United States v. De Bonchamps

• Citation: 278 F.2d 127
• Decision Date: 08 April 1960
• Docket Number: No. 16098-16100.,16098-16100.
• Parties: UNITED STATES of America, Appellant, v. Dale King DE BONCHAMPS, Appellee. UNITED STATES of America, Appellant, v. Winston S. COWGILL and Geraldine King Cowgill, Appellees. UNITED STATES of America, Appellant, v. Ada N. KING, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

278 F.2d 127 (1960)

UNITED STATES of America, Appellant, v. Dale King DE BONCHAMPS, Appellee.

UNITED STATES of America, Appellant, v. Winston S. COWGILL and Geraldine King Cowgill, Appellees.

UNITED STATES of America, Appellant, v. Ada N. KING, Appellee.

Nos. 16098-16100.

United States Court of Appeals Ninth Circuit.

April 8, 1960.

Charles K. Rice, Asst. Atty. Gen., Helen A. Buckley, James P. Turner, I. Henry Kutz, Lee A. Jackson, Attorneys, Department of Justice, Washington, D. C., Lynn J. Gillard, U. S. Atty., San Francisco, Cal., for appellant.

Henry V. Colby, Joseph B. McKeon, San Francisco, Cal., for appellee.

Before CHAMBERS, STEPHENS, POPE, BARNES, HAMLEY, HAMLIN, JERTBERG, MERRILL and KOELSCH, Circuit Judges.

MERRILL, Circuit Judge.

These three cases, consolidated for our decision, present the question whether legal life tenants are taxable either as owners or as fiduciaries on capital gains realized in sales of portions of the corpus. In all three cases, gains were realized by sales of estates assets. Taxes were paid thereon by the life tenants as owners; claims for refund were made and these actions were brought to recover such refunds. In each action the United States has counterclaimed for the amount of tax payable by the taxpayer as fiduciary of a trust.¹ In each case summary judgment by the trial court was rendered in favor of the taxpayer. Appeals have been taken by the United States.

The life estates were created by will under California law and grant broad powers to the life tenants to use and consume the corpus for their needs, maintenance and comfort.

In the De Bonchamps and Cowgill cases, the taxpayers are daughters of the testator. The will granted one-half of the estate to each daughter for her use during her life. Upon her death, the remainder was to go to her children then living and the issue of any deceased child per stripes. It provided:

"Each of my said daughters may consume, use, invest and reinvest her share and the income therefrom for her needs, maintenance and comfort during her life without any restriction and her children and the issue of any predeceased child shall take only what remains of her share on her death."

In the King case, the taxpayer is the wife of the testator. The will granted to her the entire estate for her use during her life, the remainder upon her death to go to the daughters of the decedent and the issue of any deceased child per stripes. It provided:

"My said wife in her discretion may convert any of said property into cash and she shall have and enjoy the rents, issues, income and profits during her life and she also shall be free to invade and use the corpus for her own needs, maintenance and comfort as well as for those of my daughters and their issue or any of them. I declare that it is my wish and intention to have my wife enjoy the free use of said corpus and income during her natural life and that my daughters or their issue, as heretofore provided, shall have and take what is left thereof at the time of her death."

The first contention of the United States is that under these broad powers the life tenants are to be treated and taxed as the beneficial owners of the capital gains.²

Under California law, the estates so created are regarded as life estates with powers of consumption annexed. The power to consume does not enlarge the estate into a fee. Adams v. Prather, 1917, 176 Cal. 33, 167 P. 534; Luscomb v. Fintzelberg, 1912, 162 Cal. 433, 123 P. 247; In re Estate of Smythe, 1955, 132 Cal.App.2d 343, 282 P.2d 141. Capital gains accrue to the principal and, subject to the life tenant's powers of use and consumption, belong to the remainderman. California Civil Code, § 730.05(2).

The United States refers to language in Corliss v. Bowers, 1930, 281 U.S. 376, 377, 50 S.Ct. 336, 74 L.Ed. 916, and Burnet v. Wells, 1933, 289 U.S. 670, 677-678, 53 S.Ct. 761, 77 L.Ed. 1439. In the former the Supreme Court stated:

"But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid."

In Burnet v. Wells, the court stated 289 U.S. 677, 53 S.Ct. 763:

"In these and other cases there has been a progressive endeavor by the Congress and the courts to bring about a correspondence between the legal concept of ownership and the economic realities of enjoyment or fruition. * * *

"* * * Liability does not have to rest upon the enjoyment by the taxpayer of all the privileges and benefits enjoyed by the most favored owner at a given time or place. * * Government in casting about for proper subjects of taxation is not confined by the traditional classifications of interests or estates. It may tax, not only ownership, but any right or privilege that is a constituent of ownership. * * * Liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis."

The United States contends that the right of these taxpayers to create and consume statutory items of income renders it reasonable and just to deal with them as owners of such income items. It asserts that the power possessed by the life tenants here is similar to the power to dispose and the right to receive which were held sufficient for attribution of income in Helvering v. Horst, 1940, 311 U.S. 112, 61 S.Ct. 144, 85 L. Ed. 75, and North American Oil Consolidated v. Burnet, 1932, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197.

Of the cases relied upon by the United States, those appearing to us as most pertinent are cases dealing with tax problems arising in the Clifford area³ and, more specifically, under the Mallinckrodt case.⁴ The rules of these cases formed the basis for Treasury Regulations 118: §§ 22(a)-21, 22 (1945, amended 1947) and for the 1954 amendment of the Revenue Code, Subpart E of Part I of Subchapter J, dealing with estates, trusts, beneficiaries and decedents. By Section 671, the attributes of exclusiveness attach to these code provisions. They deal for the most part with situations in which the grantor, notwithstanding his having parted with ownership, is nevertheless treated as the owner for tax purposes. Section 678 deals with the situation which confronts us here. It provides in pertinent part:

"(a) General rule. — A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which:

"(1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself * * *."

While Subpart E deals with trust situations, nevertheless we feel that Section 678 should be recognized as applicable to the instant cases. Here it is contended that, notwithstanding lack of ownership, a taxpayer is to be treated as owner by virtue of his beneficial interest in the capital gain. Congress, in Section 678, has spoken positively upon this subject. This Court, in 1949, recognized the Clifford regulations to have a persuasive effect in a non-trust case. Hawaiian Trust Company v. Kanne, 9 Cir., 1949, 172 F.2d 74.

The question then is whether the powers of these taxpayers may be said to constitute a power to vest the corpus in themselves.

We have concluded that, upon the record before us, the powers of these life tenants are not the equivalent of a power to vest in themselves the corpus of the estate or the capital gains in question. A life tenant under these testamentary provisions may not in any manner control the disposition of the corpus save by consuming it for the enumerated purposes. She may not give it away nor make testamentary disposition of it. She has no power of appointment. She may not change the beneficiaries nor reapportion their shares.

Nor has any one of these life tenants the unlimited power to take the corpus of the estate to herself. Her power to consume is expressly limited to her needs, maintenance and comfort. Nor may it be said that the boundaries of such power as so expressed are so vague as to constitute no real limitation upon the power to consume. Smither v. United States, D.C.S.D.Tex.1952, 108 F.Supp. 772, adopted by reference, United States v. Smither, 5 Cir., 1953, 205 F.2d 518.⁵

The power of the life tenant which is granted here is essentially the power to determine for herself her own personal mode of living. Such control as she may have over the disposition of the corpus is necessary to such purpose. Any beneficial interest she may have in the corpus is limited to the extent to which it is required to effectuate such purpose. It is not a situation where failure of the life tenant to take to herself a portion of the corpus may be regarded as a gift of such portion to the remainderman.⁶ There is no right to take which she has forborne to exercise.

Nor has it been contended that a remainder in any of these cases is in truth fictitious and that the expressed limitation upon its consumption is therefore falsely apparent rather than real. There is nothing in the record to indicate in any case that, by exercise of these limited powers, a full consumption of the corpus was reasonably to be expected. Nor is there any suggestion that these limitations have not been respected by these life tenants.

Upon the face of the record then, the bestowal of the powers of use and consumption would appear to be pursuant to legitimate and good faith estate planning: to the normal desire of a husband or father that, to the fullest measure within his control, his wife or daughter may realize the needs and comforts of life. Upon the face of the record, this arrangement does not suggest a device the choice of which has been directed by motives of tax avoidance. The choice between a grant in fee or a life estate with powers of consumption, from all that appears in this record, was based upon the desire of the testator to retain control over the disposition of the remainder...