Schroeder v. United States

Thomas Woodmansee had two adult daughters from a previous marriage, Martha and Lou Ann. In 1981, Thomas created a large stock account, naming himself and Peggy, his wife, as joint tenants with the right of survivorship. A few days later, Thomas signed a will in which his property was to be placed in trust, the income to be used to provide for Peggy during her life and the corpus to be divided between Martha and Lou Ann after Peggy’s death. Thomas died two months later. The stock account was worth $229,843 and was unknown to Martha and Lou Ann, so it caused a significant rift among Thomas’s heirs. Thomas’s will was admitted to probate, and Martha’s husband, Harry Schroeder (plaintiff)) was the executor. In settlement of the controversy between Peggy, Martha, and Lou Ann, Peggy agreed to place the stock account into a trust, with a fourth of the annual income going to Peggy and the remaining three-fourths divided evenly between Martha and Lou Ann. After Peggy’s death, the principal would be divided evenly between Martha and Lou Ann, or their heirs. Peggy also filed her election to take her statutory spousal share rather than taking under the terms of Thomas’s will. The spousal share, at the time of Thomas’s death, had a fair market value of $77,121. Peggy deposited those funds into the trust account. When Schroeder filed Thomas’s estate-tax return, he included both the joint stock account and the spousal election share in the gross estate, also claiming both as part of the federal marital deduction. The government (defendant) disallowed the deduction and issued a notice of deficiency. Schroeder paid that amount and then claimed a refund, which the government denied. Schroeder then filed suit. At issue was whether the amounts in question had passed to a surviving spouse. A treasury regulation indicated that an interest in property obtained pursuant to a compromise of a will contest or adversarial proceeding was not deductible as an interest passing to a spouse. However, the estate noted that no will contest or adversarial proceeding had been actually filed in this matter between Peggy, Martha, and Lou Ann. The district court ruled for the government, and the estate appealed.