Does a spousal elective share carry out DNI?

• Author: Hart, Kenneth M.
• Position: Distributable net income for federal tax purposes; Florida probate law

Practitioners and commentators have speculated upon whether an estate distribution of a spouse's elective share determined under Florida law carries out the estate's distributable net income for federal income tax purposes.

The common law concepts of dower and curtesy have gradually been supplanted in many states by a modified form of spousal share of the deceased spouse's estate. Although the new spousal share statutes vary from state to state, the modernized versions generally recognize that the spousal share should be computed by taking into account such items as the decedent's debts, funeral expenses, and the administration expenses of the estate. This avoids a windfall to the surviving spouse with a corresponding detriment to the other beneficiaries of the estate who would otherwise bear the entire burden of the debts, funeral expenses, and administration expenses without a contribution from the spousal share.

In Rev. Rul. 64-101, 1964-1 C.B. 77, the Internal Revenue Service ruled that, in the case of the Florida dower provisions in effect at that time, the setting aside of the dower portion for the surviving spouse did not "carry out" the estate's distributable net income (DNI) under Subchapter J. The ruling based its conclusion on the rationale that the dower portion never came into the hands of the executor and passed outside the probate estate, as in the case of real property the title to which vests pursuant to local law in the decedent's heirs or devisees.[1]

The ruling confirms the proposition that property which is not within the probate estate is not subject to the provisions of Subchapter J, but rather is subject to the general exclusion for inheritances contained in I.R.C. [sections] 102. Examples of such property include jointly owned property and life insurance or qualified employee benefit plans proceeds passing to a beneficiary other than the decedent's estate.[2]

In the case of a spousal share, however, it is sometimes difficult to ascertain whether property passes through the probate estate, and for years commentators have speculated on whether the spouse's elective share is subject to the provisions of Subchapter J.[3] In most instances, it was presumed that a spouse's elective share was subject to Subchapter J, so that the distribution would include a share of the estate's distributable net income for the year.[4]

Recently, however, in Deutsch v. Comm'r of Internal Revenue, T.C. Memo 1997-470, the United States Tax Court held that the distribution of a Florida widow's elective share was not subject to the provisions of Subchapter J. In the Deutsch case, the taxpayer-petitioner had been married to her deceased husband for nine years, and each had children from a prior marriage. The husband's will left...