## Facts

- Thomas J. Woodmansee created a joint tenancy stock account with his wife, Peggy, with right of survivorship.
- Thomas later executed a will placing his property in trust to provide income to Peggy for life, with the remainder to his adult daughters from a prior marriage, Martha and Lou; he also deeded a farm to the daughters.
- After Thomas’s death, the joint stock account (about $229,843) surfaced and triggered a dispute among Peggy and the daughters over Peggy’s entitlements.
- The parties settled: Peggy surrendered her survivorship rights in the joint stock account and relinquished rights associated with taking against the will; the stock account was placed into a trust paying Peggy one-fourth of annual income and the daughters three-fourths, with principal to the daughters at Peggy’s death.
- Peggy elected to take a statutory spousal share (about $77,121 as of death) and deposited that amount into the same trust.
- The executor included the joint account and the statutory share in the gross estate and claimed both as part of the federal estate-tax marital deduction under 26 U.S.C. § 2056.
- The IRS disallowed the marital deduction for these interests; the estate paid the deficiency and sued for a refund.

## Issues

1. Whether property interests a surviving spouse initially held by survivorship and elective-share rights “passed” to the spouse under 26 U.S.C. § 2056(a), (d) when the spouse surrendered those interests in a settlement resolving an intra-family controversy over the estate.
2. Whether Treas. Reg. § 20.2056(e)-2(d) (excluding interests obtained via compromise of a will contest or similar adversarial proceeding from “passing” to the spouse) applies to an out-of-court settlement where no formal will contest was filed.

## Decision

- The Tenth Circuit affirmed summary judgment for the United States.
- The court held the property placed into the settlement trust did not “pass” to Peggy within the meaning of § 2056.
- The marital deduction was unavailable for both the joint tenancy stock account and the statutory-share funds deposited into the trust.

## Legal Principles

- For § 2056 purposes, an interest is not treated as “passing” to the surviving spouse when it is obtained or defined by a settlement that functions as a compromise of a will contest or similar adversarial estate dispute.  
- The regulation governing will-contest compromises applies based on the substance of the controversy and compromise, not on whether formal litigation was filed.  
- A spouse’s initial survivorship or elective-share entitlement does not secure a marital deduction when the spouse relinquishes those rights in a settlement that routes the principal benefit to non-spouse beneficiaries, consistent with the marital deduction’s anti-avoidance purpose.

## Conclusion

Because the settlement effectively resolved a will-contest-type controversy and resulted in Peggy surrendering property interests so that the trust principal was destined for the decedent’s daughters, the assets did not “pass” to Peggy under § 2056, and the estate was not entitled to the claimed marital deduction.


Schroeder v. United States, 924 F.2d 1547 (10th Cir. 1991)