Outstanding 401(k) Loan when Participant Dies

[Guest progressivejoe]

I found several threads on these boards discussing the question of how to deal with outstanding plan loans when the participant dies prior to full repayment, but none of them seem to come to a conclusion I'm comfortable with. The issue doesn't seem to be addressed at all in Treas. Reg. 1.72(p)-1 which deals with loans treated as distributions and I haven't found another good source of authority.

Here's the situation. Participant has $100,000 in his 401(k) plan. He takes out a loan for $10,000, the repayment of which he defaults on. Then he dies. The IRS has not yet taken any lien/levy type enforcement action. The plan says they will send a 1099 to the estate, but the estate is insolvent (there's not even enough to pay for administration expenses, so the IRS won't get anything out of the estate. I want to tell the non-spouse beneficiary that she can take the the remaining balance of the 401(k) plan without worrying about the IRS holding her liable for the participant's debt and penalties/interest on that debt.

Does anyone have any thoughts on where I can find authority for this question? Any insight would be a great help. Thanks!