4.76.21  Cemetery Companies - IRC 501(c)(13)  (08-09-2006)

  1. This IRM section contains specific examination guidelines for an organization recognized as exempt from Federal income tax under IRC 501(c)(13). It provides examination techniques effective in identifying and developing issues commonly encountered during the examination of an IRC 501(c)(13) organization.

  2. These guidelines provide specific assistance for the examination of an IRC 501(c)(13) organization and are not all-inclusive. The purpose is to supplement the guidelines contained in IRM 4.75.2 through 4.75.6. The intent is not to restrict the examiner in identifying issues or using examination techniques not included herein.

  3. This IRM does not contain detailed technical information regarding IRC 501(c)(13) organizations. The examiner should review the technical information contained in IRM 7.25.13, Cemetery Companies.  (08-09-2006)
Background Information

  1. IRC 501(c)(13) provides for the exemption from Federal income tax of cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation chartered solely for the purpose of the disposal of bodies by burial or cremation which is not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual.  (08-09-2006)
Organizational Requirements

  1. There are two types of exempt cemetery companies:

    1. Nonprofit mutual cemetery companies must be owned and operated exclusively for the benefit of their members (owners), although they may also engage in charitable activities, such as the burial of indigents.

    2. Other nonprofit cemetery companies and crematoria must be chartered solely for the purposes of burial or cremation. They cannot be permitted by their charters to engage in any business not necessarily incident to that purpose.  (08-09-2006)
Examination Guidelines - Organizational Requirements

  1. Read the organizing document and by-laws to determine if:

    1. The organization is permitted to engage in activities not in furtherance of IRC 501(c)(13) purposes, such as the operation of a mortuary;

    2. The organization has dedicated its earnings to the operation, maintenance, and improvement of the cemetery property;

    3. The organization is authorized to issue preferred stock after November 28, 1978. In general, preferred stock cannot be issued after this date. See Treas. Regs. §1.501(c)(13)-1(c)(2) and (3) for transitional rules; and

    4. In the case of a nonprofit mutual cemetery company, the organization is owned and operated exclusively for the benefit of its members (lot owners).  (08-09-2006)
Operational Requirements

  1. Nonprofit mutual cemetery companies must operate exclusively for the benefit of members. Charitable activities, such as providing burial for indigents, are considered to be within the scope of such activities.

  2. Other nonprofit cemetery companies and crematoria must be operated solely for the purpose of the disposal of bodies by burial or cremation They are not permitted to engage in any business not necessarily incident to that purpose. No part of the net earnings may inure to the benefit of any private shareholder or individual.  (08-09-2006)
Examination Guidelines - Operational Requirements

  1. (1) Read the minutes to determine:

    1. The existence of special funds, trusts, or other related entities mentioned (e.g., perpetual care funds);

    2. Whether authorized acts conform to those specified in the governing instruments and are consistent with IRC 501(c)(13); and

    3. Whether the organization's purchase of cemetery land, especially in relation to method of purchase, price, and terms, is consistent with IRC 501(c)(13) activities.

  2. Review pamphlets and brochures to determine what the organization is offering for sale. Look for items and services not incidental to its burial purposes.

  3. Review stock certificates and organizational documents to determine:

    1. Whether issuance of stock is authorized and the details relative to payment of dividends. The requirement of nonprofit operation (and the proscription against inurement) would be violated if the organization pays dividends on common stock;

    2. Whether any preferred stock is being retired at par as soon as sufficient funds are realized from sales; and

    3. Whether the dividend rate paid on preferred stock exceeds the greater of the legal rate of interest in the state of incorporation or 8 percent on the value of the consideration for which the stock was issued.

  4. Examine the cash receipts journal and related supporting documents to determine whether the income is related to activities incidental to burial.

  5. Review disbursements to determine if they were related to exempt purposes and made for the following:

    1. Operation, maintenance, and improvement of the cemetery;

    2. Payment for cemetery property;

    3. Dividends on preferred stock (issued prior to November 28, 1978) and/or retirement of issued preferred stock; and

    4. Purchase of income-producing assets, the income from which is to be used to defray care and improvement costs.

  6. Inspect land or property purchase agreements and cost records, appraisals, and related correspondence, etc., for indications of private benefit.  (08-09-2006)
Operation of a Mortuary

  1. An exempt cemetery company cannot directly operate a mortuary business. The cemetery can hold stock in a mortuary for investment purposes, provided that the mortuary is separately incorporated and run as an independent business with no overlap between the cemetery's and the mortuary's Boards of Directors.

  2. Review the cash receipts and disbursements journals to:

    1. Identify any reversion of income attributable to amounts paid for mortuary services, such as interest income from special accounts in which the sales of pre-need mortuary services are held. These amounts are properly the income of the taxable mortuary.

    2. Ensure that the organization properly allocates any joint expenses (e.g., advertising) between the mortuary and the cemetery company.  (08-09-2006)
Perpetual Care Organizations

  1. Perpetual care organizations may come within the meaning of the term "cemetery company." These organizations are usually created by cemetery companies to receive and hold funds for the perpetual care and maintenance of the cemeteries.

  2. When examining related perpetual care organizations, determine whether the fund or organization is a separate entity. If a separate entity, determine if it is exempt under IRC 501(c)(13), and inspect Form 990 to determine if an examination is warranted.

  3. If the perpetual care fund is not a separate entity:

    1. Review the trust agreement or enabling instrument to determine the provisions and conditions to be followed; and

    2. Review the activities of the perpetual fund to determine whether these provisions and conditions have been properly carried out in accordance with the provisions of IRC 501(c)(13).

  4. Examine any payments of a perpetual care fund to determine:

    1. Whether any net earnings of the perpetual care fund are used for private benefit, such as the maintenance of a for-profit cemetery.  (08-09-2006)
Land Sales

  1. A substantial part of the receipts of a cemetery company may be used to amortize indebtedness incurred in the purchase of land for burial purposes.

  2. Review the purchase contracts and subsequent payments to determine whether:

    1. The payments constitute only a liquidation of the purchase price indebtedness, or whether they contain an element of profit distribution; and

    2. The sales contract contains a fixed purchase price, or instead provides the seller with a percentage of the selling price of all cemetery lots.

  3. Distributions based in whole or in part on revenues or income of the organization, including distributions based upon the sales price of burial lots, confer upon the recipients a prohibited equity interest in the organization. Treas. Regs. §1.501(c)(13)-1(d)  (08-09-2006)

  1. IRC 170(c)(5) provides for the deduction of contributions to cemetery companies described in IRC 501(c)(13). To be deductible, the contributions must be voluntary and must be made to or for the use of the nonprofit cemetery. The contributions must be irrevocably dedicated to the care of the cemetery as a whole.

  2. Review correspondence files, brochures, pamphlets, etc., to determine if:

    1. Contributions received were for the perpetual care of a particular lot or crypt, rather than for the cemetery as a whole; and

    2. Payments made to the cemetery company as part of the purchase price of a burial lot or crypt contain funds for the perpetual care of the cemetery. Amounts that are actually part of the purchase price are not deductible as a contribution under IRC 170(c)(5).

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