An IRA is one of the exceptions to the usual rule that inheritances are not taxed. Because IRA money is not taxed when it is deposited, it is always subject to regular income tax when withdrawn. (Regular income tax, not capital gains rates.)
With an inherited IRA, you have the option of withdrawing the entire amount as a lump sum, in which case you don't pay the 10% early withdrawal penalty. (Or you can do some other things, but those options no longer apply.)
So I would say that any money you receive from the state that was derived from an IRA, is taxable as regular income. (That would include any interest that was earned after your father's death.)
