Lyeth v. Hoey

• Decision Date: 11 April 1938
• Docket Number: No. 211.,211.
• Parties: LYETH v. HOEY, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

96 F.2d 141 (1938)

LYETH v. HOEY, Collector of Internal Revenue.^*

No. 211.

Circuit Court of Appeals, Second Circuit.

April 11, 1938.

Lamar Hardy, U. S. Atty., of New York City (George B. Schoonmanker, of New York City, of counsel), for appellant.

Carter, Ledyard & Milburn, of New York City (J. M. Richardson Lyeth and Allin H. Pierce, both of New York City, of counsel), for appellee.

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

The plaintiff is a grandson of Mary Beecher Longyear, late of Brookline, Mass., who died on March 14, 1931. She disposed of all her property by a will which was duly presented for probate. Its allowance was, however, contested by her heirs who in accordance with the applicable law of Massachusetts moved in the probate court that jury issues be framed in order that the validity of the will might be determined by trial by jury. The motion was granted.

Under the provisions of the will, the heirs would have received only a comparatively small portion of the estate of Mrs. Longyear. The major part of her property, making up her residuary estate, had been left to trustees under a charitable trust she had created. But before the will contest was tried all the parties in interest entered into a settlement agreement providing for the allowance of the will and the distribution of the estate in accordance with the will and the agreement of settlement. This settlement of the will contest was approved by the probate court in a decree which allowed the will; provided for the issuance of letters testamentary to the executors named therein; and directed them "to administer the estate of said deceased in accordance with the terms of said will and said agreement of compromise."

The executors performed their duties as directed and as a result of the compromise thus carried out, the appellee received on July 26, 1933, property, determined by the Commissioner to be worth $141,484.03, which he did not include in his gross income for that year and which he would not have received under the terms of the will had that been allowed as presented for probate originally. The value of the property so received was disputed but that is of no moment on this appeal, nor will it be helpful to recite the various steps taken to carry out the compromise and turn the property over to the appellee. Because of its receipt, he was assessed, and he paid on October 16, 1936, additional income taxes for 1933 which with interest amounted to $65,005.68. A claim for refund was duly filed and disallowed in full. Thereafter this suit was timely brought to recover the taxes and interest thus paid. On motion of the plaintiff a summary judgment for him for the amount paid with interest was entered and from that this appeal was taken.

The taxes which the plaintiff is seeking to recover were assessed and paid on what was treated as income under the provisions of section 22 of the Revenue Act of 1932, 47 Stat. 169, 178, 26 U.S.C.A. § 22 and note, which in subdivision (a), 26 U.S.C.A. § 22(a) and note, defines "gross income" as including "gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever." The basis of the plaintiff's present action is that what was taxed as income was not income within the meaning of the statute and of the sixteenth amendment. The defendant, and the defendant actually though not in form is the United States, denied that what was taxed was anything but income and as an affirmative defense alleged that in the alternative the plaintiff was liable as a distributee for estate taxes unpaid which should be set off against his present demand.

In deciding whether or not what the plaintiff received as a result of the compromise of the contest of his grandmother's will should have been included in his gross income for that year, it must not be forgotten that the statutory definition of gross income includes gains and profits growing out of an interest in property and gains and profits derived from any source whatever. The statute couples the word "income" with gains and profits but we put nothing upon that for obviously gross income does include income and the solution of the present problem is not advanced by merely saying so. But to the extent that what was received was a gain growing out of an interest in property or was a gain derived from any source whatever it did fall within the broad definition of the statute and became a part of the plaintiff's gross income for the year received.

As a grandson of the decedent, the plaintiff occupied a status under the laws of Massachusetts which entitled him to inherit a part of her estate provided she died intestate but if she died testate his right to inherit as an heir at law would be extinguished by her will when allowed and he would take, if anything, in accordance with its provisions. This status was his for whatever it might be worth but such rights as it gave to him were but the expectations of an heir at law incapable of being given any cost basis for they in fact cost him nothing. When his grandmother died leaving an instrument which she had executed as her will which purported to dispose of her entire estate, his right to inherit as an heir-at-law was not absolutely extinguished but that was made contingent upon the probate of her will. He then had, for the time being, merely the right to contest that probate. A successful contest would do away with the will and leave him in the same position as though his grandmother had left none. His right to contest the probate of the will enabled him to participate in the compromise agreement whereby the contest was abandoned in return for the amount agreed upon. This was not the amount he would have received had there been no will and was something he did receive in spite of the will. It was the realization by him of the value of his bargaining position without running the risk of the outcome of the will contest. As what he relinquished in return for what he got had no cost basis, what he did receive, increased whatever he had to the full extent of its value. It grew out of his claim to an interest in the property comprising his grandmother's estate and was a "gain * * * from whatever source derived." This increase of the property of this plaintiff distinguishes his situation from that of the taxpayer who received the stock dividend in Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570, and got but new evidence of a capital interest he had before. Nor was it received in satisfaction of any duty to support the plaintiff as was the alimony in Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211. Nor can it be treated in any sense as a reimbursement for capital expenditures as in Edwards v. Cuba Railroad Co., 268 U.S. 628, 45 S.Ct. 614, 69 L.Ed. 1124. The translation by this taxpayer of his right to contest the will into property capable of being...