701

701

Income in Respect of a Decedent

All amounts of gross income that are not
properly includible in the final return but that
the decedent had a right to receive and
could have received had he or she
continued to live are treated as income in
respect of the decedent.

701

IRD Reported When Received

These amounts must be included in gross
income for the tax year when received by the
estate or person receiving such amount by
reason of inheritance or survivorship
through the decedent, regardless of whether
such recipient reports income on the cash
or accrual method of accounting.
Sec. 691(a)(1); Reg. 1.691(a)-2

701

If a sale has been completed and the estate

receives the proceeds after death, the gain
is income in respect of a decedent and is
taxable to the estate.
If the executor of the estate completes a sale
that the decedent had negotiated, gain on
the sale is taxable to the estate although it is
not income in respect of a decedent.
Reg. 1.691(1)-2(b), Example 5

701

No IRD Under the Accrual Method

If a decedent on the accrual basis completes
a sale before death and the proceeds are
received after death by the estate, the gain
will be included in the decedents final
income tax return and the proceeds will not
be income in respect of a decedent taxable
to the estate.

701

In order for a sale to be considered income in

respect of a decedent by a cash-basis taxpayer, the
following conditions must be met before the
taxpayers death with the payment following death:
1. The decedent entered into a legally significant
contract.
2. The decedent performed the substantive
preconditions to the sale.
3. No economically material contingencies existed
a the time of the decedents death that might
have disrupted the sale.
4. The decedent would have received the sale
proceeds (actually or constructively) if he or she
remained alive.

701

A decedents income tax is taxed to the

recipient retains the same character it would
have had in the hands of the decedent if he
or she had lived and received the income.
Thus, if the income would have been capital
gain, exempt income, or dividend income to
the decedent, it continues to be the same
kind of income to the recipient.
Sec. 691(a)(3); Reg. 1.691(a)-3

701

S Corporation Stock
Any person who acquires stock in an S
corporation by reason of a bequest, devise,
or inheritance from a decedent must treat as
income in respect of a decedent the pro rata
share of any item of income of the
corporation that would have been income in
respect of a decedent If the income had
been acquired directly from the decedent.
Sec. 1367(b)(4)(A)

701

Reduce S Corporation Stock Basis

The stepped-up basis of the stock acquired
from a decedent is reduced to the extent that
the stocks value is attributable to items
consisting of income in respect of a
decedent.
Sec. 1367(b)(4)(B)

702

IRD Also Included in the Gross Estate

It should be noted that rights to income to
be collected after death are usually part of
the decedents estate subject to federal
estate tax.
Because of the income-in-respect-of-adecedent rules, such income is taxed to the
recipient even though, for income tax
purposes, it has a basis equal to the amount
includible for estate tax purposes.

702

Estate Tax Deductible on Income Tax Return

However, the law give partial relief from this
duplication of taxes by allowing a deduction
to the recipient of the income based on the
increase in the estate tax attributable to the
inclusion of the value of such income right
in the estate.

702

Sam Wilson who kept his books on the cash

basis, was entitled at the date of his death to
a large salary payment to be made in equal
annual installments over five years.
His estate, after collecting two installments,
distributed the right to the remaining
installments to the residuary legatee of the
estate.
Wilsons estate must include in its gross
income the two installments received by it,
and the legatee must include in his or her
gross income each of the three installments
received.

702

A claim owned by Dan Jacobs, who reported

his income on the cash basis, was in the
process of litigation at the time of his death.
Before administration of Jacobs estate was
complete, the claim was settled for $10,000.
The $10,000 is income in respect of a
decedent and is required to be included in
the income of the estate in the tax year in
which received.

702

Assume the same facts as the previous

example, except that Dan Jacobs estate,
which makes its returns on the cash basis
and for a calendar-year period, received
$6,000 on account of the claim on February
15, Year 1.
On March 20, Year 1, before it collects any
more, the estate is wound up and the
account receivable for the balance is
distributed, together with other assets, to
Harry Smith, Dan Jacobs sole heir.

702

Smith makes his returns on the accrual

basis and for a calendar-year period. He
collects the balance on February 4, Year 2.
The estate includes the $6,000 on its Year 1
return, and Smith includes the $4,000 on his
Year 2 return.
Smith is not to accrue the $4,000 in Year 1,
the year it was distributed, because it is
taxable to him in the year he receives the
money even though he is on the accrual
basis.

702

Francis Jackson, uses the cash method of

accounting and sells his crop to a processor
for $5,000, but did not receive payment
before his death.
The processor pays the $5,000 to Jacksons
estate.
The payment is taxable to the estate as
income in respect of a decedent.
Had Jackson used the accrual method of
accounting, however, the $5,000 payment
would have been includible on his final
return, and the estate would not realize
income when it received the payment.

702

Xavier Lucas, before this death, acquired 10,000

shares of the capital stock of the Y Corporation at a
cost of $100 per share.
During his lifetime, Lucas had entered into a
contract with Y Corporation or with other
shareholders whereby Y Corporation or other
shareholders agreed to purchase, and Lucas agreed
that his executor would sell, the 10,000 shares of Y
Corporation stock owned by Lucas at the book
value of the stock at the date of his death.
Upon Lucas death, there is no income in respect of
a decedent based on the appreciation in value of
Lucas stock to the date of his death.

703

Juan Hernandez has an employment

contract under which he is to be employed
for life at fixed annual salaries, and, after his
death, payments are to be made to his
widow.
The payments are to be based on
Hernandezs salary.
Payments made under the contract to his
widow are income in respect of a decedent.
A.V. Bernard, DC N.Y., 63-1 USTC 9340, 215 FSupp 256

703

Zachary Banks, an inventor, sells the patent

rights to one of his inventions.
Royalties accruing and paid after his death are
income in respect of a decedent.
If, however, the transfer of the patent rights is a
nonexclusive license (rather than a sale), only
royalties accrued and due at Banks death are
income in respect of a decedent. Royalties
accruing after his death are ordinary income to
the recipient.
Rev. Rul. 60-227, 1960-1 CB 262 clarifying and
distinguishing Rev. Rul. 57-544, 1957-2 CB 361

703

Mickey Taylor was entitled to two week of

vacation at the time of his death, and his
employer makes the vacation payments to
Taylors estate.
Such payments are income in respect of a
decedent.

703

If a right to receive income in respect of a

decedent is transferred by the owner of the
right (the estate, heir, or other beneficiary) to
another person, the fair market value of the
right at the date of the transfer is to be
included in the income of the transferor,
plus the amount by which any consideration
received for the transfer exceeds the fair
market value of the right.
Sec. 591(a)(2)

703

Thus, if the right to receive the income is

disposed of by sale, the fair market value of
the right or the consideration received,
whichever is higher, is includible in the
sellers gross income.
If the right is disposed by gift, the fair
market value of the right will be includible in
the donors gross income.
Reg. 1.691(a)-4(a)

703

Joe West bequests to his son, Danny, the right to

receive rental payments from certain real estate.
To obtain immediate cash, Danny sells the right to
receive the rental payments to John Farley.
The fair market value of the right at the date of
transfer is $10,000.
The sales price is $8,000.
Danny will have to include $10,000, the fair market
value of the right, in his gross income in the year of
transfer.
If Danny had made a gift, the fair market value of the
right at the time of the gift, here $10,000, would
have been includible in his gross income.
If he had done neither, the rental income would
have been taxed to him as received

703

A transfer of a right to receive income in

respect of a decedent includes
(1) a sale, exchange, or other disposition;
(2) the satisfaction of installment obligations
at other than face value; or
(3) the cancellation of an installment
obligation.
It does not include a transfer at death to the
estate of the decedent or a transfer to a
person who would eventually be entitled to
the income by reason of the death of the
decedent by bequest, devise, or inheritance.

703

Jamie Santos bequeaths his right to certain

payments of income to a trust.
If the trust terminates and the right to the
payments is transferred to the beneficiary,
the trust does not have to include the fair
market value of the right to receive the
payments in its income, but the payments
are includible in the income of the
beneficiary.

704

Installment Obligations Acquired from Decedent

Installment obligations acquired from a
decedent are to be treated as items of income in
respect of a decedent.
Therefore, the estate, heir, or other person
receiving the installment payments after the
death of the decedent will use the same gross
profit percentage that the decedent used to
arrive at the portion of each collection that
represents taxable income.
Sec. 691(a)(4)
`

704

If the estate, heir, or other recipient sells or

exchanges the installment obligation, the transferor
(estate, heir, etc.) should include in its gross
income the fair market value of the obligation at the
time of the sale or exchange, or the consideration
received for the transfer, whichever amount is
greater, reduced by the basis of the obligation (i.e.,
the decedents basis, adjusted for all installment
payments received before the disposition).
The basis of the obligation in the hands of the
decedent is the excess of the face value over the
amount of income that would be returnable had the
obligation been satisfied in full.
Sec. 453B(b)

704

Ann Jessup, the heir of a decedent, is

entitled to collect an installment obligation
with a face value of $100, a fair market value
of $80, and a basis in the hands of the
decedent of $60.
If Jessup collects the obligation at face
value, the excess of the amount collected
over the basis is considered income in
respect of a decedent and is includible in
Jessups gross income.

704

In this case, the amount includible would be $40.

If Jessup collects the obligation at $90, an
amount other than face value, the entire
obligation is considered a right to receive
income in respect of a decedent.
The amount required to be included in Jessups
gross income is the consideration received in
satisfaction of the installment obligation
(because it is greater than market value) less the
amount of the basis of the obligation in the
decedents hands.
In this case, the amount includible would be $30.

704

Bonuses
With respect to bonuses, several courts
have taken the liberal position that bonuses
may be taxed as income in respect of a
decedent even when no right to the bonus
existed at the time of death and the amount
of the bonus was not determined until after
death.
E. ODoaniel Est., CA-2 49-1 USTC 9235,
173 F2d 966; E. Bausch Est., CA-2, 51-1
USTC 9146, 186 F2d 313

704

Other types of compensation that are

considered income in respect of a decedent
are accrued vacation allowances, [Rev. Rul.
59-64, 1951-1 CB 31; Rev. Rul. 86-109, 1986-2
CB 196]
Lump-sum payments of accrued annual
leave, [Rev. Rul. 55-229, 1955-1 CB 75] and
A decedents interest in fees and
commissions. [J.M. Enright, SCt. 41-1 USTC
9356, 312 US 636]

704

Also, transactions that arise after the

decedents death may receive IRD treatment.
For instance, the right to received renewal
commissions is an example of
compensation that may be characterized as
income in respect of a decedent.
Reg. 1.691(a)-2(b)(2)

705

Crystal Christenson acquired, by bequest

from her husband, the right to receive
renewal commissions on life insurance sold
by him in his lifetime.
The commissions were payable over a
period of years.
Christenson died before she received all of
the commissions, and her son inherited the
right to receive the remainder.
The commissions received by Christenson
were includible in her gross income.

705

The commissions received by her son were

not includible in Christensons gross income
but must be included in the sons gross
income.
The commissions in the sons hands
represent a decedents income.
Christenson being the decedent for this
purpose.

705

Deduction for IRD Included in Gross Estate

An estate or other person taxed on income
in respect of a decedent is entitled to a
deduction for any federal estate tax (and any
generation-skipping transfer tax) imposed
on the decedents estate that is attributable
to such income.
Sec. 691(c)(1)

705

The deduction must be itemized [Rev. Rul.

78-203, 1978-1 CB 199] and, therefore, does
not reduce a recipients adjusted gross
income.
The deduction for estate tax paid in the case
of income in respect of a decedent is not
included in the definition of the term
miscellaneous itemized deduction and,
therefore, is not subject to the two percent
floor that is generally applicable to such
deductions.

705

Computing the deduction requires a

determination of the amount by which net
income in respect of a decedent exceeds the
deductions from the gross estate for claims
representing (1) the deductions and (2) the
credit in respect of a decedent.
Sec. 691(c)(2); Reg. 1.691(c)-1(a)(1)

705

The excess is the net value of the relevant

items of income in respect of a decedent.
The estate tax attributable to such net
value is the actual estate tax (reduced by
the credits against it) less an estate tax
computed independently of such value.
This amount is apportioned among the
various recipients of the income in respect
of a decedent.
This deduction is available even though part
of the income items may qualify for the
marital deduction.