Lyeth v. Hoey
59 S. Ct. 155, 305 U.S. 188, 1938 U.S. LEXIS 1173 (1938)
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Rule of Law:
Property received by an heir from a decedent's estate in a compromise agreement settling a will contest is acquired by 'inheritance' for purposes of the federal Revenue Act and is therefore exempt from federal income tax. The characterization of such property for federal tax purposes is a matter of federal law, not state law.
Facts:
- Mary B. Longyear died in 1931, leaving a will that bequeathed the vast majority of her multi-million dollar estate to a trust for the Longyear Foundation, dedicated to preserving records related to Mary Baker Eddy.
- Her grandson, Lyeth (petitioner), and other heirs were left only small legacies in the will.
- Lyeth and the other heirs objected to the will being probated, asserting that Longyear lacked testamentary capacity and was subjected to undue influence.
- After the Massachusetts probate court agreed to frame issues for a jury trial regarding the will's validity, the parties entered into a compromise agreement.
- Under the court-approved agreement, the will's provision for the residuary estate was disregarded, and the net residue was divided equally between the heirs and the Endowment Trust.
- Pursuant to this compromise, Lyeth received a distributable share of the estate consisting of cash and corporate stock units.
Procedural Posture:
- The Commissioner of Internal Revenue determined that the property Lyeth received was taxable income and assessed an additional tax of $56,389.65.
- Lyeth paid the tax and filed a suit for a refund against the collector, Hoey, in the U.S. District Court.
- The District Court granted summary judgment in favor of the petitioner, Lyeth.
- The respondent, Hoey, appealed to the Circuit Court of Appeals, which reversed the District Court's judgment.
- The U.S. Supreme Court granted certiorari to resolve a conflict among the circuit courts.
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Issue:
Is property received by an heir from a decedent's estate in compromise of a claim to contest the will taxable as income under the federal Revenue Act?
Opinions:
Majority - Mr. Chief Justice Hughes
No. Property received by an heir from the decedent's estate through a compromise agreement settling a will contest is not taxable income; it is considered property acquired by inheritance. The determination of what constitutes an 'inheritance' for federal tax purposes is a federal question that must be applied uniformly nationwide, irrespective of differing state laws. Congress intended the exemption for property acquired by 'bequest, devise, or inheritance' to be comprehensive. Lyeth's standing to contest the will arose solely from his status as an heir, and the property he received through the compromise was in recognition of that status. The distinction between property acquired through a litigated judgment versus a compromise agreement is too formalistic to be sound, as both are derived from the heir's underlying claim against the estate. The compromise simply removed the will as an impediment to his inheritance.
Analysis:
This decision establishes a critical principle of federal tax law: the substance of a transaction, not its form or state-law characterization, determines its tax consequences. By creating a uniform federal rule, the Court prevented inconsistent tax outcomes for heirs in different states, ensuring that settlements of will contests are not tax-disadvantaged compared to litigating to a final judgment. This ruling provides certainty and reinforces the idea that federal taxing statutes should be interpreted to apply consistently across the nation, independent of the peculiarities of local property or probate law.
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