A Section 457 Savings Plan is often used by municipalities to avoid having to pay employer side of employment taxes. Instead the employee contributes to a deferred income savings plan. So none of the money, either funds paid in or any income into the account, has yet to be taxed.
When you take money out of this account that you inherited, you will have to pay ordinary income tax on this and the amount that is to be taxed will be reported on the Form 1099-R issued to you at the end of the year in which you take money out.