McFeely v. Commissioner

Background

These cases involve people who inherited property after someone died and then sold that property. The heirs included residuary legatees, a widow’s donee who took against a will, and an intestate heir. Each sold inherited assets more than two years after the decedent’s death but less than two years after the estate actually distributed the property. The tax collector reclassified their profits as ordinary income, taxing at higher rates; the heirs reported the gains at the lower capital‑gains rate.

Reasoning

The central question was whether the two‑year holding period for the lower capital‑gains rate starts at the decedent’s death or at the later date when the estate distributes the property. The Court looked at the language of the Revenue Acts, past administrative rulings, and how similar phrases were used earlier. The Court concluded that property “held by the taxpayer” is owned from the date of acquisition, and when title derives from a decedent that acquisition date is the decedent’s death. The Court rejected the Commissioner’s argument that a later statutory rule about how to compute the taxable basis changes when the holding period begins.

Real world impact

Because the Court treated inherited property as held from the date of death, heirs who sell more than two years after that death can use the lower capital‑gains rate even if distribution occurred later. The decision relies on existing administrative practice and statutory language, and it resolves conflicts among lower courts about the correct start date.

Dissents or concurrances

Three Justices disagreed and would have ruled for the Government, relying on a different appellate court view that supports using distribution timing as controlling.