Rev. Rul. 83-107

ISSUE

Can an estate deduct under section 2056 of the Internal Revenue Code an amount paid to the decedent's spouse pursuant to a negotiated settlement of the spouse's dower claim?

FACTS

D, a resident of State X, died in 1981, survived by A, D's spouse, to whom D bequeathed 10x dollars. Under the law of State X, A elected, in lieu of the 10x dollars, to receive a dower interest in the form of a life estate in one-third of the decedent's real property. A had the right, under the laws of State X, to petition a state court for commutation of the lower interest if D's executor could not conveniently "lay off and assign" A's dower interest in kind.

D's executor could not conveniently "lay off and assign" the dower interest. After bona fide negotiations a settlement agreement was reached pursuant to which A was paid a lump sum in lieu of the dower interest. No judicial proceedings were initiated by A. The lump sum did not exceed the amount A would have received had A pursued commutation through a court proceeding.

LAW AND ANALYSIS

Section 2056(a) of the Code 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 passed from the decedent to the surviving spouse, but only to the extant such interest is included in determining the value of the gross estate.

Section 20.2056(e)-2(d)(2) of the Estate Tax Regulations provides that if, as a result of a controversy involving the decedent's will, or involving any bequest or devise thereunder, a property interest is assigned or surrendered to the surviving spouse, the interest so acquired will be regarded as having passed from the decedent to the surviving spouse only if the assignment or surrender was a bona fide recognition of enforceable rights of the surviving spouse in the decedent's estate. 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 of the property interest as 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.

Rev. Rul. 66-139, 1966-1 C.B. 225 holds that where a claim asserted by a surviving spouse for a share of the decedent's estate is paid pursuant to a negotiated settlement without any court contest, the payment will qualify for the marital deduction if the claim is valid, asserted in good faith, and settled pursuant to arm's length negotiation and the interest which would have passed to the spouse as a result of the completed exercise of the spouse's right would have been a deductible interest. Under such circumstances, the claim is treated as a bona fide claim within the meaning of section 20.2056(e)-2(d) of the regulations and the property passing as a result of the settlement reflects a bona fide recognition of enforceable rights of the surviving spouse in the decedent's estate.

In Moore v. United States, 214 F. Supp. 603 (W.D. Ky. 1963), a surviving spouse was paid a lump sum amount in settlement of a claim of dower pursuant to a negotiated compromise rather than a judicial proceeding. The court held that the lump sum payment was a statutory interest in lieu of dower which passed to the surviving spouse within the meaning of section 2056 of the Code. The court stated that the formality of a judicial proceeding is unnecessary if the spouse made a good faith assertion of a statutory right that would have been legally enforceable if the claimant had pursued court action, and a bona fide settlement was reached. See also, Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir., 1981); Mauldin v. United States, 468 F. Supp. 422 (E.D. Ark. 1979).

Rev. Rul. 72-7, 1972-1 C.B. 308, citing Estate of Nachimson v. Commissioner, 50 T.C. 452 (1968), holds in part that an amount payable to a surviving spouse as the commuted value of a dower right is considered to be an interest passing from the decedent to the surviving spouse for purposes of section 2056, only if the cash payment is requested in a judicial proceeding and paid, in accordance with applicable state law.

The Service has reconsidered the holding of Rev. Rul. 72-7, in light of the Moore, Mauldin and Ahmanson cases and will no longer advance this holding of Rev. Rul. 72-7 that a cash payment received in lieu of dower must be paid pursuant to a court decree in order for the payment to be deductible. Rather, a cash payment received in settlement of a spouse's deductible dower interest, that is based on a legally enforceable claim, under properly interpreted state law, and paid pursuant to a bona fide compromise, is deductible under section 2056 of the Code. The deduction, however, is limited to the fair market value of the spouse's dower interest as of the date of D's death (or alternate valuation date). See Ahmanson Foundation v. United States, supra.

Thus, in the present case, D's executor may deduct the payment made to A in settlement of A's claim of dower right because it was paid pursuant to a bona fide compromise in recognition of A's assertion of a right enforceable under state law, and was not in excess of the amount A would have received had A pursued commutation through a court proceeding.

HOLDING

An estate can deduct, under section 2056 of the Code, the amount it paid to the decedent's spouse pursuant to a negotiated settlement of the spouse's deductible dower claim if the settlement is a bona fide compromise resulting from the spouse's assertion of an enforceable right for commutation, and the amount received is not in excess of the commuted value of the dower interest that the spouse would have received if commutation were pursued in a court proceeding. The deduction is limited to the fair market value of the spouse's dower interest as of the date of D's death (or alternate valuation date).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 72-7 is modified to the extent it holds that a formal judicial proceeding is necessary in order for an estate to be entitled to a marital deduction for an amount paid in lieu of a dower interest. Rev. Rul. 66-139 is clarified to emphasize that only good faith negotiated settlements based on a surviving spouse's enforceable rights to a deductible interest, under properly interpreted state law, will be recognized for purposes of section 2056 of the Code. See Ahmanson Foundation v. United States, supra.