Internal Revenue Service
Revenue Ruling
Rev. Rul. 66-139
1966-1 C.B. 225
Caution: Clarified by Rev. Rul. 83-107
IRS Headnote
A settlement payment made by the executor of a decedent's estate to
decedent's surviving spouse in compromise of a claim made by her in good
faith for an absolute dower interest under State law, following
arm's-length negotiations, qualifies for the marital deduction for Federal
estate tax purposes.
Full Text
Rev. Rul. 66-139
Advice is requested whether an amount paid to a surviving spouse pursuant
to a compromise agreement qualifies for the marital deduction for Federal
estate tax purposes under the circumstances described below.
The decedent bequeathed to his surviving spouse an income interest in his
estate during her lifetime or until her remarriage. The widow renounced
under the will and instead claimed and elected to take her dower interest
in the estate. A widow's dower interest under the law of the local
jurisdiction is a one-third part absolutely in the realty and personalty
owned by her husband at the time of his death. However, because of an
antenuptial agreement entered into by the decedent and his wife whereby
each renounced all rights, present and future, in and to any and all
property of the other, the executor of decedent's estate denied her claim
of dower. The widow contended that the agreement was invalid on the grounds
that it was entered into by her without consideration, without disclosure,
and without legal advice. Prior to a hearing on her claim, the controversy
between the interested parties was settled by their entering into a
compromise agreement whereby the widow was paid 3 x dollars in settlement
of all her rights and interests in the estate. This amount was 1 x dollars
in excess of the value of the interest she would have received under the
will. The value of the gross probate estate was approximately 11 x dollars.
Section 2056(a) of the Internal Revenue Code of 1954 provides that the
value of the taxable estate shall be determined by deducting from the value
of the gross estate an amount equal to the value of any interest in
property which passes or has passed from the decedent to his surviving
spouse. For purposes of this section, an interest in property shall be
considered as passing from the decedent to his surviving spouse if such
interest is the dower or curtesy interest, or statutory interest in lieu
thereof, of such person. Section 2056(e)(3) of the Code. Where a surviving
spouse elects dower or her statutory share in her husband's estate instead
of the interest which he left her in his will, the interest which she
takes, rather than the interest which she renounces, is regarded as passing
to her from the decedent. Section 20.2056(e)-2(c) of the Estate Tax
Regulations.
The Supreme Court of the United States in Munro L. Lyeth v. Hoey , 305 U.S.
188 (1938), Ct. D. 1370, C.B. 1938-2, 208, held that an amount paid to an
heir from the estate of a decedent in compromise of a will contest should
be treated as acquired by inheritance for the reason that it was possible
for him to receive it only because of his standing as an heir and of his
claim in that capacity. While the issue there presented was the income tax
liability of such heir, the rationale has long been followed in Federal
estate tax cases. Estate of John Sage v. Commissioner , 122 Fed. (2d) 480
(1941), affirming 42 B.T.A. 1304, certiorari denied, 314 U.S. 699 (1942);
Estate of Mary Clare Milner v. Commissioner , 6 T.C. 874 (1946),
acquiescence, C.B. 1946-2, 4.
However, where there is a will contest and a property interest is assigned
or surrendered to the surviving spouse, the interest so acquired is
regarded as having passed from the decedent to his surviving spouse only
where the assignment or surrender was a bona fide recognition of the
surviving spouse's rights in the decedent's estate. Section 20.2056(e)-2(d)
of the regulations. The regulations further provide that `such a bona fide
recognition will be presumed where the assignment or surrender was pursuant
to a decision of a local court upon the merits in an adversary proceeding
following a genuine and active contest. However, such a decree will be
accepted only to the extent that the court passed upon the facts upon which
deductibility of the property interests depends. If the assignment or
surrender was pursuant to a decree rendered by consent, or pursuant to an
agreement not to contest the will or not to probate the will, it will not
necessarily be accepted as a bona fide evaluation of the rights of the
spouse.' On the other hand, a valid claim to a share in decedent's estate
made in good faith and settled as a result of arm's-length negotiations
without any court contest will qualify as a bona fide claim within the
meaning of the regulations. Estate of Gertrude P. Barrett v. Commissioner ,
22 T.C. 606 (1954), acquiescence, C.B. 1954-2, 3; Estate of Leo J. Dutcher
v. Commissioner , 34 T.C. 918 (1960), acquiescence, C.B. 1961-1, 4.
Following the rationale of the Lyeth and Barrett decisions, the amount paid
to a surviving spouse pursuant to a bona fide compromise agreement in
recognition of her alleged rights in her deceased husband's estate
qualifies for the marital deduction to the extent that the interest which
would have passed to her as a result of the completed exercise of such
rights would have been a deductible interest.
With respect to the effect of an antenuptial agreement, the Supreme Court
of Florida in the case of Del Vecchio v. Del Vecchio , 143 So.(2d) 17
(1962) stated:
Inadequacy of provision for the wife does not in itself vitiate an
antenuptial agreement. If, when she signed the contract freely and
voluntarily, she had some understanding of her rights and had been fully
informed by the husband as to his property or if, notwithstanding the
husband's failure to disclose, she had or reasonably should have had a
general and approximate knowledge of the character and extent of his
property she will be bound.
In remanding the case to the trial court, however, the court said:
The questions of whether she had some understanding of her rights and had
or reasonably should have had a general and approximate knowledge of her
future husband's property are matters of fact to be determined by the
chancellor upon the evidence and his finding thereon will not lightly be
disturbed.
Accordingly, it is held that the settlement payment made by the executor of
decedent's estate to the surviving spouse following arm's-length
negotiations, in compromise of a claim made by her in good faith for a
one-third, absolute, dower interest under State law, qualifies for the
marital deduction for Federal estate tax purposes.
