Income in Respect of a Decedent (Portfolio 862)

Tax Management Portfolio, Income in Respect of a Decedent, No. 862-3rd, discusses the scheme for taxing “income in respect of a decedent” (IRD). 

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Tax Management Portfolio, Income in Respect of a Decedent, No. 862-3rd, 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. IRD has been defined as the amounts to which the decedent was entitled as gross income.
IRD generally is taxed to the decedent's estate or to the beneficiary acquiring the right to receive the amount. One of the most difficult questions in the area of IRD is determining which receivables are subject to IRD treatment. This Portfolio, 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.
This Portfolio may be cited as Acker, 862-3rd T.M., Income in Respect of a Decedent.

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Alan S. Acker, University of Illinois (B.S. 1974), Illinois Institute of Technology – Chicago Kent School of Law (J.D. 1977); member of Ohio, Illinois and Virginia Bars; adjunct professor of law at Capital University Law and Graduate Center, Columbus, Ohio, 1992–present; DePaul College of Law, Chicago, Illinois, 1984–1985; member of American, Ohio, Illinois, and Columbus Bar Associations; member of American Institute of Certified Public Accountants, and Ohio CPA Society; Fellow of American College of Trusts and Estates Counsel; contributor to Journal of Taxation, Taxation for Lawyers, Review of Taxation of Individuals and other legal publications; lecturer at various tax seminars.


Detailed Analysis

I. Underlying Concept

A. Introduction

B. Fundamental Principle

II. Purpose and Development of IRD Scheme

A. Introduction

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

1. Generally

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

Introductory Material

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

(a) General Rule

(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

a. In General

b. Open Transaction

3. Sale Made by Successor

a. In General

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

1. Introduction

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

Introductory Material

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




Internal Revenue Code:

Treasury Regulations:

Committee Reports:

Treasury Rulings: