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Yes, they are probably correct depending upon the type of annuity you are dealing with.
What you have received is what is called "Income in Respect of a Decedent".
Basically, someone has to pay income tax on the earnings of the annuity up to the date of death.
If your father originally invested after tax dollars (as opposed to a rollover of another annuity or a retirement plan distribution) in the annuities, then you would only be taxed on the difference between his after tax investment and the annuity payout amount which would represent the earnings.
In the current annuity world for tax purposes, the income must come out first, before any principal is distributed. If you received the complete value of the annuity as his beneficiary, then that rule wouldn't matter as it only pertains to partial distributions.
You should have been given the opportunity to have income taxes withheld before the distribution was made.
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