Participant's Estate Must Include IRA Balance for Tax Purposes

March 8, 2006 ( - A federal judge in Indiana has ruled that the executrix of a deceased participant's estate must include in the estate's value for the purpose of determining tax liability an individual retirement account (IRA) rolled over from a qualified employer plan.

US District Judge Rudy Lozano of the US District Court for the Northern District of Indiana ruled that plaintiff Walter Mucha’s IRA proceeds should be counted when totaling his estate because the proceeds were not from a qualified plan. The court noted that the government conceded that if Mucha had retained his funds in the qualified pension plan, the value of that interest would have been excluded from his estate.

The court said the 1986 Tax Reform Act treated IRAs differently from qualified plans because inherent in a qualified plan is the concept of employment and retirement or separation from service. However, the proceeds of an IRA do not meet the “separation from service” requirement even though the proceeds may have been transferred from a qualified plan, the court said.

According to Lozano, Mucha worked for Amoco Oil Co. and participated in its pension plan. Mucha chose a lump-sum settlement distribution from the plan when he retired in 1981 instead of receiving an annuity. He then rolled the funds into an IRA account and began taking a $1,000 monthly distribution from the IRA.

After Mucha’s death, the executrix of his estate sought to have the IRA account value kept apart from the rest of his estate for the purposes of fixing the estate’s income tax bill, an effort that eventually proved unsuccessful. The executrix filed a protest with IRS Office of Appeals, which disallowed the request for a refund, and the executrix turned to the courts.

The case is Sherrill v. United States, N.D. Ind., No. 2:04-CV-509, 1/27/06.