747 / What is income in respect of a decedent and how is it taxed?

“Income in respect of a decedent” (IRD) refers to those amounts to which a decedent was entitled as gross income, but that were not includable in his taxable income for the year of his death.¹ It can include, for example: renewal commissions of a sales representative; payment for services rendered before death or under a deferred compensation agreement; and proceeds from sales on the installment method (see Q 667). Generally, if stock is acquired in an S corporation from a decedent, the pro rata share of any income of the corporation that would have been IRD if that item had been acquired directly from the decedent is IRD.² The IRS has determined that a distribution from a qualified plan of the balance as of the employee’s death is IRD.³ The Service has also privately ruled that a distribution from a 403(b) tax sheltered annuity is IRD.⁴ The Service has also concluded that a death benefit paid to beneficiaries from a deferred variable annuity would be IRD to the extent that the death benefit exceeded the owner’s investment in the contract.⁵ In addition, the Service has determined that distributions from a decedent’s individual retirement account were IRD, including those parts of the distributions used to satisfy the decedent’s estate tax obligation, since the individual retirement account was found to have automatically vested in the beneficiaries.⁶

However, a rollover of funds from a decedent’s IRA to a marital trust and then to the surviving spouse’s IRA was not IRD, according to the Service, where the surviving spouse was the sole trustee and sole beneficiary of the trust.⁷ The Service also ruled that designation of a QTIP trust as the beneficiary of a decedent’s account balance in a qualified profit sharing plan would not result in the acceleration of IRD at the time the assets from the plan passed into the trust. Consequently, the taxpayer would include the amounts of IRD in the plan in the taxpayer’s gross income only when the taxpayer received a distribution (or distributions) from the trust.⁸

Gain realized upon the cancellation at death of a note payable to a decedent has been held to be IRD to the decedent’s estate.⁹

The unreported increase in value reflected in the redemption value of savings bonds as of the date of a decedent’s death constitutes income in respect of a decedent.¹⁰ See Q 7688. If savings bonds on which the increases in value have not been reported are inherited, or the subject of a bequest, the reporting of such amounts may be delayed until the bonds are redeemed or disposed of by the legatee, or reach maturity, whichever is first.¹¹ However, to the extent savings bonds are distributed by an estate or trust to satisfy pecuniary obligations or legacies, the estate or trust is required to recognize the unreported incremental increase in the redemption price of Series E bonds as income in respect of a decedent.¹²