Income in Respect of Decedents
by SHELDON RICHMAN Principal, Los Angeles Office
Presented before the Annual Tax Accounting Conference of The California Society of Certified Public Accountants,
San Francisco and Los Angeles—November 1967
A FAIRLY THOROUGH UNDERSTANDING of this topic is essential in prop-erly preparing the income tax returns for a decedent's estate, for testamentary trusts, and in many cases for the ultimate beneficiaries of the decedent. Needless to say, such an understanding is necessary in maximizing planning opportunities for clients.
After a very cursory review of the historical provisions of the law, this paper will discuss numerous types of income that can constitute income
in respect of a decedent. Particular emphasis will be placed on items of compensation and items of business income, since these are two major areas in which tax planning can be effective. Following such review, deductions in respect of a decedent, those many times elusive items that can be deducted both for federal income and for federal estate
tax purposes, will be considered. And finally, the paper will deal with those provisions permitting the recipient of income in respect of a decedent to claim an income tax deduction for applicable amounts of estate tax.
Those who have not encountered the concept of income in respect of a decedent before may logically ask, "What is the problem? Doesn't all property passing through an estate get a step-up in basis to its fair market value at date of death?" The answer, in general, is yes. Property passing through an estate does get a step-up in basis. However, IRC section 1014(c) provides very specifically that income in respect of a decedent does not get a new basis. As a result, the collection of income in respect of a decedent requires measuring gross income (say, the collection
of a dividend) against whatever basis the decedent had for the item. Since a cash-basis taxpayer usually has a zero basis for items constituting income in respect of a decedent, the receipt of such income would result in full taxability of the item.
Before 1934, cash-basis taxpayers enjoyed an advantage over accrual-
basis taxpayers in certain circumstances. Unfortunately, in order