Need confirmation on tax issue for a new client.

Basic facts: Client’s aunt retired and left her retirement plan balance in her employer’s plan. At 70-1/2 aunt began taking RMDs. Then she died in 2001 and client (now the beneficiary) continued taking the RMDs through 2005. In 2006 client withdrew remaining balance of retirement plan.

Client’s aunt was born before Jan 2, 1936 and client used Form 4972 on self-prepared 2006 1040 to take advantage of 10-yr averaging tax calculation. The IRS’ proposed adjustment includes the distribution in AGI, no 4972, and a much higher tax amount due.

Q1: For the beneficiary, is the 10-yr averaging treatment not available because the 2006 final distribution was not a qualifying lump sum distribution because the benficiary had continued taking the RMDs each year after the aunt died?

Q2: For the beneficiary, had she withdrawn the entire balance in the year the aunt died, or possibly the following year, would she have been eligible for 10-yr averaging?

Q3: Does taking RMDs either by the aunt, or by her beneficiary after death, disqualify a subsequent year’s lump sum distribution from 10-yr averaging?

Anyone run into this situation before?
Thanks for your response!