Income in Respect of a Decedent, written by Alan S. Acker, Esq., Columbus, Ohio, discusses the scheme for taxing “income in respect of a decedent” (IRD). The IRD scheme is intended to eliminate, as much as possible, the consequences of death on the operation of the income tax laws. It accomplishes this goal largely by preventing the basis step-up rule from operating on a decedent's receivables in situations where income tax forgiveness would be inappropriate.
This Portfolio addresses the taxation of IRD under §691. Broadly speaking, IRD generally is understood to mean moneys owed to a decedent at the time of his or her death and that would have been included in the decedent's gross income had the decedent lived to collect such moneys. Although the statute sets forth the governing rules, its language has been said to be “high on the list of vaguely drafted legislation in a field notoriously complex.” One of the most difficult questions in the area of IRD is determining which receivables are subject to IRD treatment.
Income in Respect of a Decedent, which has a detailed discussion on receivables, is helpful in answering this question.
This Portfolio also contains a detailed discussion and analysis of the federal estate and income tax computations that arise in connection with items of IRD. Specific analysis is provided on the following areas: determining the taxable recipient and the time, character, and amount of taxable IRD; deductions in respect of a decedent; the income tax deduction for federal estate tax; and planning techniques.
Section 691 addresses more than just IRD. As a corollary of its treatment of IRD, §691(b) provides for deductions and credits in respect of a decedent (DRD). Further, §691(c) allows an income tax deduction for the estate tax attributable to IRD to avoid having the same item exposed to both the estate and income tax.
This Portfolio looks at particular items of IRD and explores the available tax and estate planning for IRD.
Income in Respect of a Decedent allows you to benefit from:
This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.
Detailed Analysis
I. Underlying Concept
A. Introduction
B. Fundamental Principle
II. Purpose and Development of IRD Scheme
B. Background - The Basis Step-Up Rule
C. Function of IRD Scheme
D. The First IRD Statute
E. The Enright Case
F. The 1942 Revision
1. The Problems Addressed
2. The New Approach
3. Statutory Lapse
G. Post-1942 Act Changes
H. The Economic Growth and Tax Relief Reconciliation Act of 2001
III. Identifying Items of IRD
Introductory Material
A. The IRD Scheme's Function
B. Definition of IRD
1. Generally
2. Identifying Items of IRD in the Compensation Area
a. Court Decisions
b. Definition of IRD in the Compensation Area
3. Identifying Items of IRD in the Investment Income Area
4. Identifying Items of IRD in the Sales Area
5. Identifying Items of IRD in Other Areas
IV. Determining the Taxable Recipient and the Time, Character, and Amount of IRD
A. To Whom IRD Is Taxable
1. The Decedent's Estate
2. Distributee from Estate
3. Recipient by Reason of Death
a. Normal Situation
b. Community Property Interests in IRD
c. Holder Prior to Death
4. Successive Decedents
B. When IRD Is Taxable
1. Necessity of an Event
2. Collection of Receivable/Contributions of IRD to Private Foundations
3. Transfer of Receivable
a. Exempt Transfers
(1) Generally
(2) Section 643(e) Elections
(3) Bankruptcy Estates
b. Taxable Transfers
(1) In General
(2) Transfers in Otherwise Nontaxable Transactions
4. Installment Obligations
a. Transfer to Obligor
b. Value of Obligation
c. Cancellation of Obligation
d. Self-Canceling Notes
C. Amount of IRD Recognized
D. Character of IRD in Hands of Recipient
1. Self-Employment Income
2. Capital Gains vs. Ordinary Income
3. Nonrecognition of Gain
4. Exclusion of Income
a. Sick Pay
b. Tax Elections Available to the Decedent
c. Foreign Source Income
d. Excludible Interest
5. Tax Preference
6. Personal Service Income
7. Charitable Recipient
E. Attribution of Ownership to Decedent
1. Assignment-of-Income Doctrine
2. Grantor Trust Rules
a. Transfer of Receivable
b. Transfer of Property
3. Community Property Receivables
V. Deductions in Respect of a Decedent
A. Generally
1. Need for § 691(b)
2. Legislative History of § 691(b)
B. What Constitutes DRD
1. Classes of Included Items
2. Excluded Items
a. Losses
b. Excess Charitable Contributions Carryover
c. Medical Expenses
d. Alimony Payments
3. DRD vs. Other Deductions
C. When and By Whom DRD Is Deductible
1. Time of Deduction
2. Taxpayer Entitled to Deduction
D. Operation of DRD
1. Section 162 Business Expenses
2. Section 212 Expenses
3. Section 163 Interest Expense Deduction
4. Section 164 Deduction for Taxes
5. Section 611 Depletion Deduction
6. Section 27 Foreign Tax Credit
7. Character of DRD
VI. Deduction for Federal Estate Tax - § 691(c)
A. Section 691(c) Generally
B. Computation of § 691(c) Deduction
1. Basic Structure
2. Determining the Net Value of IRD for Estate Tax Purposes
3. Determining the Estate Tax Attributable to IRD
a. Generally
b. Treatment of IRD Consisting of Capital Gains
c. Effect of Marital and Other Deductions
d. Effect of Credits on § 691(c) Deduction
e. Treatment of Generation-Skipping Transfers
C. Allocation of § 691(c) Deduction Among Various Items of IRD
2. Effect of Marital Deduction
3. Effect of DRD Items
4. Effect of Increases or Decreases in IRD Received
5. Apportionment Over Several Taxable Years
6. Allocation to and Through an Estate or Trust
D. Application of § 691(c) Deduction to Capital Gains
1. Pre-1978 History
2. Addition of § 691(c)(4)
E. Application of § 691(c) Deduction to Qualified Plan Lump Sum Distributions
F. Section 691(c) and Qualified Domestic Trusts
VII. Particular Receivables as Constituting IRD Receivables
A. Compensation for Services Rendered
1. As Employee
a. Salary or Wages
b. Fringe Benefits
c. Post-Death Bonuses
d. Insurance Renewal Commissions
e. Deferred Compensation
(1) Payable to Employee
(2) Not Payable to Employee
f. Voluntary Payments
g. Nonvested Property
h. Statutory Stock Options and Purchase Plans
i. Qualified Pension and Profit-Sharing Plans
j. IRAs
2. As Independent Contractor
B. Investment Income
1. Interest
a. Meaning of "Earned"
b. Earned After Death
c. Earned Before Death
(1) Accrual Method Decedents
(a) General Rule
(b) Contingent Interest
(c) Jump-Increment Obligations
(d) Short-Term Government Discount Obligations
(2) Cash Method Decedents
(b) Jump-Increment Obligations
(c) Original Issue Discount
2. Dividends
a. General Approach
b. Customary Dividends
(1) Declared After Death
(2) Declared Before Death
c. Subchapter S Corporations
d. Liquidating Dividends
3. Rents
a. In General
b. Crop Rents
4. Royalties
5. General Rule for Investment Income
C. Sales Proceeds
1. Introduction
a. Meaning of "Sale" and "Own"
b. Liquidations as Sales
c. Imputed Interest
2. Sale Completed by Decedent
b. Open Transaction
3. Sale Made by Successor
b. Special Kinds of Property
c. Exchange Property
d. Decedent-Initiated Sales
(1) Bilateral Contract
(a) To Be Closed Only After Death
(b) Other Contracts
(2) Option Granted or Put Acquired
(a) Option
(b) Put
(3) Negotiations
(4) Engaging of Selling Agent
4. Suggested Rules for the Sales Area
a. Right to Sale Proceeds - The Threshold Question
b. Timing
c. Right to Income
d. Completion of Material Acts
e. Acts After the Decedent's Death
f. Unique Problem Yet Unanswered
D. Partnership Interests
a. Meaning of "Successor"
b. The Exclusivity Problem
2. Current Distributive Share
3. Post-Death Realization of Unrealized Receivables
4. Sale of Partnership Interest
5. Liquidating Distributions
E. Limited Liability Company Interests
F. Trust and Estate Interests
G. Medical Savings Accounts
H. Miscellaneous
VIII. Open Issues
A. The Date for Determining the Existence of Items of IRD
B. The Character Rule in the Sales Area When the Sale Does Not Occur
C. Final Distributions from Estates and Trusts Being Less Than DNI
D. Sections 661 and 662 and Distributions of Items of IRD
E. Additional Estate Tax Liability and the § 691(c) Deduction
F. Amount of IRD from Qualified Retirement Benefit Distributions
IX. Planning for IRD
Working Papers
Table of Worksheets
Additional Resources
Worksheet 1 Section 42, Revenue Act of 1934; 48 Stat. 680, 694
Worksheet 2 S. Rep. No. 558, 73d Cong., 2d Sess. 28 (1934)
Worksheet 3 Section 42, Revenue Act of 1938; 52 Stat. 447, 473
Worksheet 4 Section 126, Revenue Act of 1942; 56 Stat. 798, 831
Worksheet 5 S. Rep. No. 1631, 77th Cong., 2d Sess. 100â€"105 (1942)
Worksheet 6 H.R. Rep. No. 1337, 83d Cong., 2d Sess. (1954) (IRC 1954, pp. 64â€"65, A218â€"A220)
Worksheet 7 S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) (IRC 1954, pp. 87â€"89, 373â€"376)
Worksheet 8 Final Report of the Advisory Group on Subchapter J of the Internal Revenue Code of 1954 (Excerpt)
Worksheet 9 Identifying Items of IRD and DRD
Worksheet 10 Will or Trust Clause Authorizing Distribution of IRD Items
Bibliography
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Statutes:
Internal Revenue Code:
Treasury Regulations:
Committee Reports:
Treasury Rulings:
Cases:
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