United States v. De Bonchamps

This case was a consolidation of three similar cases essentially presenting the same issue. In each case, a life estate was created by will allowing children or a spouse rights to use or consume estate corpus for their needs, maintenance, and comfort, with other remainder holders taking on the life tenant’s death. In each case, estate asserts were sold, resulting in gains. The life tenants, including Dale De Bonchamps (plaintiff), each paid income tax as owner and filed a claims for refund. In each case, the government (defendant) counterclaimed for taxes due by the life tenant as fiduciary of a trust. The trial court in each case granted summary judgment to the life tenant, and the government appealed. First, the government argued that the life tenants should be taxed as owners of the capital gains, as their control over estate corpus was essentially equivalent to ownership. The life tenants disagreed, arguing that the limitations of needs, maintenance, and comfort were real and that there were limits on their power to obtain the corpus in question. In the alternative, the government argued that the assets instead were held in trust and that the life tenants should be taxed as trustees for capital gains realized by the various estates. Prior caselaw had held that property subject to a life estate did not reach the definition of trust as used in the Internal Revenue Code. The government argued that the case gave undue weight to technical concepts and that functionally, such an arrangement was a trust. The life tenants disagreed, arguing that the imposition of tax should be read narrowly.