## Facts

- Mary B. Longyear died domiciled in Massachusetts, leaving four children and two grandsons as heirs, including J. M. Richardson Lyeth.
- Longyear’s will left small legacies to heirs and directed the residuary estate (over $3,000,000) to trustees of an Endowment Trust benefiting a foundation.
- Lyeth and other heirs contested the will in probate on grounds including lack of testamentary capacity and undue influence, and jury issues were framed.
- The parties (including heirs, legatees, devisees, executors, and the Massachusetts Attorney General) entered a compromise settling the will contest.
- The compromise provided that the will would be admitted to probate, the residuary bequest to the Endowment Trust would be disregarded, and the net residue would be divided equally between the Endowment Trust and the heirs, with additional cash payments.
- The probate court approved the compromise and ordered administration and distribution in accordance with the will as modified by the compromise.
- Lyeth received a small cash amount and corporate shares valued at approximately $141,484 under the compromise.
- The federal tax authorities treated the distribution as taxable income; Lyeth paid the assessed tax and sued for a refund.

## Issues

1. Whether property received by an heir from a decedent’s estate pursuant to a compromise settling a will contest is “property acquired by … inheritance” excluded from gross income under § 22(b)(3) of the Revenue Act of 1932.
2. Whether the meaning of “inheritance” for federal income tax purposes is controlled by state law or is a federal question requiring a uniform national definition.

## Decision

- The Supreme Court reversed the court of appeals and reinstated judgment for the taxpayer.
- The Court held that property received by an heir under a settlement compromising a bona fide will contest is property acquired by “inheritance” within § 22(b)(3) and is therefore excluded from gross income.
- The Court treated the classification of the receipt as a federal question not determined by state law labels.
- The Court reasoned that the distribution to the heir came because of heirship; the compromise functioned to remove, to that extent, the will’s impediment to the heir’s succession rights.

## Legal Principles

- Federal revenue statutes supply their own meaning for tax terms unless Congress expressly or by necessary implication makes operation depend on state law.
- For § 22(b)(3), “inheritance” includes property received by an heir in settlement of a will contest when the claim asserted and recognized is based on the claimant’s status as an heir.
- A compromise distribution to an heir is treated substantively as a recognition of inheritance rights, even if the heir receives less than the amount claimed and even though the will is admitted to probate as part of the settlement.
- The tax treatment turns on the origin of the taxpayer’s right (heirship) rather than the form of the transaction (contractual settlement versus adjudicated invalidity of the will).

## Conclusion

The Court held that an heir’s receipt of estate property under a court-approved compromise settling a will contest is an “inheritance” excluded from federal gross income, and that this classification is governed by a uniform federal meaning rather than state law characterizations.


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