§ 1.691(a)-2 Inclusion in gross income by recipients.
(a) Under section 691(a)(1), income in respect of a decedent shall be included in the gross income, for the taxable year when received, of:
(1) The estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;
(2) The person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or
(3) The person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.
These
amounts are included in
the income of
the estate or of such persons when received by them whether or not they
report income by use of
the cash receipts and disbursements methods.
(b) The application of paragraph (a) of this section may be illustrated by the following examples, in each of which it is assumed that the decedent kept his books by use of the cash receipts and disbursements method.
Example 1.
The decedent was entitled at
the date of his death to a large salary payment to be made in equal annual installments over five
years. His
estate, after collecting
two installments, distributed
the right to
the remaining
installment payments to
the residuary legatee of
the estate.
The estate must include in its
gross income the two installments received by it, and
the legatee must include in his
gross income each of
the three installments received by him.
Example 2.
A widow acquired, by bequest from her husband,
the right to receive renewal
commissions on
life insurance sold by him in his lifetime, which
commissions were payable over a period of
years.
The widow died before having received all of such
commissions, and her son inherited
the right to receive
the rest of
the commissions.
The commissions received by
the widow were includible in her
gross income.
The commissions received by
the son were not includible in
the widow's
gross income but must be included in
the gross income of
the son.
Example 3.
The decedent owned a Series E
United States savings
bond, with his wife as co-owner or beneficiary, but died before
the payment of such
bond.
The entire
amount of
interest accruing on
the bond and not includible in income by
the decedent, not just
the amount accruing after
the death of
the decedent, would be treated as income to his wife when
the bond is
paid.
Example 4.
A, prior to his death, acquired 10,000 shares of
the capital
stock of
the X
Corporation at a
cost of $100 per share. During his lifetime, A had entered into an agreement with X
Corporation whereby X
Corporation agreed to
purchase and
the decedent agreed that his
executor would sell
the 10,000 shares of X
Corporation stock owned by him at
the book value of
the stock at
the date of A's death. Upon A's death,
the shares are sold by A's
executor for $500 a share pursuant to the agreement. Since
the sale of
stock is consummated after A's death, there is no income in respect of a decedent with respect to
the appreciation in
value of A's stock to
the date of his death. If, in this
example, A had in
fact sold
the stock during his lifetime but
payment had not been received before his death, any
gain on
the sale would constitute income in respect of a decedent when
the proceeds were received.
Example 5.
(1) A owned and operated an apple orchard. During his lifetime, A sold and delivered 1,000 bushels of apples to X, a canning factory, but did not receive
payment before his death. A also entered into negotiations to sell 3,000 bushels of apples to Y, a canning factory, but did not complete
the sale before his death. After A's death,
the executor received
payment from X. He also completed
the sale to Y and transferred to Y 1,200 bushels of apples on hand at A's death and harvested and transferred an additional 1,800 bushels.
The gain from
the sale of apples by A to X constitutes income in respect of a decedent when received. On
the other hand,
the gain from
the sale of apples by
the executor to Y does not.
(2) Assume that, instead of the transaction entered into with Y, A had disposed of the 1,200 bushels of harvested apples by delivering them to Z, a cooperative association, for processing and sale. Each year the association commingles the fruit received from all of its members into a pool and assigns to each member a percentage interest in the pool based on the fruit delivered by him. After the fruit is processed and the products are sold, the association distributes the net proceeds from the pool to its members in proportion to their interests in the pool. After A's death, the association made distributions to the executor with respect to A's share of the proceeds from the pool in which A had in interest. Under such circumstances, the proceeds from the disposition of the 1,200 bushels of apples constitute income in respect of a decedent.
