## Facts

- Allen M. Early and Jeannette B. Early claimed they had received 50,000 shares of stock as a gift from Rose Van Wert.
- After Rose Van Wert’s death, ownership of the stock and the will were contested; the Earlys’ claim to the shares was disputed.
- The dispute was resolved by settlement: the Earlys surrendered the stock claim and received a joint life interest in income from a trust funded with estate assets.
- The Earlys reported trust income and claimed annual amortization deductions based on the actuarial value of their joint life interest.
- The Commissioner disallowed the deductions for 1964 and 1965 under I.R.C. § 273, asserting the life interest was acquired by gift, bequest, or inheritance.
- The Tax Court ruled for the Earlys, treating the settlement as a purchase/exchange for consideration and allowing the deductions; the Commissioner appealed.

## Issues

1. Whether a joint life interest in trust income received under a settlement of a disputed claim to allegedly gifted stock is an interest “acquired by gift, bequest, or inheritance” within I.R.C. § 273.
2. Whether the settlement should be treated for federal income tax purposes as a purchase of a life interest (permitting amortization) or as a compromise of inheritance-related rights (barring amortization under § 273).

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court characterized the settlement as a compromise of the taxpayers’ disputed claim derived from an alleged gift by the decedent, not a purchase of a life estate.
- Because the taxpayers asserted rights as donees, the life interest received in settlement was treated as acquired in that same gratuitous capacity.
- I.R.C. § 273 applied and barred amortization deductions for the life interest; the Commissioner’s deficiency determinations were sustained.

## Legal Principles

- I.R.C. § 273 disallows deductions “in respect of” life interests (and similar term interests) acquired by gift, bequest, devise, or inheritance.
- Property (or substitute property) received through compromise of disputed rights originating in a decedent’s donative or testamentary transfer is generally treated as acquired by inheritance or in the same gratuitous character as the underlying claim.
- Tax characterization turns on substance of the settlement and the origin of the taxpayer’s asserted rights, rather than transactional labels used to describe the compromise.

## Conclusion

The court held that a life income interest obtained by settling a disputed claim to allegedly gifted stock was acquired in a gratuitous capacity for tax purposes, triggering I.R.C. § 273 and precluding amortization of the life interest’s actuarial value.


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