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Washington Report 022004
Robert M. Fells
US Tax Court: Preneed Funds Not Taxable Until Contract Is Performed
by Robert M. Fells, Esq., general counsel
Recently, the U.S. Tax Court published its decision in Perry Funeral Home Inc. v. Commissioner of Internal Revenue, T.C. Memo.2003-340. The court held, based on the facts involved, that preneed funds are not taxable as income until the contract is performed.
The IRS argued that the funds are taxable when received by the funeral home because, under a previous U.S. Supreme Court ruling, where the seller has "dominion and control" over the funds, the proceeds are taxable when received. The accrual basis funeral home recognized the preneed funds it received from purchasers only when the contracts were performed.
An important fact that influenced the Tax Court's decision involved the requirement under state law that all preneed funeral contracts are cancellable by the purchaser at any time prior to performance, and the purchaser must receive a full refund. The funeral home did not deposit the funds into a trust but placed them into investment plans instead.
The court ruled that the lack of a trust did not alter its conclusion that the purchaser, and not the seller, had "dominion and control" over the funds because it was the purchaser who ultimately determined whether the funeral home would keep the funds.
Therefore, the court rejected the IRS arguments and held that the funds received by the funeral home are taxable only when the funeral home has performed its obligations under the contract and was entitled to keep the funds.
It is important to note that Tax Court decisions apply only to the taxpayer involved and cannot be cited as precedent for other parties. In addition, the IRS may appeal this decision. Tax Court decisions are useful for highlighting the thinking of the court and for use in other cases with similar fact patterns.
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