Lyeth v. Hoey

• Citation: 59 S.Ct. 155,83 L.Ed. 119,305 U.S. 188,119 A.L.R. 410
• Decision Date: 05 December 1938
• Docket Number: No. 48,48
• Parties: LYETH v. HOEY, Collector of Internal Revenue
• Court: U.S. Supreme Court

305 U.S. 188

59 S.Ct. 155

83 L.Ed. 119

LYETH

v HOEY, Collector of Internal Revenue.

No. 48.

Argued Nov. 16, 1938.

Decided Dec. 5, 1938.

Mr. J. M. Richardson Lyeth, of New York City, for petitioner.

Messrs. Homer S. Cummings, Atty. Gen., and James W. Morris, Asst. Atty. Gen., for respondent.

Mr. Chief Justice HUGHES delivered the opinion of the Court.

The question presented is whether property received by petitioner from the estate of a decedent in compromise of his claim as an heir is taxable as income under the Revenue Act of 1932, 47 Stat. 173.

Petitioner is a grandson of Mary B. Longyear who died in 1931, a resident of Massachusetts, leaving as her heirs four surviving children and the petitioner and his brother, who were sons of a deceased daughter. By her will, the decedent gave to her heirs certain small legacies and the entire residuary estate, amounting to more that $3,000,000, was bequeathed to trustees of a so-called Endowment Trust, created April 5, 1926, the income from which was payable to another set of trustees under another trust described as the Longyear Foundation. The main purpose of the latter trust was to preserve 'the records of the earthly life of Mary Baker Eddy,' the founder of the Christian Science religion.

When the will was offered for probate in Massachusetts there was objection by the heirs upon the grounds, among others, of lack of testamentary capacity and undue influence. After hearing, at which a statement was made by the respective parties of their proposed evidence, the probate court granted a motion for the framing of issues for trial before a jury. In that situation a compromise agreement was entered into between the heirs, the legatees, the devisees and the executors under the will and the Attorney General of Massachusetts. This agreement provided that the will should be admitted to probate and letters testamentary issued; that the specific and pecuniary bequests to individuals should be enforced; that the bequest of the residuary estate to the Endowment Trust should be disregarded; that $200,000 should be paid to the heirs and a like amount to the Endowment Trust, and that the net residue of the estate, as defined, should be equally divided between the trustees of the Endowment Trust and the heirs. The net residue to which the heirs were thus entitled was to be payable in units of stock owned by the decedent in certain corporations, Longyear Estate, Inc., Longyear Corporation and Longyear Realty Corporation, and for that purpose a unit was to consist of three shares, one share of each corporation.

The compromise was approved by the probate court pursuant to a statute of Massachusetts (Mass.Gen.Laws (Ter.Ed.) 1932, Chap. 204, Secs. 15—17) and a decree was entered on April 26, 1932, admitting the will to probate, issuing letters testamentary to the executors and directing them 'to administer the estate of said deceased in accordance with the terms of said will and said agreement of compromise'. Owing to the depression and the necessity of discharging pecuniary legacies amounting to about $300,000, which were entitled to priority in payment before distribution of the residue, the heirs undertook to finance one-half of these legacies and the residuary legatees the other one-half. For this purpose the heirs formed a corporation known as Longyear Heirs, Inc., to which they assigned their interests in the estate in exchange for common stock. Preferred stock was issued to the pecuniary legatees.

In July, 1933, the executors distributed to Longyear Heirs, Inc., as assignee of the petitioner, his distributable share of the estate consisting of $80.17 in cash and a certificate of deposit for 358 units, each unit representing one share of each of the three corporations mentioned in the compromise agreement. The Commissioner of Internal Revenue valued this distributable share at $141,484.03 and treated the whole amount as income for the year 1933 in which it was received. An additional tax of $56,389.65 was assessed which petitioner paid in October, 1936, with interest. Claim for refund was then filed and on its rejection this suit was brought against the collector.

On motion of petitioner the District Court entered a summary judgment in his favor (20 F.Supp. 619) which the Circuit Court of Appeals reversed. 2 Cir., 96 F.2d 141. Because of a conflict with the decision of the Circuit Court of Appeals of the Fourth Circuit in Magruder v. Segebade, 94 F.2d 177, certiorari was granted, May 31, 1938, 304 U.S. 557, 58 S.Ct. 1060, 82 L.Ed. 1525.

The Court of Appeals overruled the contentions of petitioner that the property he received was within the statutory exemption (Section 22(b)(3) of the Revenue Act of 1932, 26 U.S.C.A. § 22(b)(3), and, further, that the property was not income either under the statute or under the Sixteenth Amendment of the Federal Constitution. As the view of the Court of Appeals upon these questions determined the rights of the parties, it was found unnecessary to discuss certain affirmative defenses set up by the answer of the respondent and these defenses are not pressed in this court.

First.—By section 22(b)(3) of the Revenue Act of 1932, 26 U.S.C.A. § 22(b) (3), there is exempted from the income tax—

'The value of property acquired by gift, bequest, devise, or inheritance * * *'.

Whether property received by an heir from the estate of his ancestor is acquired by inheritance, when it is distributed under an agreement settling a contest by the heir of the validity of the decedent's will, is a question upon which state courts have differed. The question has arisen in the application of state laws of taxation. In Massachusetts, the rule is that when a will is admitted to probate under a compromise agreement, the state succession tax is applied to the property 'that passes by the terms of the will as written and not as changed by any agreement for compromise'. Baxter v. Treasurer & Receiver General, 209 Mass. 459, 463, 95 N.E. 854, 856. Although under the Massachusetts statute relating to compromise¹ it is the practice to insert a clause in the court's decree that the estate is to be administered in accordance with the agreement, 'yet the rights of the parties so far as they rest upon the agreement are contractual and not testamentary'. Ellis v. Hunt, 228 Mass. 39, 43, 116 N.E. 956. See, also, Brandeis v. Atkins, 204 Mass. 471, 474, 90 N.E. 861, 26 L.R.A.,N.S., 230; Copeland v. Wheelwright, 230 Mass. 131, 136, 119 N.E. 667. Thus, when a contest was withdrawn under a compromise and the residuary estate was divided equally between the legatee and the heirs, it was held that the tax was properly levied upon the entire residuary legacy and that the administrators with the will annexed had no right to pay out of the share transferred to the heirs one-half of the tax thus collectible from the legatee unless the compromise agreement expressly or impliedly so provided. Brown v. McLoughlin, 287 Mass. 15, 17, 190 N.E. 795. Several States have a similar rule.² In other States the amount received by an heir under an agreement compromising a contest of his ancestor's will is considered to be received by virtue of his heirship and is subject to an inheritance tax unless the statute exempts him.³

In the instant case, the Court of Appeals applied the Massachusetts rule, holding that whether the property was received by way of inheritance depended 'upon the law of the jurisdiction under which this taxpayer received it' (page 143). We think that this ruling was erroneous. The question as to the construction of the exemption in the federal statute is not determined by local law. We are not concerned with the peculiarities and special incidences of state taxes or with the policies they reflect. Undoubtedly the state law determines what persons are qualified to inherit property within the jurisdiction. Mager v. Grima, 8 How. 490, 493, 12 L.Ed. 1168; Maxwell v. Bugbee, 250 U.S. 525, 536, 537, 40 S.Ct. 2, 5, 63 L.Ed. 1124. The local law determines the right to make a testamentary disposition of such property and the conditions essential to the validity of wills, and the state courts settle their construction. Uterhart v. United States, 240 U.S. 598, 603, 36 S.Ct. 417, 418, 60 L.Ed. 819. The State establishes the procedure governing the probate of wills and the processes of administration. Petitioner's status as heir was thus determined by the law of Massachusetts. That law also regulated the procedure by which his rights as an heir could be vindicated. The state law authorized its courts to supervise the making of agreements compromising contests by heirs of the validity of an alleged will of their ancestor, in order that such compromises shall be just and reasonable with respect to all persons in interest.⁴ But when the contestant is an heir and a valid compromise agreement has been made and there is a distribution to the heir from the decedent's estate accordingly, the question whether what the heir has thus received has been 'acquired by inheritance' within the meaning of the federal statute necessarily is a federal question. It is not determined by local characterization.

In dealing with the meaning and application of an act of Congress enacted in the exercise of its plenary power under the Constitution to tax income and to grant exemptions from that tax, it is the will of Congress which controls, and the expression of its will, in the absence of language evidencing a different purpose, should be interpreted 'so as to give a uniform application to a nation-wide scheme of taxation'. Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199. Congress establishes its own criteria and the state law may control only when the federal taxing act by express language or necessary implication makes its operation dependent upon state law. Burnet v. Harmel, supra. See Burk-Waggoner Oil Association v. Hopkins, 269 U.S. 110, 111, 114, 46 S.Ct. 48, 49, 70 L.Ed. 183; ...