Maybe, and no.
"Do I pay tax?"
This is a bit unclear to me, but if the estate liquidated the IRA, then I believe the estate must pay the income tax on the IRA, and you get whatever is left over. The K-1 may indicate that you are getting the gross proceeds from the IRA and then you will have to pay the income tax. This is probably better, since your tax rate is probably 12% or 22%, and the estate tax rate is 35%.
"I will still put it in an inherited IRA."
No. After the IRA is liquidated and you pay the tax, it's now just cash to you. You can spend it, or invest it, and you might be eligible to make new contributions to an IRA (maximum of $6500, or $7500 if over age 55, and subject to all the other usual rules). But you can't roll it over to an inherited IRA because if it was liquidated, the money is not in an IRA any more, its just money.
The decision to liquidate the IRA is unfortunate, and might be legally suspect, depending on the situation. As an inherited IRA, you have the choice of withdrawing the money all at once or taking it out over 10 years, which allows you to spread out the taxes. The estate liquidating the IRA is the same thing as if you got the inherited IRA and then immediately cashed it out and closed the account. You owe the tax all at once, and you can't treat the money as special any more. I don't know if the executor actually had the authority to do this, and it's probably not worth it to fight, and it may be unfixable anyway. But it's not an IRA any more.
