Early v. Commissioner - 445 F.2d 166 (5th Cir. 1971)

Rule:

Where there exists a substantial controversy in which a taxpayer claims as a donee, what is received in settlement is received for tax purposes as a donee.

Facts:

Appellee taxpayers, Allen and Jeannette Early, acquired interest in stock from decedent as a gift. Due to a will contest, appellees agreed to return the stock to the estate in exchange for a life estate in a portion of the income. Appellees sought to amortize the value of the life estate in subsequent tax returns, which appellant Commissioner of Internal Revenue disallowed. However, the tax court reversed and allowed the amortization, finding that 26 U.S.C.S. § 273 did not govern because the life estate was not a gift, but an exchange for consideration. Appellant Commissioner challenged the decision. 

Issue:

Was the life estate in question an exchange for consideration, thereby warranting the appellees to amortize the value of the same in their subsequent tax returns? 

Answer:

No.

Conclusion:

On review, the court disagreed and reversed the tax court's decision, holding that because the original stock exchange from decedent was a gift, the subsequent settlement for the life estate was a gift, as well. Since, under the rationale of Lyeth v. Hoey, taxpayers must be treated for income tax purposes as having acquired their joint life estate by gift, § 273 of the Code prohibited any deductions for amortization of the cost basis of the life estate.