I am just providing a letter I had written to a client concerning income with respect to decedent (IRD) and the implications on a specific situation, or if a step-up in basis is appropriate for the circumstances. I am providing this letter as an educational tool, for anyone who may not have been familiar with the details of IRD.
Section 1014 – Basis of Property Acquired from a Decedent, outlines the process for property received from a decedent. This section represents that unless otherwise provided in the section, the basis of property passed from the decedent shall be the fair market value of the property at the date of the decedent’s death.
It continues to state this section shall not apply to property which constitutes a right to receive an item of Income in Respect of a Decedent under Section 691 (Section 1014(c)).
Congress left defining IRD to the court system. In the end, no universal test has yet been announced; nor can one be devised because of the variety of settings in which Income in Respect of a Decedent can arise (Trust Co. of Ga. V. Ross) (Estate of Davison v. United States). The court concluded (based on its examination of case law and the regulations) that there are four requirements for determining whether post-death sales proceeds are IRD:
1. The decedent entered into a legally significant arrangement, e.g., a contract, regarding the disposition of the subject matter of the sale.
2. The decedent performed the substantive (non-ministerial) acts required as preconditions to the sale, i.e., the subject matter of the sale was in a deliverable state on the date of the decedent's death.
3. There existed, at the time of the decedent's death, no economically material contingencies which might have disrupted the sale.
4. The decedent would have eventually received (actually or constructively) the sale proceeds if he had lived.
The Tax Court said that all four of the above requirements are necessary to support a finding that the decedent possessed a right to the sale proceeds as of his date of death, and that the absence of one of these requirements means that the proceeds are not IRD (Peterson, Charley W. Est, (1980) 74 TC 630 , affd (1981, CA8) 49 AFTR 2d 82-424 , 667 F2d 675, 82-1 USTC ¶9110).
In our specific case, requirement (2) was not met because a significant amount of legal performances were incomplete, thus the Equinor payments were not in a deliverable state on the date of the decedent's death. Furthermore, the activities that were performed by the estate were not perfunctory or ministerial but were substantial and essential acts not performed by the decedent before his death. Requirement (2) has been reaffirmed by Estate of Peterson v. Commissioner, (1980) 74 TC 630; Estate of Ernest G. Napolitano, (1992) TC Memo 1992-316; and in IRS Letter Ruling 200744001
In addition, requirement (3) discusses economically material contingencies which could impact the sale. Reliance on courts, attorneys, appraisers, and testimonies of professional are all largely associated as contingent representatives at the time the decedent passed.
In Conclusion, there are four elements of determination for Income in Respect of a Decedent. Lack of any one of the four elements may exclude the transaction as a Section 691 transaction which implies the proper code placement is Section 1014 where a step-up basis is appropriate.
Cory Wheeler, CPA.
Smith, Lange, and Halley, P.C.