A Practical Approach to Income in Respect of a Decedent
| Publication year | 1986 |
| Pages | 388 |
| Citation | Vol. 15 No. 3 Pg. 388 |
1986, March, Pg. 388. A Practical Approach to Income in Respect of a Decedent
Many tax quandaries result because people continue to earn income even after they die. The date of death is considered the last day of a cash-basis taxpayer's last taxable year. However, what happens if the taxpayer dies before payday and was entitled to wages accrued but not yet paid? What if a stock dividend check arrives the day after death? Alternatively, what if the deceased taxpayer was entitled to future payments under an installment contract?
Internal Revenue Code of 1954, as amended ("Code") § 691 and the accompanying Treasury Regulations ("Treas. Regs.") are the culmination of a long effort to produce a workable approach to taxation of income in respect of a decedent ("IRD").(fn1) The Code generally treats an IRD item as an estate asset for purposes of estate taxation because the decedent possessed a valuable right to that income at death. However, the IRD item is also taxable income and must be reported on the estate's income tax return, not the decedent's final return, since it is received after the decedent's final taxable year ends.
The estate is permitted an income tax deduction for estate taxes attributable to IRD items.(fn2) Special rules apply to joint and survivor annuities, which must spread the deduction for estate taxes paid over the life expectancy of the surviving annuitant.(fn3)
However, there is much more to the problem of an IRD item than simply reporting the income on the proper return and obtaining a deduction for estate taxes paid. This article identifies and discusses several IRD characteristics that may warrant extra caution in tax planning for a decedent's estate.
Code § 691 does not define IRD except to state that it is gross income not properly includible in the taxable period in which the date of death falls or in a prior period.(fn4) The Treas. Regs, are not much more helpful. They state that the term refers to:
those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent.(fn5)
Included within the ambit of this definition are (1) all accrued income of a cash-basis decedent; (2) income of an accrual-basis decedent which accrues solely by reason of death; and (3) income to which a decedent had a contingent claim at the time of death.(fn6)
Case law is much more helpful. A plethora of cases has identified various types of post-death receipts that may constitute IRD. Medical insurance reimbursements have been held to be IRD when the related medical expenses were previously deducted.(fn7) Other receipts held to be IRD include accounts receivable, alimony arrears, patent infringement lawsuit recoveries, and crops or livestock paid as rentals.(fn8) Also, dividends, bond interest, life insurance renewal commissions, royalties, condemnation proceeds, bank interest and real estate sale proceeds have been held to be IRD.(fn9) Additional examples provided in the Treas. Regs, are largely derived from case law.(fn10)
Case law has done more than earmark specific examples of IRD. It has provided guidelines to help the practitioner solve a knotty but frequent problem: is an item of gross income IRD or merely income to the estate? This problem arises most often in the context of business or sales transactions which are interrupted by the death of one of the principals involved.
In Commissioner v. Linde,(fn11) the decedent owned a vineyard. Before he died, he delivered grapes to a number of cooperatives for conversion into wine and for the sale of the wine. The court held that proceeds received by the estate from the sale of the wine were IRD, even if the wine was not sold until after the decedent died. The wine proceeds were the result of contracts and deals made during the decedent's lifetime. They represented the fruits of his labors.(fn12)
Perhaps the most complete analysis of the nature of IRD can be found in Estate of Davison v. United States.(fn13) The court determined that in-kind farm rents consisting of crops and crop proceeds constituted IRD. The rentals were received after the landowner's death, under an agreement between the landowner and the tenant farmers. The court determined the following: (1) the rents were attributable to pre-death economic activities; (2) the rents would have been income to the decedent had she lived; (3) the decedent was fully entitled to the income; and (4) the rents were not attributable to any acts performed by the estate or to unrealized appreciation of...
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