Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02946/USCOURTS-ca10-88-02946-0/pdf.json

Parties Involved:
Harry D. Schroeder
Appellant
United States of America
Appellee

Document Text:

.. 

PUBLISH 

FILED 

UNITED STATES COURT OF APPEALS United Stake: 0c .!rt. ol Appeals 

Tnnt.h o"it'f"tJit 

TENTH CIRCUIT 

HARRY D. SCHROEDER, Executor of the 

Estate of Thomas J. Woodmansee, 

deceased, 

Plaintiff-Appellant, 

v. 

UNITED STATES OF AMERICA, 

Defendant-Appellee. 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

) 

FEB 0 7 1991 

!.OBERT L. HOECKFR 

Clerk 

No. 88-2946 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE WESTERN DISTRICT OF OKLAHOMA 

(D.C. No. 87-1901-A) 

F.H. Wright of Wright & Wright, Oklahoma City, Oklahoma, for 

Plaintiff-Appellant. 

Kevin Brown, Tax Division, United States Department of Justice, 

Washington, D.C. (James I. K. Knapp, Acting Assistant Attorney 

General; Gary R. Allen, Robert A. Bernstein, John A. Dudeck, Jr., 

Tax Division, Department of Justice, Washington, D.C.; Williams. 

Price, United States Attorney, Oklahoma City, Oklahoma, Of 

Counsel, were on the brief) for Defendant-Appellee. 

Before McKAY, SEYMOUR, Circuit Judges, and KANE,* District Judge. 

PER CURIAM. 

*Honorable John L. Kane, District Judge, United States District 

Court for the District of Colorado, sitting by designation. 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 1 
This is a case of first impression in the area of federal 

estate tax. A surviving spouse surrendered her survivorship 

rights to property held in joint tenancy with her husband, and her 

statutory-election rights to the decedent's property, in 

settlement of· ·a controversy with decedent's ·daughters from a 

previous marriage concerning her entitlement to the property. At 

issue is whether that property nevertheless "passed" to her within 

the meaning of the marital deduction statute, 26 u.s.c. § 2056(a), 

(d). 1 The District Court for the Western District of Oklahoma 

determined on summary judgment that such property in these 

circumstances does not pass to the surviving spouse and 

accordingly disallowed the marital deduction. Schroeder v. United 

States, 696 F. Supp. 1426 (W.O. Okla. 1988). We agree with the 

district court and affirm. 

I. 

Thomas J. Woodmansee (Thomas) was married to Peggy Woodmansee 

(Peggy) for approximately eighteen years, and had two adult 

daughters from a previous marriage, Martha Schroeder (Martha) and 

Lou Ann Waters (Lou). On July 6, 1981, Thomas created a 

substantial stock account, naming himself and Peggy as joint 

tenants with a right of survivorship. Neither of his daughters 

was aware of the creation of this account. On July 16, 1981, 

Thomas signed a will providing that his property be placed in a 

trust, the income from which was to be used to provide for Peggy 

1 All statutory references are to the Internal Revenue Code of 

1954, as amended and in effect as of the date of the decedent's 

death on September 17, 1981. 

2 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 2 
for the remainder of her life. After Peggy's death, the corpus of 

the trust was to be divided equally between Martha and Lou, or 

their issue, keeping the property in the family. On the same day, 

Thomas deeded the family farm over to Martha and Lou. Both of the 

daughters ·stated-by affidavit that they knew of· -the provisions of 

the will and of their father's intent and that both intended to 

honor their father's wishes. In addition, both daughters stated 

that Thomas was mentally competent at all times during his life. 

Thomas died two months later. At the time of his death, the 

fair market value of the stock account was approximately $229,843. 

Later that month, Martha and Lou learned for the first time that 

Thomas had created the joint stock account, which was wholly and 

independently owned by Peggy and would not pass through Thomas' 

will. Relations between Peggy and Thomas' daughters were strained 

by this revelation. In their affidavits, Martha and Lou stated 

that they thought Peggy had a "moral duty" to leave the principal 

of the stock account to them and their children. 

The will was admitted to probate and Harry D. Schroeder 

(Schroeder), Martha's husband, was named executor. Martha and Lou 

were advised by an attorney to negotiate with Peggy concerning the 

stock account, and their attorney entered into discussions with 

Peggy's attorney. In February 1982, in settlement of these 

discussions, Peggy placed the stock account into a trust account 

with a neutral trustee. Quarterly income from the trust is 

divided among the three women, one-fourth to Peggy and 

three-fourths divided equally between Martha and Lou, or their 

issue, until Peggy's death. At that time, the principal in the 

3 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 3 
trust account is to be distributed equally to Martha and Lou, or 

their issue. 

In April 1982, Peggy filed her election to take the statutory 

spousal share of the estate rather than take under the will. At 

the time of Thomas' death, the spousal election, one-third of the 

estate, had a fair market value of $77,121. Peggy deposited the 

spousal share into the trust account, under the conditions for 

distribution set forth for the stock account. 

When Schroeder filed the estate tax return, he included the 

joint stock account and the spousal election share in the estate, 

2 pursuant to 26 u.s.c. §§ 2033, 2040(a). He also claimed them as 

part of the federal marital deduction, pursuant to 26 u.s.c. § 

2056. 3 The IRS issued Schroeder a notice of deficiency after it 

2 At the time of decedent's death, 26 u.s.c. § 2033 provided 

that: "The value of the gross estate shall include the value of 

all property to the extent of the interest therein of the decedent 

at the time of his death." 26 u.s.c. § 2040(a) provided in 

pertinent part: "The value of the gross estate shall include the 

value of all property to the extent of the interest therein held 

as joint tenants with right of survivorship by the decedent and 

any other person • • • in their joint names and payable to either 

or the survivor." 

3 26 U.S.C. § 2056 provided: 

(a) ALLOWANCE OF MARITAL DEDUCTION.- For purposes of 

the tax imposed by section 2001, the value of the 

taxable estate shall, except as limited by subsections 

(b) [limitation in the case of life estate or other 

terminable interest] and (c) [limitation on aggregate of 

deductions], 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, but only to [the] 

extent that such interest is included in determining the 

value of the gross estate. 

4 

(continued on next page) 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 4 
disallowed the marital deduction with respect to the stock account 

and Peggy's statutory share of the estate. Schroeder paid the 

deficiency and claimed a refund, which the IRS denied. Schroeder 

then brought this action. 

Schroeder moved· for partial···summary judgment, arguing that 

the value of the stock account should be included in the marital 

deduction under the express provisions of 26 u.s.c. § 2040. 4 

Schroeder denied that the provisions of Treas. Reg. § 

(continued from previous page) 

(c) LIMITATION ON AGGREGATE OF DEDUCTIONS.-- ..• 

The aggregate amount of the deductions allowed under 

this section (computed without regard to this 

subsection) shall not exceed the greater of- (i) 

$250,000, or (ii) 50 percent of the value of the 

adjusted gross estate •. 

. . . . 

(d) DEFINITION.- For purposes of this section, an 

interest in property shall be considered as passing from 

the decedent to any person if and only if --

(3} such interest is the dower or courtesy interest 

(or statutory interest in lieu thereof) of such person 

as surviving spouse of the decedent; 

(5) such interest was, at the time of the decedent's 

death, held by such person and the decedent (or by them 

and any other person) in joint ownership with right of 

survivorship. 

4 Under the version of the tax code in effect at the time of 

Thomas' death, the federal marital deduction was limited to the 

greater of $250,000 or one-half of the value of the estate. 

Although Schroeder's complaint claimed deductions for both the 

stock account and the statutory share, he argued for summary 

judgment only on his claim for marital deduction on the stock 

account because he calculated that the fair market value of the 

stock account plus the uncontested portion of the marital 

deduction would exceed the maximum allowed marital deduction. 

5 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 5 
20.2056(e)-2(d) (the will contest regulation) 5 applied to the 

value of the stock account because under Oklahoma law the property 

had vested in Peggy before the disagreement arose. Schroeder 

argued that the will contest provision only applies when the 

spousal property is vested -after and --in settlement -of a 

controversy specifically concerning the terms of a will. 

The IRS responded with its own motion for summary judgment. 

It argued that the value of both the joint stock account and the 

spousal election were properly excluded from the marital deduction 

due to the will contest regulati on. It urged the district court 

to consider two circuit court cases, United States Trust Co. v. 

5 Treas. Reg. S 20.2056(e)-2(d) provides: 

{1) If as a result of a controversy involving the 

decedent's will, or involving any bequest or devise 

thereunder, his surviving spouse assigns or surrenders a 

property interest in settlement of the controversy, the 

interest so assigned or surrendered is not considered as 

having "passed from the decedent to his survi v i ng 

spouse . " 

(2) If as a result of the 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 his 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 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. 

6 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 6 
Commissioner, 321 F.2d 908 (2d Cir. 1963), and Citizens & Southern 

Nat'l Bank v. United States, 451 F.2d 221 (5th Cir. 1971), which 

do not limit application of the will contest regulation to 

contests under the terms of a will. The IRS also relied on a 

policy argument,--stating·that the marital deduction was intended 

to be applied in situations in which the government had the 

potential for a two-tiered taxing of the property. Under this 

system, a portion of the deceased's property was taxed at death, 

and a portion remained free of tax until the death of the spouse, 

at which time the "balance" of the estate tax would be levied. 

Thus the government was protected from circumstances in which 

property might pass untaxed to the next generation by means of an 

agreement between the surviving spouse and other beneficiaries. 

The district court was persuaded by the arguments of the IRS and 

the circuit court cases, concluding that the will contest 

regulation should apply in this circumstance. Schroeder, 696 

F. Supp. at 1429-30. Schroeder appealed to this court. 

II. 

We review a grant of summary judgment under the same standard 

employed by the trial court pursuant to Fed. R. Civ. P. 56(c). 

When a motion for summary judgment is granted, it is the 

appellate court's duty to examine the record to 

determine if any genuine issues of material fact were in 

dispute; if not, the court must decide if the 

substantive law was correctly applied. During this 

review, the court must examine the record in the light 

most favorable to the party opposing the motion. 

7 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 7 
Lowell Staats Mining Co. v. Philadelphia Elec. Co., 878 F.2d 1271, 

1274 (lOth Cir. 1989) (quoting Osgood v. State Farm Mut. Auto. 

Ins. Co., 848 F.2d 141, 143 (lOth Cir. 1988)). 

The marital deduction was originally conceived in 1948 to 

equalize ·treatment of spousal estates -between states with 

community property statutes and those with the so-called "common 

law" statutes. 4 J. Rabkin & M. Johnson, Federal Income, Gift and 

Estate Taxation S 53.04 at 5339 (1989) (hereinafter Rabkin & 

Johnson). "The marital deduction is based on the value of 

property 'passing' from the decedent to the surviving spouse. The 

property must be included in the gross estate but not necessarily 

in the probate estate." Id. at 5340. 

The legislative history of the measure sheds some light on 

congressional philosophy behind the marital deduction. 

[A] decedent with a small- or medium-sized estate 

should be able to leave a minimum amount of property to 

the surviving spouse without the imposition of an estate 

tax. • • . [T]he present limitation on transfers to a 

spouse free of gift tax is too restrictive and tends to 

interfere with normal interspousal lifetime transfers. 

H.R. Rep. No. 94-1380, 94th Cong., 2d Sess. 17 (1976)(to accompany 

H.R. 14844 amending§ 2056 of the 1954 Code), reprinted in 

7A Rabkin & Johnson at 7:3242.1 (1986). 

In 1981, Congress further liberalized the marital deduction 

by, among other actions, removing the maximum deduction 

limitation. These 1981 provisions do not apply to Thomas' estate. 

They are effective with respect to estates of decedents who died 

after December 31, 1981, while Thomas died September 17, 1981. 

Nevertheless, the legislative history of the 1981 provisions does 

explain in greater detail why the code provisions applicable to 

8 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 8 
Thomas' estate did not comport with congressional intent and were 

changed. 

Because the maximum estate tax marital deduction 

generally is limited, under present law, to one-half of 

a decedent's adjusted gross estate, the estate of a 

decedent who bequeaths his entire estate to his 

surviving spouse may·be subject to estate-taxes even 

though the property remains within the marital unit. 

When the surviving spouse later transfers the property 

(often to their children), the entire amount is subject 

to transfer taxes. The cumulative effect is to subject 

their property to tax one and one-half times, i.e., 

one-half upon the death of the first spouse and again 

fully upon the death of the second spouse. This effect 

typically occurs in the case of jointly held property. 

Because this additional tax falls most heavily on 

widows, it is often referred to as the "widow's tax. " 

Although the committee recognizes that this 

additional tax can be minimized through proper estate 

planning, it believes that an individual should be free 

to pass his entire estat e to a surviving spouse without 

the imposition of any additional tax. For similar . reasons, the committee believes it appropriate to permit 

unlimited lifetime transfers between spouses without the 

imposition of any transfer taxes. 

The committee believes • • • that tax consequences 

should not control an individual's di sposition of 

property. 

H.R. Rep. No. 97-201, 97th Cong., 1st Sess. 158-164 (1981)(to 

accompany H.R. 4242 amending§ 2056 of the 1954 Code), reprinted 

in 7A Rabkin & Johnson at 7:3242.3-.4 (footnote omitted). 

The tax code clearly provides that certain interests which 

have "passed" to the surviving spouse may be included in the 

marital deduction. 26 u.s.c. S 2056(a) (marital deduction for 

"property which passes or has passed from the decedent to his 

surviving spouse"); id. § 2056(d)(S) (definition section, "an 

interest in property shall be considered as passing from the 

decedent to any person if ..• such interest was, at the time of 

9 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 9 
the decedent's death, held by such person and the decedent 

in joint ownership with right of survivorship"). However, 

subsequent interpretive regulations provide that property 

surrendered by a surviving spouse in settlement of a controversy 

over a decedent '·s will is constructively deemed not to have 

11 passedu to such spouse. Treas. Reg. 20.2056(e)-2(d)(l) (will 

contest regulation). This regulation is consistent with the 

legislative history of the code section: 

If the surviving spouse takes under the decedent's 

will, the interest passing to her is determined from the 

will. In this connection proper regard should be given 

to interpretations of the will rendered by a court in a 

bona fide adversary proceeding. If as a result of a 

controversy involving a bequest or devise to the 

surviving spouse, such spouse assigns or surrenders an 

interest in property pursuant to a compromise agreement 

in settlement of such ·controversy, the amount so 

assigned or surrendered is not deductible as an interest 

passing to such spouse. 

S. Rep. No. 1013 Part 2, 80th Cong., 2d Sess. 4 (1948), reprinted 

in 4 Rabkin & Johnson at 5344. 

This statutory and regulatory scheme is built upon the 

fundamental rule that state law determines what property interest 

individuals hold, and federal law determines how that property 

shall be taxed, see e.g., United States v. National Bank of 

Commerce, 472 u.s. 713, 722 (1985); Morgan v. Commissioner, 309 

U.S. 78, 80 (1940); Goldstein's Estate v. Commissioner, 479 F.2d 

813, 816 (lOth Cir. 1973). Thus, federal law controls whether 

property "passes" from the estate of a deceased individual for the 

purposes of the federal estate tax. 

The IRS and the district court relied heavily on United 

States Trust Co. v. Commissioner, 321 F.2d 908 (2d Cir. 1963), and 

10 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 10 
Citizens & Southern Nat'! Bank v. United States, 451 F.2d 221 (5th 

Cir. 1971). These cases involved situations in which the 

surviving spouse and a beneficiary reached an agreement modifying 

the estate which would have otherwise passed to the surviving 

spouse. 

In United States Trust Co . , a u.s. citizen held property in 

both New York and in France. He intended to give his wife a life 

estate with a power of appointment over a portion of the New York 

estate and to have his wife inherit his villa in France. Although 

he attempted to dispose of the property separately in two 

testamentary devices, his intent that his wife take the French 

real property was blocked by the French requirement that his 

daughters execute certain documents, which they refused to 

execute. After negotiations, the daughters agreed to execute the 

appropriate French documents in exchange for the wife's agreement 

to relinquish her power of appointment over the decedent's New 

York property after the state probate procedure was complete. 

The court concluded that the wife could not claim a marital 

deduction for the value of the New York property. The French 

property did not qualify for the marital deduction. Although the 

estate argued that the wife had taken the New York property 

interest under the decedent's will through the New York probate 

procedure, the court held that the marital deduction was to be 

taken only for the property which the wife actually received after 

the terms of the settlement agreement had been fulfilled. The 

wife was not permitted to claim as part of the marital deduction 

the trust property over which she had previously agreed to 

11 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 11 
relinquish control. 

When the resolution of a controversy between the 

beneficiaries regarding the decedent's property 

culminates in an agreement by which the surviving spouse 

relinquishes property which qualifies for the marital 

deduction in return for property which does not so qualify, ~reas. ·Reg. ·§ ·20.2056(e)-2(d) (1) . is applicable. 

• • • The regulation is clear; it provides that where 

an agreement resolving a controversy over the decedent's 

property entails the assignment or surrender of property 

by the surviving spouse, said property 'is not 

considered as having "passed from the decedent to his 

surviving spouse.'" Treas. Reg. S 20.2056(e)-2(d)(1). 

United States Trust Co., 321 F.2d at 910-11. 

In Citizens & Southern, the decedent had lived in and owned 

property in Florida and had also held real property in Georgia. 

After his death, his wife and his son from a previous marriage 

entered into an agreement with respect to the decedent's estate. 

She received $40,000 from the son in exchange for her statutory 

interest in any of decedent's property in Georgia and in Florida. 

The IRS refused to allow her to take a marital deduction on the 

value of the statutory election in Florida and of a potential 

elective share under Georgia statute, but rather insisted that she 

claim as her marital deduction only the $40,000 which she received 

in settlement from the son. The district court agreed with the 

IRS action and the Fifth Circuit affirmed, basing its opinion on 

the will contest regulation. 451 F.2d at 228. 

The court noted that the settlement agreement contained a 

complete release of all interest that the decedent's wife may have 

had in property in the decedent's estate. The court held that the 

will contest regulation's requirement for a "controversy" was 

satisfied by the potentially adverse positions of decedent's son 

and his wife. It relied on the Second Circuit's broad 

12 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 12 
interpretation of the will contest regulation's scope in United 

States Trust Co. Under the guidance of that case, the court 

concluded that the wife's "acquisition and subsequent 

relinquishment of 'vested' rights in no way renders the 'will 

controversy·(· regulation inapplicable." Citizens-· & Southern, 451 

F.2d at 228. The court thus held that the widow could only claim 

the value of the cash received from the son as her marital 

deduction from federal estate taxes. 

These two cases invoked policy to expand the reach of Treas. 

Reg. § 20.2056(e)-2(d)(l) well beyond its plain language. 

Citizens & Southern defined "the decedent's will, or involving any 

bequest or devise thereunder" to include transfers of property at 

death under intestacy statutes or spousal election. Both cases 

expanded the terms "will contest" or "controversy" to include 

arms-length negotiations conducted between parties who have 

potentially adverse positions. Under this view, no litigation is 

required, much less court adjudication of various parties' rights 

to the property of the deceased. 

Peggy's rights in the present case to a statutory share of 

the probate estate and to the joint account do not arise under 

Thomas' will. It is undisputed that Peggy surrendered this 

property in settlement not of a will contest, 6 but of a more 

general controversy over the rightful passing of Thomas' property 

considered as a whole. By its plain terms, therefore, the will 

6 The Government asserts that the settlement was "indirectly" a 

will contest because the dispute centered on whom Thomas intended 

to bestow his worldly possessions. This contention is 

inapplicable to the spousal election because these rights derive 

from state law regardless of Thomas' intent. 

13 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 13 
contest regulation is not dispositive here. In the absence of an 

applicable regulation, we must look directly to the relevant 

provisions of the Internal Revenue Code. 

As previously discussed, section 2056(a) requires that 

property ''pass"· from· the· decedent to ·his or her-surviving spouse 

to claim the marital deduction. The meaning of this term is 

dispositive of this appeal. Clearly, transfers of property under 

spousal election statutes and by survivorship rights concerning 

joint interests may "pass" within the meaning of the marital 

deduction provision. See 26 u.s.c. S 2056(d){3) and (5). The 

issue in this case is whether the rationale for the Secretary's 

regulatory gloss on the passing requirement in the context of a 

will contest mandates a similar result based on an analysis of the 

term "passes" in the marital deduction statute. 

In United States Trust Co., the court noted that the 

statutory "passing" requirement is "crucial in qualifying property 

for a marital deduction." 321 F.2d at 910. It held that "[w]hen 

the resolution of a controversy between the beneficiaries 

regarding the decedent's property culminates in an agreement by 

which the surviving spouse relinquishes property which qualifies 

for the marital deduction in return for property which does not so 

qualify, [the will-contest regulation] is applicable." Id. In 

essence, the court defined "passing" to mean property to which the 

surviving spouse retains her rights after resolution of all 

disputes concerning the decedent's property. The court in 

Citizens & Southern agreed with this definition of passing in 

14 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 14 
concluding that "the medium by which the decedent's property 

passes ••• is inunaterial." 451 F.2d at 227. 

Both courts also properly disregarded the significance of the 

surviving spouse's acquisition of "vested" rights under state law 

in determining whether· the · property ·"passed" ·for purposes of the 

marital deduction. See United States Trust, 321 F .2d at 910 

(vesting under state law has no bearing on interpretation of 

federal passing requirement); Citizens & Southern, 451 F.2d at 228 

("acquisition and subsequent relinquishment of 'vested' rights in 

no way renders the 'will controversy' regulation inapplicable"). 

Indeed, a contrary view arguably would transgress the Supreme 

Court's holding in Lyeth v. Hoey, 305 u.s. 188, 193-94 (1938), 

that federal law controls the incidence of federal taxation of 

7 property acquired under state law. 

7 Schroeder relies on First Nat'l Bank v. United States, 233 F. 

Supp. 19 (D. Kan. 1964), to bolster his argument that the property 

at issue "passed" when it vested in Peggy and when she obtained 

possession and control over it. The court in First National found 

the will contest regulation inapplicable to property passing by 

intestate succession. In construing the statutory passing 

requirement without regard to the regulation, the court concluded 

that "qualification for the marital deduction must be determined 

as of the time of death and not as of a later date established by 

some subsequent development ." Id. at 26. 

Under most state statutes, property passing by will, 

intestacy, or by statutory election vests as of the date of death. 

See, ~' Okla. Stat. tit. 84 § 175 (testamentary dispositions 

presumed to vest at testator's death). Under the analysis in 

First National, even property surrendered in a bona fide will 

contest would, absent the regulation, "pass" to the surviving 

spouse for purposes of the federal estate tax because it is 

presumed to vest in the beneficiary as of the date of decedent's 

death. We agree with the district court in the present case that 

such a construction of the word "passes" in section 2056(a) is 

contrary to Lyeth v. Hoey, 305 U.S. 188, 192-93 (1938). Even 

assuming that First National could be rationalized to be 

consistent with Lyeth, its rule freezing property rights as of the 

(continued on next page) 

15 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 15 
Unlike the district court and the courts in United States 

Trust and Citizens & Southern, we believe the will-contest 

regulation is inapplicable to property passing to a surviving 

spouse by statutory election or under the law of survivorship 

because the regulation speaks only in terms of a controversy 

involving a bequest or devise under decedent's will. Nonetheless, 

we find the reasons those courts articulated to broaden the reach 

of the regulation to be persuasive in our own analysis of what 

Congre ss intended by the "passing" requirement in the marital 

deduction statute. To the extent a surviving spouse surrenders 

her share of the decedent's property to other beneficiaries not 

entitled to the marital deduction to avoid litigation concerning 

her rights, it defies common sense to conclude that this property 

"passed" to the surviving spouse. Not only is the ultimate 

recipient of the property a person other than the surviving 

spouse, but the transfer comprising the settlement could 

altogether escape taxation applying to gratuitous transfers of 

wealth. 8 

(continued from previous page) 

date of death would preclude any consideration for federal tax 

purposes of any post-mortem settlement of a controversy concerning 

property of the decedent. However, a controversy involving the 

surviving spouse's entitlement to the decedent's property is Qx 

definition a post-mortem dispute. We believe that this approach 

is inconsistent with the purpose of the marital deduction. 

8 Indeed, Peggy paid no gift tax upon the transfer of the 

property into the trust and did not report the transfer as a sale 

on her income tax returns. See rec., doc. 43, at exh. Band exh. 

c. In his Reply Brief, Schroeder justifies Peggy's position 

concerning gift tax by stating that avoidance of litigation over 

her rights was appropriate consideration for the transfer. 

Schroeder's position seems to undercut his assertion in claiming 

the marital deduction that Peggy transferred property which had 

(continued on next page) 

16 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 16 
In creating the marital deduction, Congress envisioned a 

scheme in which interspousal transfers of wealth would not result 

in a taxable event. Sees. Rep. No. 97-144, 97th Cong., 1st Sess. 

126, reprinted in 1981 u.s. Code & Conq. Admin. News 105, 228 ("a 

husband and wife should be treated as one economic unit for 

purposes of estate and gift taxes, as they generally are for 

income tax purposes. Accordingly, no tax should be imposed on 

transfers between a husband and wife."). The marital deduction 

was designed to eliminate the "double-taxation" that would result 

when the same property became subject to tax upon the death of 

each spouse. Once property passes outside of the interspousal 

unit, however, this exception no longer applies. Under 

Schroeder's proposed interpretation, property may exit the spousal 

unit without~ creating a taxable event. 9 Congress clearly did 

not intend to replace double-taxation with tax avoidance. 

Accordingly, we hold that the property comprising Peggy's 

statutory election and the joint account did not "pass" to her 

within the meaning of the marital deduction statute. Instead, 

Peggy surrendered her entitlement to this property in settlement 

of a bona fide controversy concerning her rights to the property 

(continued from previous page) 

already "passed" to her. Similarly, for income tax purposes, 

Peggy claimed no gain or loss on sale when she transferred the 

joint tenancy account to the trust even though the premise of 

Schroeder's argument here is that the property "passed" to her 

prior to transfer. Schroeder's position that Martha and Lou's 

release of their rights, if any, to property otherwise passing 

Peggy constituted valid consideration necessarily implies a 

recognition that the property in question had not "passed" for 

practical purposes. 

9 See n.S, supra. 

17 

to 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 17 
in the decedent's gross estate for federal estate tax purposes. 

We therefore AFFIRM the district court. 

18 

Appellate Case: 88-2946 Document: 01019684071 Date Filed: 02/07/1991 Page: 18