Income in Respect of a Decedent - Commentary

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By Alan S. Acker, Attorney at Law Columbus, OH

Income in respect of a decedent (IRD), found in §691 of the Internal Revenue Code, deals with gross income owed to a decedent that was not reportable during the decedent's life. Although the statute has been in its current form for nearly 70 years, identifying items of IRD still presents problems to even experienced practitioners. No definition exists for IRD and the courts have shaped the IRD scheme to fit its legislative purpose.

The essential function of the IRD scheme is to eliminate the impact of death upon the application of the income tax laws in those situations in which income tax forgiveness would be inappropriate. This function is embodied in §1014(c), which provides that a new basis upon death “shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.”

Based on the author's analysis of the cases involving IRD, the definition of IRD depends on the type of receivable being examined. With respect to the compensation area, items of IRD will encompass:

• wages, compensation, and other benefits payable to the decedent because of and for his or her services and labor (economic activities in the words of O'Daniel Est. v. Comr., 173 F.2d 966 (2d Cir. 1949), over which the decedent has a legal right to enforce such payments;

• post-death bonuses or other payments payable to the decedent because of and for his or her services and labor and in which there was a substantial certainty existing at the date of the decedent's death that such bonuses or other payments would be awarded to the decedent, even though the decedent had no legal enforceable right to such bonuses or payments; and

• post-death payments payable to a third party because of and for the decedent's services and labor in which there was a substantial certainty existing at the date of the decedent's death that such payments would be made to the third party, even though the decedent had no legal enforceable right to such bonuses or payments.

The characterization of compensatory items as IRD is independent of their inclusion in the decedent's gross estate for estate tax purposes.

With respect to the investment area, items of IRD will encompass:

• income where the decedent owned the investment that gives rise to the income at the date of his or her death;

• on the date of death, the decedent, as the owner of such investment, is legally entitled to such income so that, had the decedent lived, he or she would have collected such income; and

• such accrued income is not includable in the decedent's final income tax return

With respect to the sales area, items of IRD the Tax Court in Peterson Est. v. Comr., 74 T.C. 630 (1980), aff'd 667 F.2d 675 (8th Cir. 1981) listed the following four requirements for determining whether post-death sales proceeds are IRD:

• the decedent entered into a legally significant arrangement, e.g., a contract, regarding the disposition of the subject matter of the sale;

• the decedent performed the substantive acts required as preconditions to the sale, i.e., the subject matter of the sale was in a deliverable state at the decedent's death;

• at decedent's death there were no economically material contingencies which might have disrupted the sale; and

• the decedent would have received, actually or constructively, the sale proceeds if he or she had lived.

Determining whether an item of IRD exists in the context of a sale may depend upon determining whether substantial conditions remain to be performed after the decedent's death or whether the executor has only a passive or ministerial role to play in completing the sale. The outcome of such determinations will depend upon the facts and circumstances of each case.

Items of IRD are not confined to the areas of compensation, investment income, and sales. Such items are best identified by reference to the purpose and intent of the IRD scheme. Thus, whenever the decedent has taken some action or events have developed in a way that, without more than the mere passage of time, the decedent would have received income or gain had the decedent survived, then such income or gain should be treated as IRD.

For more information, in the Tax Management Portfolios, see Acker, 862 T.M., Income in Respect of a Decedent, and in Tax Practice Series, see ¶6150, Income in Respect of a Decedent.