The withdrawal amount is included in the 2017 1099-R. The "rationale" for income tax avoidance is that the amount withdrawn from the inherited IRA would not have been part of the inheritance (and therefore not subject to income tax) had the estate tax had been properly deducted at the time of settlement.
Your rationale is somewhat flawed. Estate taxes paid do not reduce the size of the taxable estate, nor do they reduce the taxable income to the estate. What the law *does* permit you to do is take an Estate Tax Deduction on your tax return for Income in Respect of a Decedent (IRD) up to the amount of your share of the estate taxes paid by the estate.
See Estate Tax Deduction in IRS Pub 559: https://www.irs.gov/publications/p559#en_US_2017_publink100099618
To enter this into TurboTax, go to Deductions & Credits -> Other Deductible Expenses, answer No to Less Common Expenses, answer Yes to Any Other Deductions?, then enter the Estate Tax Deduction, computed by you as indicated in Pub 559.