Rev. Rul. 72-7

The Internal Revenue Service has been asked to reconsider its position, as stated in Revenue Ruling 279, C.B. 1953-2, 275, with respect to the allowance of a marital deduction under section 2056 of the Internal Revenue Code of 1954 in the circumstances described below.

The decedent, a resident of Virginia, directed in his will that his entire net estate be placed in trust. The net income was to be paid to his widow for her life and, upon her death, the assets were to be distributed to his children. The widow elected pursuant to section 64.1-13, Code of Virginia, 1950, to take against the will and petitioned the court to commute her dower interest. The state court found that she was entitled to receive the cash equivalent of her dower interest, and the sum was paid in accordance with the terms of the decree.

Upon renunciation of the benefits under her husband's will, a widow becomes entitled to receive a dower interest in the form of a life estate in one-third of the decedent's real property. Section 64.1-19, Code of Virginia. The provisions of section 64.1-36 give the widow a right to elect commutation of her dower if it appears that her dower cannot be conveniently laid off and assigned in kind.

Under the provisions of section 2056(b)(1) of the Code, no marital deduction will be allowed with respect to a property interest which passes or has passed from a decedent to his surviving spouse where the interest passing is a terminable interest. Section 20.2056(b)-1(e)(3) of the Estate Tax Regulations provides that the determination of whether an interest is terminable is to be based upon the property interest which actually passed from the decedent to his spouse and, for this purpose, any subsequent conversion of the property is immaterial. Section 20.2056(e)-2(c) of the regulations provides that if the widow elects to take against the will, the property interest to which she becomes entitled is considered to have passed from the decedent.

At the moment of the decedent's death, several rights accorded the widow under state law became effective. She had the right to take the life estate conferred upon her under the will, or to renounce the will. If she elected to renounce, she had a vested right to receive dower. A dower interest does not become a life interest in any specific land until it is laid off and assigned in kind. Since the land in this case was not susceptible to assignment in kind, the widow had an absolute right to the commutation of her dower. Thus, the commutation was not a conversion or sale of her life interest in property, but payment for her vested right to dower. First National Exchange Bank of Roanoke v. United States, 335 F. 2d 91 (4th Cir. 1964). See also Hawaiian Trust Company v. United States, 412 F. 2d 1313 (Ct. Claims 1969), Donald E. Bradham v. United States, 287 F. Supp. 10 (W.D. Ark. 1968), United States v. Mary Isabel Hiles, 318 F. 2d 56 (5th Cir. 1963), Dorothy J. Dougherty v. United States, 292 F. 2d 331 (6th Cir. 1961), United States v. Traders National Bank of Kansas City, 248 F. 2d 667 (8th Cir. 1957), in which substantially similar statutes in other states were considered by the courts in connection with the identical issue.

Accordingly, it is held that the amount payable to the widow as the commuted value of her dower right under state law is a nonterminable interest that qualifies for the marital deduction under section 2056 of the Code.

It should be noted, however, that the Supreme Court of the United States has held that section 2056 of the Code is to be strictly construed. Commissioner v. Estate of Herman J. Bosch, 378 U.S. 456 (1967), Ct. D. 1915, C.B. 1967-2, 337. Therefore, unless a cash payment received in lieu of a life estate in real estate is requested and paid in accordance with the applicable state law, it is not considered to be an interest passing from the decedent to his surviving spouse and does not qualify for the marital deduction. Callie L. Cox v. United States, 421 F. 2d 576 (1970); Estate of Joseph Nachimson, 50 T.C. 452 (1968).

Since Revenue Ruling 279 which holds that a cash payment received in lieu of a life estate in real estate that was paid in Alabama in accordance with similar laws did not qualify for the marital deduction is contrary to the above, it is hereby revoked.