In the Lyeth v. Hoey case of 1938, the Supreme Court ruled that money received by a beneficiary as part of an inheritance dispute settlement should be considered taxable income under federal law. The plaintiff, John J. Lyeth, had contested his father's will and reached a settlement with other potential heirs in which he received more than what was originally designated to him in the will. However, when filing taxes for that year, he did not include this additional amount as income because it came from an inheritance - traditionally non-taxable under U.S tax laws at the time. The Internal Revenue Service (IRS) disagreed with this interpretation and taxed him on it anyway; thus leading to litigation. The court held that since Mr.Lyeth would not have gotten any portion of his father's estate without entering into a compromise agreement with other beneficiaries who were also claiming rights to inheritances from their deceased relative’s estate; therefore such amounts are subject to taxation just like any other form of income one might earn during a given fiscal year.

In the dissenting opinion for Lyeth v. Hoey, it was argued that the majority's decision to exclude inheritance from gross income for tax purposes contradicted previous rulings and interpretations of the Sixteenth Amendment. The dissenting justices believed that an inherited sum should be considered as part of a taxpayer’s total income, regardless of its source or form. They contended that this interpretation is consistent with both common understanding and legal precedent regarding what constitutes 'income'. Furthermore, they expressed concern about potential loopholes in taxation law if certain types of income were exempted based on their origin rather than their nature as financial gain. This could potentially lead to inequities in how different taxpayers are treated under the law depending on how they acquired their wealth.