Petition for Review of Decision of the Tax Court of the United States.
Before EVANS, SPARKS, and KERNER, Circuit Judges.
The facts: The parties stipulated that petitioner's father died in 1917, leaving an estate of approximately two million dollars. She, her mother, and two brothers survived. Had the father died interstate, her share would have been approximately $400,000. He left a will, however, wherein he created several trusts, spendthrift in nature.
The trust to petitioner was smaller than those which were made for her brothers.
Dissatisfied with the provision she thus received under the will, petitioner threatened to contest the will. Her threat was withdrawn, however, when she and her borthers executed a contract on May 1, 1917, which might be called a settlement or adjustment agreement, wherein they redivided the estate which was left them. By this settlement she surrendered her right to contest the will. In consideration of this agreement by her, the brothers agreed to pay her, from the income of the trusts created for their enjoyment, an amount "sufficient to bring her income from her father's estate to an amount equal to three-fourths of the amount of net income from the said estate thereafter remaining to each of said brothers."
She was to be paid, and every year thereafter from 1917 to 1939, was paid, a sum in addition to that which she received under the will.
This additional sum, or annuity, was to come from the income of the trusts created by the will and not from the corpus.
In 1939, another agreement was made between petitioner and her brothers. For $20,000 cash in hand, she released them from further payments under the abovementioned settlement agreement. The present contest is over this $20,000 payment to her in 1939. Was it taxable income? Respondent asserts, and petitioner denies, its income tax character. The U.S. Tax Court held it was taxable income.
It is worthy of note that (1) the annual paymentks which petitioner received from 1917 to 1939 were properly subject to income tax as income. Petitioner paid the income tax assessed thereon each year. (2) The annuity payments from 1917 to 1939 were at least one step removed from the inheritance controversy. (3) The settlement agreement herein differed from the agreement in Lyeth v. Hoey, 305 U.S. 188, 59 S. Ct. 155, 83 L. Ed. 119, 119 A.L.R. 410, a case relied on by petitioner, in that it lacked(a) incorporation or recognition in the probate decree settling the estate, (b) the annuity payments were not out of the corpus of the estate, as was the situation in the Hoey case, (c) the agreement for annuity payments was the personal obligation of the brothers to pay petitioner an amount equal to three-fourths the share each received. (4) The trust agreements here under consideration were spendthrift in nature.
Non-taxability on theory the $20,000 was exempt because an "inheritance." Petitioner contends this $20,000 payment was in lieu of her right to contest her father's will. It was so directly related to and descended from her right as an heir, so she argues, as to be non-taxable as income.
The decision in Lyeth v. Hoey, supra, relied on by petitioner, is, of all cases cited, the nearest to being in point. There, the taxpayer's threat to contest a will reached such a stage of proof as to receive the serious attention of the probate court, and a settlement was effected in that court, and incorporated in that court's decree, whereby a portion of the corpus of the estate was paid to the contrestant. The Supreme Court held such payment was in actuality an inheritance because paid in addition to the amount provided in the will, and was received by virtue of the court's decree, as though the will had been set aside and intestacy prevailed. In short, a par tof the actual corpus of the estate descended to the heir.
While we think the case is distinguishable in two respects, to-wit, (a) the settlement was not incorporated in the final decree in the probate court and thereby given judicial affirmation that it was inheritance and (b) the annual payments made pursuant to the settlement were from income and not from the corpus, we find it impossible to escape the conclusion that the $20,000 indirectly came to petitioner as a part of her inheritance.
She was an heir and as such was entitled to a share of her father's estate, provided he did not leave a will which gave her less. Whether the document presented for probate as her father's will was his voluntary and uninfluenced last will and testament, was a question of fact. As his heir she had a legal standing which permitted her to ...