Bonner v. Commissioner

Background

Trustees and residuary heirs of a testamentary trust that became a private foundation asked courts to resolve a tax dispute after a Louisiana court in 1971 ordered the trust dissolved and its remaining assets distributed to the settlor’s heirs. The IRS treated those distributions as taxable under section 4945 of the Internal Revenue Code and imposed a 100% excise tax, even though the Service acknowledged the trust’s potential liability under section 507(c) was zero. The trustees contested the tax in Tax Court, which ruled the foundation status had ended and found for the trustees.

Reasoning

The core question was whether distributions made after the state court dissolved the trust could still count as taxable “expenditures” by a private foundation under section 4945, despite the absence of any section 507(c) liability. The Court of Appeals for the Fifth Circuit reversed the Tax Court, holding the transfer qualified as a section 4945 taxable expenditure. The Supreme Court declined to review that appeals-court ruling, leaving the Fifth Circuit’s decision in place and the tax assessment intact.

Real world impact

As a practical matter, the appeals-court view stands: heirs and trustees may face a severe excise tax on distributions that occurred after a state-ordered dissolution. The Supreme Court’s denial of review means the high court did not settle the broader legal question, so the issue remains decided for now by the lower court’s interpretation of the tax code.

Dissents or concurrances

Justice O’Connor, joined by Justices Blackmun and Powell, dissented from the denial and said she would have granted review because she questioned whether the Fifth Circuit’s harsh result matched the letter or intent of the tax provisions.