501(c)(13) Cemetery Tax Exemption: Qualifications, Filings, and Audits

The 501(c)(13) cemetery tax exemption is a federal income tax exemption under Section 501(c)(13) of the Internal Revenue Code for nonprofit cemetery companies and crematoria. It applies to two kinds of organizations — mutual cemeteries owned by their lot owners, and other nonprofit corporations chartered solely to bury or cremate human remains — and it turns entirely on one condition: no part of the organization’s net earnings may benefit any private shareholder or individual.¹

Who Qualifies

The statute recognizes two categories.¹

A nonprofit mutual cemetery company must be owned by and operated exclusively for the benefit of its lot owners, and those owners must hold their lots for actual burial rather than for resale.² A mutual cemetery can bury indigent people without losing its status, and it can limit membership to a specific class — including a single family — and still count as “mutual” under the regulations.

An other nonprofit cemetery corporation or crematorium must be chartered solely to dispose of bodies by burial or cremation. Its charter cannot allow any business that is not “necessarily incident” to that purpose.¹

Both categories are subject to the same core prohibition on private inurement. No one may hold an interest in the organization’s net earnings. That reaches equity interests, bonds paying interest contingent on revenue, and convertible debt obligations issued after July 7, 1975.² The category was expanded to crematoria in 1970 by Public Law 91-618, effective for taxable years beginning after December 31, 1970.¹

What Activities Are Allowed

Selling monuments, vaults, flowers, and similar burial or cremation products is permitted, provided profits from those sales go to cemetery upkeep and maintenance.³ The test is whether the activity is necessarily incident to the burial or cremation purpose. Straying beyond that line does not just trigger tax on unrelated business income; it risks the exemption itself.

Running a mortuary or funeral home is not an exempt activity. An exempt cemetery cannot operate a mortuary directly. It may hold stock in a separately incorporated and independently managed mortuary as an investment, so long as there is no overlap between the boards of the two entities.⁴

Percentage-of-Sales Land Contracts

The single most common way cemeteries lose the exemption is through a land acquisition arrangement in which the seller, instead of receiving a fixed purchase price, gets a percentage of future lot sales. The IRS treats these as giving the seller an equity interest in the cemetery rather than a true debt, and the resulting payments as prohibited inurement.⁵

A legitimate debt arrangement generally has an unconditional promise to pay a fixed sum, a maturity date, a stated interest rate, and minimum annual payments. The absence of those features, combined with payments tied to lot sales and sellers who retain control of the cemetery, points to a disguised equity interest and disqualifies the cemetery.⁵

Preferred Stock

Organizations that issue preferred stock on or after November 28, 1978, are generally disqualified from 501(c)(13) exemption.² A transitional rule preserves the exemption for stock issued before that date, or issued after it under a written plan adopted beforehand, but only if the stock pays dividends at a fixed rate not exceeding the greater of 8 percent per year or the legal rate of interest in the state of incorporation. The articles must also require retirement of the preferred stock at par as funds become available, with remaining funds directed to cemetery care and improvement.⁴ Paying dividends on common stock is flatly prohibited as inurement.

Perpetual Care Funds

A perpetual care fund is a pool of money set aside to generate investment income that covers ongoing maintenance. Under Revenue Ruling 64-217, the fund takes on the tax character of the cemetery it serves. A fund tied to a nonprofit 501(c)(13) cemetery qualifies for the same exemption because it performs a service essential to the cemetery’s maintenance. A fund tied to a for-profit cemetery does not qualify, because its earnings are treated as inuring to the profit-making company or its shareholders.⁶

A separate provision at 26 CFR § 1.642(i)-1 allows perpetual care fund trusts created by taxable cemetery corporations under state law to deduct distributions used for gravesite care and maintenance, capped at $5 multiplied by the aggregate number of gravesites the corporation has sold.⁷

Whether Donations Are Deductible

A donor can deduct a contribution to a 501(c)(13) cemetery, but the rules are narrower than for other exempt organizations. Under Section 170(c)(5), the contribution must be voluntary and irrevocably dedicated to the care of the cemetery as a whole.⁴

Two payments do not qualify. A gift earmarked for the perpetual care of a particular lot or crypt is not deductible, because it benefits a specific owner rather than the cemetery generally. A payment made as part of the purchase price of a lot or crypt is also not deductible, even if it is dedicated to perpetual care of the cemetery as a whole.¹

A 501(c)(13) cemetery is not a 501(c)(3) charity. A cemetery organized around historic preservation or education, rather than active burial, can sometimes qualify under 501(c)(3) and receive donations deductible under the broader rules of Section 170(c), but that is a different exemption.

How to Apply

A cemetery or crematorium seeking recognition of 501(c)(13) status files IRS Form 1024, the Application for Recognition of Exemption Under Section 501(a). Form 1023 is reserved for 501(c)(3) applicants and is not the right form. Form 1024 must be submitted electronically through Pay.gov.⁸

The application requires several attachments specific to cemetery applicants:

Conformed copies of the articles of incorporation and bylaws, or the trust agreement for a trust.
Schedule H, which asks for complete copies of the sales contracts or debt certificates used to acquire the cemetery property, any contract designating an agent to sell lots, and an appraisal of the property from a disinterested party as of the acquisition date.
If the organization maintains a perpetual care fund, a copy of the fund agreement and an explanation of the fund’s nature.
The user fee, paid through Form 8718. Applications submitted without the fee may be returned.

Annual Filings to Keep the Exemption

A 501(c)(13) organization files an annual information return with the IRS. The form depends on financial size:⁹

Form 990-N (the e-Postcard) for organizations with gross receipts normally $50,000 or less.
Form 990-EZ for organizations with gross receipts under $200,000 and total assets under $500,000.
Form 990 for organizations with gross receipts of $200,000 or more, or total assets of $500,000 or more.

Missing the return for three consecutive years causes automatic revocation of tax-exempt status.¹

What Triggers an IRS Audit

The IRS publishes a Technical Guide (TG 13) that tells agents what to look for when auditing a cemetery company.⁴ The recurring red flags:

Land purchase contracts without a fixed total price, maturity date, or stated interest rate, suggesting the seller holds an equity interest.
The people who sold the land to the cemetery still controlling its operations.
Transactions with related funeral homes or land companies producing zero-interest loans or inflated payments.
Marketing materials offering goods or services unrelated to burial or cremation.
Preferred stock left outstanding when funds are available to retire it, or surplus accumulated while stock remains outstanding.
Claimed charitable deductions for payments that were really part of the purchase price of a lot or for the care of a specific grave.

Auditors review governing documents for unauthorized business purposes, examine land acquisition agreements for disguised profit-sharing, and trace cash flows to check that spending matches exempt cemetery purposes. Perpetual care funds receive close attention: the IRS looks at whether they are organized as separate entities with their own exempt status and whether their trust agreements prevent the assets from supporting for-profit operations.¹

1
IRS. Publication 5861, TG 13: Cemetery Companies
2
eCFR. 26 CFR § 1.501(c)(13)-1
3
MKSH. 501(c)(13) Cemeteries: A Primer
4
IRS. IRS Audit Technique Guide, Cemetery Companies
5
IRS. Rev. Rul. 77-70
6
IRS. Rev. Rul. 64-217
7
Cornell Law Institute. 26 CFR § 1.642(i)-1
8
IRS. About Form 1024
9
IRS. Instructions for Form 990