IRS Private Letter Rulings Surprise Industry
by Robert M. Fells, Esq., general counsel
The Internal Revenue Service (IRS) responded to requests from two different taxpayers with surprising private letter rulings (PLRs). One ruling discussed the circumstances under which a funeral home would not have to issue information returns for cash advances, and the second dealt with the conditions under which a church can sell caskets tax-free.
PLR No. 200106032 dealt with a company operating funeral homes called "X" (IRS does not identify the parties) that makes cash advances on its customers' behalf for "gratuities to clergy, special music, death notices, hairdressers or barbers, florists, transportation, long distance telephone charges, copies of certified documents and professional fees to other funeral directors." If cash advances are made, they are listed separately on the funeral home contract, which states that the mortuary does not profit from the cash advance and is reimbursed dollar-for-dollar.
Internal Revenue Code section 6041(a) provides that businesses making payment of income to others of $600 or more annually must issue an information return, i.e., Form 1099. Certain exceptions are made "for payment of bills for merchandise, telegrams, telephone, freight, storage and similar charges." However, in October 2000, the IRS initiated a Notice of Proposed Rulemaking to develop so-called "middleman" regulations whereby a business that makes payments on behalf of others must issue an information return if it: 1) "Performs management or oversight functions (i.e., performs more than mere administrative or ministerial functions) in connection with payment; or 2) has a significant economic interest in the payment."
According to the PLR, "X," the funeral home company in question, "performs no oversight function. By its very nature, the majority of services rendered for a funeral must be completed before or at the time of the funeral service and burial. X neither directs nor inspects the quality of the work provided. X does not select the providers, negotiate the price for services, order or direct provision of the third party services. ... The standard funeral contract reflects that X has no significant economic interest in these payments."
The PLR concluded that section 6041-3(d) excludes telephone, freight and similar charges from the reporting requirements. "As to cash advances for clergy, special music, death notices, hairdressers or barbers, florists, copies of certified documents and professional fees to other funeral directors, X performs no management or oversight function and has no significant economic interest. ... Accordingly, X is not required to issue information returns to service providers for those payments made on behalf of a family" pursuant to the funeral home's contract with the family.
It should be noted that an IRS private letter ruling applies only to the taxpayer requesting it and may not be cited as precedent by others. However, PLRs are useful because they indicate IRS thinking on a particular issue.
Church Selling Caskets
The second PLR, No. 200033049, involves a tax-exempt monastery, "X," part of "Z" church (again, the IRS does not identify the parties), that proposes to sell caskets to its practicing members and their relatives, to alumni of religious schools it operates, and to the general public. The wooden caskets, which will be manufactured according to monastic specifications, will not be sold through funeral homes and funeral directors. The caskets will have a base price of $1,750 and are expected to sell at approximately 20 percent lower than the national average cost for caskets.
The IRS letter ruling states that the sale of caskets to be used in burial ceremonies of the church, or "at burial services at which one of the church's ordained clergy or those under vows will preside or participate will be substantially related to ... religious and charitable purposes under section 501(c)(3) of the Code ... and, thus, income generated by the sale of such caskets will not be subject to tax under section 511."
However, the IRS ruling specified that the "sale of caskets that will not be used in ceremonies or services of the church as described above, will not be substantially related to ... religious and charitable purposes ... and, thus, income generated by the sale of such caskets will be subject to tax under section 511." Again, the PLR is directed only to the party requesting it and may not be cited as precedent.
Members who would like copies of either or both PLRs should contact the ICFA offices, 1-800-645-7700, ext. 211.