[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.691(a)-2]

[Page 332-333]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 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.


[[Page 333]]


    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.