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Gross income includes all income from whatever source
derived, including income in respect of a decedent7 and income
from an interest in an estate or trust.8 Sec. 61(a)(14) and
(15). Gross income generally does not include amounts received
under a life insurance contract, if received by reason of the
death of the insured. Sec. 101(a)(1). Gross income also does
not include the value of property acquired by gift, inheritance,
bequest, or devise. Sec. 102(a). But gross income does include
the income earned on such property.9 Sec. 102(b)(1).
7 Income in respect of a decedent (IRD) refers to those
amounts to which a decedent was entitled as gross income but
which were not properly includable in the decedent’s Federal
income tax returns, including his final tax return. Sec. 691(a);
sec. 1.691(a)-1(b), Income Tax Regs. Unpaid, tax-deferred
retirement benefits, such as the instant distributions from Mr.
Purcell’s sec. 401(k) account, are taxable under sec. 72 and are
an example of IRD.
8 The trust in this case acts as a conduit, with income
flowing through the trust to the beneficiaries. Secs. 651(a),
661(a). The income received by a beneficiary retains the same
character in the hands of the beneficiary as in the hands of the
trust. Secs. 652(b), 662(b). Thus, income excludable from gross
income by the trust is excludable by the beneficiaries, but each
beneficiary must include in gross income all nonexcludable trust
income that is required to be distributed to the beneficiary,
whether actually distributed or not. Secs. 652(a), 662(a); secs.
1.652(a)-1, 1.662(a)-1, Income Tax Regs.
9 Thus, the value of Mr. Purcell’s assets at the date of his
death and the benefits under Mr. Purcell’s life insurance policy
that flow through the trust would not be taxable to the
beneficiaries. However, any distributions from his sec. 401(k)
account and other items includable in the gross income of the
trust that flow through to the beneficiaries would be taxable to
the beneficiaries.
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Last modified: March 27, 2008