Brewster v. Gage

Background

A man inherited stocks from his father after the father died and the surrogate’s court entered a final decree distributing the estate. He sold some of those stocks in 1920–1922 and for tax returns used the stocks’ value on the date of the court’s distribution. The Internal Revenue Service said the correct value was the stock price at the date of the father’s death and assessed additional taxes; the taxpayer paid under protest and sued to recover the extra amounts. The district court sided with the taxpayer, but the Circuit Court of Appeals reversed, and the case reached this Court. The relevant tax laws were the Revenue Acts of 1918 and 1921, which define how to compute gain on property acquired by inheritance.

Reasoning

The key question was whether an heir “acquires” property at the decedent’s death or at the later court decree. The Court explained that while legal title to personal property may not be physically transferred immediately, an heir’s right to a distributive share vests at death. The Court relied on property rules and on Treasury regulations that had long treated the date of death as the acquisition date for inherited personal property. Looking at the Acts’ words and the consistent administrative interpretation, the Court concluded the proper tax basis is the fair market value at the decedent’s death.

Real world impact

The decision means heirs and legatees must use the decedent’s date-of-death value when calculating gains on inherited property sold soon after inheritance. Estate administrators and taxpayers should follow the death-date valuation for the tax years at issue; the opinion also notes later legislation explicitly changed valuation rules in a subsequent Act, showing Congress can alter the rule going forward.