Hartley v. Commissioner

Background

An executor filed income tax returns for 1924 and 1925 after administering a decedent’s estate and disputed how to compute gains from sales of estate property. The Board of Tax Appeals ruled one way, the Court of Appeals for the Eighth Circuit affirmed, and the case reached the Court to resolve conflicting lower-court decisions about the proper basis date under the Revenue Acts of 1921, 1924, and 1926.

Reasoning

The Court addressed whether an estate’s acquisition date for tax purposes is the date the decedent originally acquired the property or the date the estate acquires it at the decedent’s death. The opinion explains that the revenue laws treat an estate as a separate taxpayer and that provisions covering inherited property use the value at the time of acquisition. The Court found that “cost” cannot govern when the estate did not buy the property. It relied on treasury regulations (Article 343) that used the death-date value, noted a temporary regulatory amendment and its revocation, and observed Congress carried the death-date rule into the 1928 Revenue Act. The Court therefore concluded the proper basis is the property’s fair market value at the decedent’s death and affirmed the lower courts.

Real world impact

Executors must use the decedent’s death-time value when reporting gains, not the decedent’s purchase cost. This approach avoids counting the same appreciation twice for estate and income tax purposes and settles conflicting lower-court rules about how estates compute taxable gains.