Character of Income With Respect to Decedents

With respect to a decedent, income is an amount to which a decedent was entitled but which were not properly includible in computing his/her taxable income for the taxable year ending with the date of his/her death or for a previous taxable year under the method of accounting employed by the decedent[i].

Taxable income with respect to a decedent includes:

  • the entire portion of a deceased partner’s distributive share of partnership income to the date of his death[ii].
  • payments made by a partnership in liquidation of the deceased partner’s interest which are considered to be a distributive share of partnership income or a guaranteed payment[iii].
  • interest accruing on term savings certificates between the last interest payment date and the date of death[iv].
  • compensation for personal services received after death, even if the deceased employee didn’t have a legally enforceable right to receive the compensation[v].
  • bonus for the services of the decedent received after death[vi].
  • deferred compensation, consisting of:
  1. compensation that had been payable to the decedent, but the receipt of which he elected to defer under his employer’s deferred compensation plan,
  2. shares of stock in the employer/corporation that had been payable to the decedent as a result of his exercise of compensatory stock options granted to him by the employer, the receipt of which the decedent elected to defer under the employer’s deferred stock option plan, and
  3. a death benefit which the decedent had negotiated with the employer for the employer to provide to the decedent’s estate or to designated beneficiaries upon the decedent’s death.
  • medical insurance reimbursements received by an estate in a year later than the year in which the decedent deducted the medical expenses[vii].
  • qualified employee plan distributions to a deceased employee’s estate or beneficiaries[viii].
  • amount received in excess of the owner-annuitant’s investment in a contract by a deferred annuity contract’s beneficiary, where owner-annuitant died before the annuity starting date[ix].

The income of a decedent is of the same character in the hands of the recipient as in the hands of the decedent[x].  The right to receive an amount of income with respect to a decedent is treated as in the hands of the estate or beneficiaries and is considered as having the same character it would have if the decedent had lived and received such amount[xi].  Thus, any income that a decedent is entitled to receive should be included in the estate’s gross income.

[i] Halliday v. United States, 655 F.2d 68 (5th Cir. Ala. 1981)

[ii] 26 CFR 1.753-1 (b)

[iii] 26 USCS § 736 (b)

[iv] Rev. Rul. 79-340 (I.R.S. 1979)

[v] Bausch’s Estate v. Commissioner, 186 F.2d 313 (2d Cir. 1951)

[vi] Estate of Jack Messing v. Commissioner, 1948 Tax Ct. Memo LEXIS 114 (T.C. 1948)

[vii] Rev. Rul. 78-292 (I.R.S. 1978)

[viii] Hess v. Commissioner, 31 T.C. 165 (T.C. 1958)

[ix] Rev. Rul. 2005-30 (I.R.S. 2005)

[x] 26 USCS § 691(a) (3)

[xi] 26 CFR 1.691(a)-3

Inside Character of Income With Respect to Decedents