner he was 100% year in its income tax return for the argues property. Thus again goods question, part as a of costs of proportion” provi- that the “substantial words, petitioner In sold. other was 112(b) (5) met. sion of § making exclusions from these incurring agree. We prior expenditure actual of It this is well settled that in order for designated funds.5 applied, section of Code to be petitioner’s It this was contention that proportion requirement the substantial accounting meth- method was the best In must be met. one held instance it was problems in 5. Some of encountered corpora- for stock or securities in such recently this area have been discussed. tion, immediately exchange after Aland, Prepaid Income and Estimated See person persons such or are in control of Expenses: Legislative Future Is a So- corporation; but in the case of an (1968). Needed? exchange by persons lution A.B.A.J. two or more only paragraph apply shall if the amount 112(b) (5) pro- § Int.Rev.Code by of the stock and securities received part: in vides substantially proportion each is in recognized gain if “No or loss shall be property prior corporation his interest property is transferred to a exchange solely exchange.” persons or more one tending prove of the the value was fered that a variation as little as 3%% express question. no disproportionate.7 We held certificates Other cases have similarly opinion can es- require such a value be and do further tablished, to that is entitled elaboration.8 but change opportunity view “clearly Because it erroneous” adopted by position appeal, Com- on original posi- sustain the Commissioner’s completely dependent missioner, which is concerning applicability tion § determination, namely, upon a factual (b) (5), we the Tax reverse Court do not an certificates have point, for further remand evi- independently We ascertainable value. taken, dence to be indi- as hereinafter to af- remand this issue therefore cated. hearing the factual ford appeal In this the Commissioner has which it is entitled. entirely tack, contending taken an new petitioner’s basis the land II. $40,000 regardless applicability Excludability Receipts 112(b) (5). of § Thus argues Gross Income that where securities of the is- suing corporation readily essence, have no point petitioner, ascer- On this independent tainable fair market value contends certain amounts received issued, when assigned grave issued stock spaces from sales markers equivalent a value *5 gross to the fair market are excludable from income be- of acquired value the assets receipts represent the ex- cause such a return change.9 Applying that well capital established of and not sub- investment are principle case, to this ject posi- the support Commissioner to income tax. To urges, now appeal, the first tion, petitioner time on cited of a wealth that the securities or holding certificates issued constitutional landmarks that the by petitioner readily had no levy government constitutionally may ascertainable independent value, pur- and therefore the receipts an on income tax but must price paid chase by McCord, of the land only gross its tax so as limit to affect $40,000, assigned be one, must to the certifi- that no income.11 We are certain agree cates. We do princi- including disagrees that Commissioner, this the ple necessarily applicable is to this principle case. with of this well established Nevertheless, the more difficult law. fully We are aware that a de confronting initial task here an us is by cision may the Tax Court be affirmed receipts of determination these on theory a different of law from that represent capital return income or a of relied in the However, lower court. by petitioner. as contended theory where such a has no basis in the up record It asserts that in the contracts made below, the is grave spaces, entitled hearing to the a it covenanted to to establish addi might price tional facts dedicate of of which the sales each affect res the 15% plot cemetery development. ult.10 exhaustively After reviewing the future Moreover, case, points record in out this that we conclude that there is presently receipts no basis were so allocated in its the record bookkeeping which the It theory entries. had ex- Commissioner’s also new may supported. engineering prior be haustive No studies made evidence was of- (1938) ; Dana, 7. Bodell v. Edwin of L. 36 B.T.A. 231 Internal Rev enue, (1937). (1st 1946). 154 F.2d 407 Cir. Respondent, pp. 9. Brief for the 17-18 and 8. See Mather & Co. v. Commissioner of cited the authorities therein. Revenue, (3d Internal F .2d 864 Cir. Gowran, Helvering 238, 10. v. 302 U.S. 1949) ; Co., Carbon United 32 B.T.A. 154, (1937). S.Ct. L.Ed. 224 (4th Cir. reversed 90 F.2d 1937) Petitioner, ; Cyrus pp. Eaton, 11. Brief the 15-16. 37 B.T.A. interpretation application Proper estimated construction which included exception as- cemetery. fund has been developing The the trust the costs tutely by of the our brothers articulated is of these estimated costs correctness Gardens, unchallenged. Circuit Mount Vernon Sixth C.I.R., supra, follows: Inc. v. as that be is the fact Also to considered * * * point opinions [prior] “As expendi- properly documented estimated out, case feature each the decisive ordinary es- real tures are excludable par- provisions is terms and day developments every and courts tate questions The trust involved. ticular consistently principles applied these have by, and inurement control cemetery Prior deci- to the business. prime of, taxpayer, are benefit issue, recognize important we sion of importance.” (298 F.2d following principles. basic added.) Emphasis consistently had held It been adopted position A similar improve properly costs of estimated by Ceme this Court in Metairie earlier cap to subdivided real estate is a ments supra, States, tery Association expenditure ital to the basis allocable we held: where to be various unsold lots recovered may cemetery “A exclude association by developer upon ultimate sale his deposits paid it from income been of the lots.12 also has held It owners, show it can burial lot if principle applicable is to a tract deposits in trust and are received developed cemetery purposes land principal there- sale of therein13 How burial lots (282 cannot inure to its benefit.” ever, exception, without it has added.) 225, 229, Emphasis long-standing rule that where a fund by attributing percentage established Regardless of a of establishment price cemetery lots, the sales principles fund, trust the same formal fund de devoted to be future case, second applicable in the to a are velopment improvement, amounts general rule, exception *6 where to the going gross into the fund will constitute development protected segregated and cemetery developer.14 income to the There From specifically required. au fund is recognized exceptions are two validity above, cited thorities definitely first, rule: is a where there upon petitioner’s turns issue claim this development established trust for funds, from ad received whether such fund;15 segregated second, and where a markers, grave spaces and sales of vance required, specific agree fund is under a actually gross income, from excluded purchasers, ment with the ac lot which managed that in manner were such tually developer binds to make petition use not inure thereof could improvements.16 specific petitioner not did er’s benefit. Because Development (6th 1962); v. Grace Willow Terrace Co. F.2d 12. 298 712 Cir. 1965) R., (5th ; Park, I. 345 Cir. C. F.2d 933 lawn Memorial Inc. v. United 1958) Co., ; Laguna (3d States, R. C. I. Land & Water Cir. v. 260 F.2d 328 1941); R., (9th F.2d 112 145 118 Cir. Butler- v. C. I. National Memorial Park Corp. R., (4th 1944) ; Realty I. American Fornari v. C. 37 F.2d 1008 Cir. (1938) ; Develop Cemetery States, 933 F.2d B. T.A. Cambria Co. v. 28 R., (D.C.Kan.1928). ment Co. v. C. I. 34 B.T.A. 1155 918 Realty Corp. (1936); I. Birdneck v. C. Gardens, Inc. and See Mount Vernon 15. (1932). R., 25 B.T.A. 1084 Park, supra. Cedar Gardens, R., Inc. v. 13. Mount Vernon C. I. Park, Burial Inc. v. Unit Monte Vista (6th 1962) ; I. R. F.2d 712 Cir. C. 298 1965) (6th ; States, ed 340 F.2d 595 Cir. Cemetery Ass’n, Park 183 F.2d v. Cedar Cemetery States, Ass’n v. United Metairie 1950). (7th Cir. 1960) ; (5th I. C. R. F.2d Cir. Gardens, Cemetery Ass’n, Memorial Inc. v. v. Park Sherwood Cedar ; (7th 1965) 1950). R., (7th Cir. I. 350 F.2d 225 Cir. C. R., Gardens, Inc. v. Mount Vernon C. I. development petitioner right establish a trust future had unfettered agree- here, prove specific a upon must it use these funds as it desired receipt. gross with burial lot owners to ment existed The funds excluded development specifi- by petitioner a fund establish in tax returns cally required. actually gross From the authorities were it. Conse- income to above, validity petitioner’s quently, deficiency cited the Commissioner’s claim on this issue turns assessment will be affirmed. funds, such received from advance We are convinced that this case grave spaces markers, ex- squarely governed by the recent deci income, cluded from were sion in Sherwood Memorial Gardens

managed in such manner the use supra, C.I.R. which identical involved petitioner’s thereof could not inure legal at issues and least one of the same benefit. Because did es- parties. Sherwood, develop In a future development a tablish trust future provision ment almost a twin to the agree- here, prove it must that a in clause this case contained in was each ment existed with burial lot owners to Regarding burial lot sales contract. such development Moreover, a establish fund. provision, a the court Sherwood held: petitioner must show this fund obligated by “Petitioner was First purchas- the benefit the burial lot Agreement only desig deposit petitioner’s ers and not for unrestricted separate nated sums a bank account use. deposited and to use the funds thus Here, clearly the evidence shows that purpose development for no other than very complete, had detailed en- cemetery. provi At best gineering studies conducted which ac- merely sion created a contractual obli curately reflected the estimated costs of gation, a trust. But even if the developing cemetery question. In agreement where, form, trust addition it has been established that sales here, petitioner had discretion wide by taxpayer plot contracts executed with fund, use of the with no definite ob purchasers development contained ligation any particular to make im reading: clause provements necessary with no relationship between “(3) amount expend DEVELOPMENT: To costs, development the fund and the general improvements develop- and the fund was not for care of indi ment, including building of Gar- lots, petitioner primary vidual was the dens, equal a sum to not less than beneficiary fund and could it per (15%) fifteen cent of the above *7 properly of exclude that amount purchase price, provided sum, such gross (350 fund from the its income.” together pre- with a like all amount of 230.) plot Company, vious sales made the already expended here, taxpayer shall not have been As the in Sherwood urged purposes subsequent obligation for such to De- that to use these (See 15-0). cember 1952.” Exhibit funds was definite and flowed from the engineering study cemetery. made of the Contrariwise, there no that is evidence any The court found no indication that these funds were for exclu- received the purchasers of the knew or were informed sive benefit of burial or the lot owners plans, put and no evidence was development that there fund of was forth that was not free to alter any Indeed, kind the established. most plans at will. We must reach the petitioner’s that can be in favor said same conclusion. regarding bookkeeping is that a mere entry noted, any to was the effect that certain made As there little if is distinc- development amounts were to be used tion between Sherwood we and the case cemetery. of No dedicated and un- now have before us. It is obvious that development right invadable fund was estab- had the to unrestricted inescapably find lished. Thus must use all pur- we funds received from burial lot only permitted, obligation the funds must not make to be no and had chasers other of someone any specific for the benefit improvements be held at actually taxpayer, must also grave but than the mark- reference to the time. With of neither necessary end. Here ers, final be used that purchase until no was and, met, requirements purchase price payment ten- these was argument accordingly, petitioner’s that cir- or occurred. These dered a death upon unconstitutionally peti- taxed compel it has been hold that us to cumstances gross upon gross receipts, in- instead tioner was not entitled exclude come, merit. is without amounts from income. foregoing reasons For persis petitioner’s Because of cited, the basis the authorities urging taxed tence in that it has been part re- Tax Court is decision of the necessary unconstitutionally, it becomes remanded, part is af- and in versed and briefly argument. dispose Tax of this firmed. urges analogy already payer dis that development cussed relative real estate FOR MOTION ORDER DENYING applicable. say is it to Suffice REHEARING cases, the real estate for where exclusions development estimated have been costs PER CURIAM: allowed, clearly it was established rehearing petition The specific improvements re either were cause entitled and numbered above quired by law or made. denied; hereby member and no improvements items These included such regular Judge panel no streets, systems drives, disposal as sewer having re- service on the Court active gas and extension of and electric service polled quested re- the Court be that, if lines. We should note exclusions 25(a), subpar. hearing banc, Rule en by taxpay were taken for these items rehearing (b), petition en banc ers, expenditures had thereafter denied. made, not been un .the doubtedly would have asserted a defi ciency against taxpayers those

done here.

Recently, in De Willow Terrace velopment C.I.R., supra, Co. v. this court allowed a cost to allocate the sewerage system of a water and LOCKETT, Appellant, C. Kenneth newly developed cost of in a sub homes However, division. we noted that

test to be made was set forth in Estate America, UNITED STATES C.I.R., (1958): Appellee. Collins v. T.C. 238 “ ‘ * * * No. 21276. concluded that We have sewerage petitioners constructed Appeals States Court system only purpose the basic Ninth Circuit. inducing purpose but the sole *8 Jan. making possible lots the sale of * * *, they not retain full Rehearing 5,1968. did Denied March sewerage ownership and control of the they

system, parted ma- with rights property therein for terial ” (345 lots.’ benefit of the subdivision 933, 938, 939.) forth in set

As indicated the test

Collins, all authorities and indeed

noted, costs of estimated an exclusion