Inherited book royalties

Client receives royalties from publishers and agents of her deceased spouse's books. In the Form 706 of the deceased's estate the discounted value of the projected stream of royalty payments was included as part of the taxable estate. Can that basis be depreciated by the surviving spouse against that royalty income? If so, what method?

Isn't your case exactly what the deduction for estate tax related to income in respect of a decedent is all about? See section 691(c).

Can that basis be depreciated by the surviving spouse against that royalty income? If so, what method?

No, it is all income. The deduction mentioned by Nilodop is claimed on Sch A, line 28 (not subject to AGI limitation).

"The deduction is claimed on Sch A, line 28..."

How fast?

But these royalties are attributable to the period after the author's death so I thought they wouldn't be IRD. If not IRD, then no sec. 691(c) deduction, right?

But they are on the 706. If not IRD how are they classified?

I'm thinkng [yeah, dangerous, I know] that it's the *right to receive the future royalties* that's been inherited, *not* the royalties themselves, and that proper income tax accounting for the basis of the inherited right to the future royalties is the subject of this thread.

I'm thinkng [yeah, dangerous, I know] that it's the *right to receive the future royalties* that's been inherited, *not* the royalties themselves, and that proper income tax accounting for the basis of the inherited right to the future royalties is the subject of this thread.

I agree with your thinking.

Right. I had assumed they were pre-death royalties. If not, I think the basis is amortizable using the income forecast method. See proposed regs. 1.167(n). https://www.irs.gov/pub/irs-regs/10382399.pdf

",,,the income forecast method."

I think my grandfather told me about having studied that when *he* was in school.

Right. I had assumed they were pre-death royalties. If not, I think the basis is amortizable using the income forecast method. See proposed regs. 1.167(n). https://www.irs.gov/pub/irs-regs/10382399.pdf

Thanks for that link. Also I found Reg. 1.167(a)-14(c)(4) and in its penultimate sentence refers to the 167(g) income forecast method.

Now I gotta look up "penultimate".

The fair market value of a future royalty stream is IRD on an estate tax return. If estate taxes were paid there is a pro-rata deduction. (received in current year/total reported x tax paid) Properly reported on Schedule E but IRS will bitch, so best to use in and out on Sch C with explanation. Note that total reported and tax paid are adjusted annually. Payments are not subject to Self-employment tax and IRD does not ever give basis.

Wouldn't that be contrary to Rev Rul 60-227?

It is the position of the Internal Revenue Service that for an item to constitute "income in respect of a decedent," within the meaning of section 691(a) of the Code, it must be an item to which a decedent was entitled in the sense that he had a right to the item, it having been earned during his lifetime, even though actual receipt thereof or determination of the amount thereof might be contingent in whole or in part.

Don't post-death royalties get earned from post-death sales? The facts seem distinguishable from Rev Rul 57-544. In OP, the right to the post-death book royalties had not accrued at date of death because the book sales had not occurred at date of death. If decedent had been on the accrual method, the royalties still would not have been taxable during his lifetime. So doesn't that fall outside of reg. 1.691(a)(1)-1

I found some additional information in PLR 9549023. It seems the question of whether the royalties are IRD or not depends on whether they are received from a license to exploit (not IRD) or a sale (IRD). In this PLR, the facts of which appear to fit my client's scenario, the ruling was that the author had granted a license to exploit. However, the PLR did not issue a ruling about depreciation under sec. 167(f), for the reasons discussed below from that PLR:

You also requested a ruling concerning whether the adjusted basis of the various copyrights may be depreciated under section 167 of the Code over the remaining useful life of those copyrights by the holder or holders of those copyrights. Copyrights acquired after the effective date of the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, 103d Cong., 1st Sess. (1993), are subject to sections 197 and 167(f).

The amortization of copyrights acquired after the enactment of sections 197 and 167(f) is the subject of an open regulations project. Until regulations are issued, or the above-referenced regulations project is closed without the issuance of regulations, we are precluded under section 5.14(3) of Rev. Proc. 95-1, 1995-1 I.R.B. 9, 21, from issuing a ruling on the question of whether the adjusted basis in the various copyrights may be depreciated under section 167 over the remaining useful life of those copyrights by the holder or holders of those copyrights.

PLR 9326043 is similar and may even be the same taxpayer, but it does not waffle on depreciation. IRS re-thought their position.

But these royalties are attributable to the period after the author's death so I thought they wouldn't be IRD.

I think it would be depend on whether or not the author “sold” the manuscript(s) to the publisher prior to his death. If he did, then the Royalties are just contingent payments associated with a pre-death sale, kind of like a normal contingent installment sale of business assets or stock. So you’d be looking at IRD there. If there wasn’t a “sale” prior to death, then you wouldn’t be looking at IRD.

Headnotes from CB.

292.36 Royalties on patents; death of patent- holder. Where a contract between a patent owner and a manufacturer constitutes merely a “license” arrangement to manufacture and sell articles under the patent in return for the payment of royal- ties, and not a “sale,” royalty payments due and accrued under the contract at the date of the death of the inventor constitutes income in respect of a decedent. Royalty payments accrued after the date of death of the patent owner are ordinary income, includable in the gross income of the recipient. Rev. Rul. 57–544 clarified and distinguished. §§1.61-8, 1.691(a)-1. (Secs. 61, 691; ’86 Code.)
Rev. Rul. 60-227, 1960-1 C.B. 262.
292.37 Royalties pursuant to decedent’s con- tract. Royalty payments received by a taxpayer under a contract executed by her mother (now deceased) as executrix of the estate of her father constitute taxable income to the taxpayer. How- ever, she is entitled to deduct that portion of the estate tax paid which is attributable to the inclu- sion in the widow’s estate of the right to receive such royalty payments. Clarified and distin- guished by Rev. Rul. 60-227. §1.691(a)-2. (Sec. 691, ’86 Code.)
Rev. Rul. 57–544, 1957–2 C.B. 361.