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.