1. Background

As everyone in the industry is well aware, the federal income tax treatment of installment sales of burial rights had long been settled since the mid-Nineties. According to two private letter rulings that were issued to two of ICCFA’s members, taxpayers using the accrual method of accounting were required to account for pre-need installment sales of burial rights in one of two ways, depending on the terms of the sales contract.

If under the terms of the pre-need sales contract and applicable state law, the customer is liable for the unpaid balance of the sales price of the burial right if the customer cancels or breaches the contract, then the IRS has ruled that a contract with those contractual terms must be treated by the seller as a completed sale of the burial right at the time the contract is entered into. Thus, the seller would recognize the entire gain on the sale of the burial right when the installment contract is first entered into. TAM 9533002. In contrast, if under the terms of the pre-need sales contract and applicable state law, if a customer cancels or breaches the contract, the seller may not enforce the contract against the customer and seek any portion of the unpaid balance of the sales price, then the seller may treat the installment sale as executory. TAM 199935060. Accordingly, the seller would treat any proceeds initially received from the customer as a recovery of the seller’s adjusted basis in the burial right, followed by the inclusion of any excess proceeds in gross income. Mothe Funeral Homes Inc. v. U.S., 75 AFTR2d 95-2103 (D.C. LA 1995).

This long-standing tax treatment was called into question in 2017, when the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA contained a provision (IRC section 451(b)) that if a taxpayer using the accrual method of accounting reported income in its applicable financial statements from the sale of property earlier than would be reported for tax purposes under the all-events test, the taxpayer would be required to accelerate the recognition of revenue for tax purposes to match the reporting of such revenue for financial reporting purposes. Such a provision would be problematic for the deathcare industry because deathcare companies typically report the entire gain from the pre-need sale of burial rights in the year in which the contract is entered into.

These concerns were allayed when the ICCFA persuaded the Treasury and IRS to include language in the preamble to the final regulations under section 451(b) indicating that pre-need sales of burial rights were not subject to new section 451(b), thus leaving the tax treatment of installment sales of burial rights unchanged. In fact, the preamble to the final regulations also discusses the two alternative methods of accounting for pre-need sales of burial rights mentioned above, leaving the deathcare industry with the distinct impression that the tax treatment of burial rights was unchanged.

2. New Development

Notwithstanding the foregoing positive developments, one of ICCFA’s members recently applied for approval to follow the foregoing tax treatment in a situation where its pre-need sales contracts could not be enforced against a customer that cancelled a contract before paying the entire sales price. However, the IRS National Office rejected that application and held that the taxpayer must recognize the entire gain from the sale of burial rights in the taxable year in which the contract was entered into, notwithstanding that the sales contract was not enforceable against the customer. When directed to the language in the preamble of the final regulations, the IRS National Office’s response was that it changed its mind, including disavowing in its long-standing ruling position since the Nineties.

ICCFA elevated the dispute with the head of the Income Tax & Accounting Division at IRS National Office, noting that the individual company’s issue was a matter that affected the entire deathcare industry. Unfortunately, ICCFA was recently informed that the IRS National Office would stand by its recent reversal of positions and the Treasury Department would not intervene and overrule the IRS.

ICCFA is strongly in disagreement with the IRS’s position. It is difficult to imagine that a court would sustain the IRS’s actions and enforce completed sale treatment on an executory installment contract where the customer is not bound to complete the contract by paying the unpaid balance of the sales price of the burial right and the customer is not entitled to the burial rights under the contract without paying the balance due under the contract. Such a contract surely seems executory and not a completed sale of burial rights.

3. Alternative Actions Items

Accordingly, members of ICCFA are now faced with a choice as to what action to take. Obviously, ICCFA is not in a position to provide tax advice to individual members and they are encouraged to seek counsel with their tax advisers.

In considering what action a member should take, it should be noted that if a member is already following the executory contract/installment sales approach, the member could simply continue to follow that treatment and wait to see if the IRS challenges that treatment on audit.

If an ICCFA member is not already following the installment sale approach and is instead recognizing the entire gain on the sales contract at the time the contract is entered into, the member must file a Form 3115, request for change in method of accounting, if the member wants to change to the executory sales treatment approach. In ICCFA’s view, the IRS National Office will likely reject such a request. In that event, the member could either abandon the change in treatment or with disclosure in its tax return the member could implement the change in treatment notwithstanding the IRS’s rejection. The member would then have to battle it out with the IRS. Perhaps one of ICCFA’s larger members will take that action and present a test case for the industry. If a member chooses to battle with the IRS on this subject, it would be helpful if the member keeps ICCFA informed of such developments so that ICCFA may offer advice and counsel.

The alternative would be for a member to continue to follow the IRS’s preferred method of accounting and await industry developments. In that case, ICCFA will endeavor to keep members informed of any developments it becomes aware of in this area.

One note of caution for smaller members. None of the discussions between ICCFA and the IRS National Office has thus far involved the tax treatment of small cemeteries that are entitled to use the cash method of accounting. A strong case can be made that the current controversy does not affect taxpayers using the cash method. Accordingly, such taxpayers may choose to sit tight and continue to use their current accounting method of accounting for pre-need sales of burial rights.

Les Schneider

Tax Counsel to ICCFA