Irwin v. Gavit

Background

The dispute involves a son-in-law who received regular quarterly payments under the will of Anthony N. Brady. The will, probated in August 1913, placed the residue in trust, split it into parts, and directed income for the testator’s granddaughter and quarterly payments to the son-in-law during his life. Because the granddaughter was a child, the son-in-law’s expected receipts were likely to run for about fifteen years. Lower courts held those payments were property acquired by bequest and not taxable as income.

Reasoning

The Court examined the 1913 Income Tax Act language that taxes "net income" and includes "the income from but not the value of property acquired by gift, bequest, devise or descent." The majority concluded the quarterly distributions paid from the trust were income in the hands of the trustees and therefore income to the recipient. The Court said it made no practical difference whether the will described the gift as of the corpus or of the income; a gift of income ordinarily creates an interest that produces income. Concluding the payments were income, the Court reversed the judgments that had exempted them.

Real world impact

The decision means people who receive periodic payments under trusts or wills like these must treat those receipts as taxable income under the 1913 Act. Trustees and payors may have duties to report or withhold tax on such payments. The ruling overturns the lower courts’ view that such distributions are untaxed bequests.

Dissents or concurrances

Justice Sutherland (joined by Justice Butler) dissented, arguing the statute’s plain text exempts the value of property acquired by bequest and that money paid under a will was the bequest itself, so it should not be taxed.