Income in Respect of a Decedent - Commentary
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.
|
