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to the beneficiary of the IRA at least as rapidly as under the
method of distribution to the owner. Sec. 401(a)(9)(B)(i).
An IRA account owned by a decedent at death is considered
part of the decedent's estate for Federal estate tax purposes.
Sec. 2039(a). As such, the estate must pay an estate tax on the
value of the IRA. Id. In addition, an income tax will be
assessed against the beneficiaries of the accounts when the
accounts are distributed. See secs. 408(d)(1), 691(a)(1)(B). To
compensate (at least partially) for this potential double
taxation, Congress enacted section 691(c), which grants the
recipient of an item of IRD an income tax deduction equal to the
amount of Federal estate tax attributable to that item of IRD.
Estate of Smith v. United States, 391 F.3d 621, 626 (5th Cir.
2004) (citing sec. 691(c)), affg. 300 F. Supp. 2d 474 (S.D. Tex.
2004). Therefore, decedent’s beneficiaries will be allowed a
deduction in the amount of Federal estate tax paid on the items
of IRD included in the distributions to them from the IRA. The
deduction is allowed in the same year the income is
recognized--that is, when the IRA is actually distributed. See
sec. 691(c)(1)(A).
II. The Estate’s Arguments That Income Tax Liability Should Be
Taken Into Account in the Valuation of the IRAs
The estate contends that the application of the willing
buyer-willing seller test mandates a reduction in the fair market
value of the IRAs to reflect the tax liability associated with
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Last modified: May 25, 2011