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Lyeth v. Hoey - 305 U.S. 188, 59 S. Ct. 155 (1938)

Rule:

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. Although under the Massachusetts statute relating to compromise, Mass. Gen. Laws. ch. 204, §§ 13-18 (1932), 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.

Facts:

During the probate of the will of Petitioner’s grandmother in Massachusetts, the heirs objected, citing lack of testamentary capacity and undue influence. A compromise agreement was entered into. Heirs formed a corporation, to which they assigned their interests in the estate in exchange for common stock. Petitioner received his share of the estate, and respondent taxed petitioner's share as income. The district court granted summary judgment in favor of the petitioner. On appeal, it was reversed. Petitioner appealed.

Issue:

Is the share of the estate taxable as income?

Answer:

No.

Conclusion:

The court reversed the decision of the intermediate appellate court, holding that the property petitioner inherited from his grandmother was exempt from taxation under the Revenue Act of 1932. The intermediate appellate court erred in applying the Massachusetts rule, which depended upon the law of the jurisdiction under which petitioner received the property. What an heir acquired by inheritance within the meaning of federal statute was a federal, not state, question.

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