Lyeth v. Hoey, 305 U.S. 188 (1938)

U.S. Supreme Court LYETH v. HOEY, 305 U.S. 188 (1938)

[Page 305 U.S. 188, 192]

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 Thus, when a contest was withdrawn under a compromise and the residuary estate was divided equally between the legatee and the heirs, it was held that the tax was properly levied upon the entire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. [Footnote 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. [Footnote 3]

[Page 305 U.S. 188, 193]

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; Maxwell v. Bugbee, 250 U.S. 525, 536, 537 S., 40 S.Ct. 2, 5. 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. 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. [Footnote 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.

[Page 305 U.S. 188, 195]

stituted the word 'inheritance' in the 1926 act and the subsequent revenue acts as 'more appropriately including both real and personal property.' [Footnote 7] Thus the acquisition by succession to a decedent's estate whether real or personal was embraced in the exemption. Further, by the 'estate tax', Congress has imposed a tax upon the transfer of the entire net estate of every person dying after September 8, 1916,8 allowing such exemptions as it sees fit in arriving at the net estate. Congress has not indicated any intention to tax again the value of the property which legatees, devisees or heirs receive from the decedent's estate.

[Page 305 U.S. 188, 197]

the amount of his claim did not alter its nature or the quality of its recognition through the distribution which he did receive.

We are not convinced by the argument that petitioner had but 'the expectations' of an heir and realized on a 'bargaining position'. He was heir in fact. Whether he would receive any property in that capacity depended upon the validity of his ancestor's will and the extent to which it would dispose of his ancestor's estate. When, by compromise and the decree enforcing it, that disposition was limited, what he got from the estate came to him because he was heir, the compromise serving to remove pro tanto the impediment to his inheritance. We are of the opinion that the exemption applies.

In this view we find it unnecessary to consider the other questions that have been discussed at the bar.

The judgment of the Circuit Court of Appeals is reversed and that of the District Court is affirmed. It is so ordered.

Judgment of Circuit Court of Appeals reversed and judgment of District Court affirmed. Footnotes

Footnote 1 Massachusetts General Laws (Ter.Ed.) 1932, Chap. 204, Secs. 13-18.

Footnote 2 See Matter of Cook's Estate, 187 N.Y. 253, 79 N.E. 991; English v. Crenshaw, 120 Tenn. 531, 110 S.W. 210, 17 L.R.A.,N.S., 753, 127 Am.St.Rep. 1025; Estate of Wells, 142 Iowa 255, 120 N.W. 713; Estate of Graves, 242 Ill. 212, 89 N.E. 978; Estate of Rossi, 169 Cal. 148, 146 P. 430; Cochran's Executor v. Commonwealth, 241 Ky. 656, 44 S.W.2d 603, 78 A.L.R. 710; MacKenzie v. Wright, 31 Ariz. 272, 252 P. 521; In re O'Neill's Estate, 111 N.J.Eq. 378, 162 A. 425; Lynchburg Trust & Savings Bank v. Commonwealth, 162 Va. 73, 173 S.E. 548.

Footnote 3 See Pepper's Estate, 159 Pa. 508, 28 A. 353; Taber's Estate, 257 Pa. 81, 101 A. 311; Taylor v. State of Georgia, 40 Ga.App. 295, 149 S.E. 321; People v. Rice, 40 Colo. 508, 91 P. 33; State v. Probate Court, 143 Minn. 77, 172 N.W. 902; Estate of Thorson, 150 Minn. 464, 185 N.W. 508. Compare Barber v. Westcott, 21 R.I. 355, 43 A. 844.

Footnote 4 See Note 1. Such agreements are 'entirely valid outside of the statute'. Ellis v. Hunt, 228 Mass. 39, 44, 116 N.E. 956.

Footnote 5 See Notes 2 and 3.

Footnote 6 See Act of October 3, 1913, Chap. 16, Section 2, 38 Stat. 167; Revenue Acts of 1918, 1921 and 1924, Section 213(b)(3), 40 Stat. 1065, 42 Stat. 237, 238, and 43 Stat. 267, 268.

Footnote 7 Revenue Act of 1926, Section 213(b)(3), 44 Stat. 23, 24; Acts of 1928 and 1932, Section 22(b)(3), 26 U.S.C.A. 22(b)(3). Sen. Rep. No. 52, 69th Cong., 1st Sess., p. 20.

Footnote 8 Act of September 8, 1916, Chap. 463, Title 2, 39 Stat. 777.