Yes, to including the income.  The tax is on the income, not on the piece of paper.

Claiming credit for the withholding:  If it's $25 I probably would, to save IRS the expense of processing a lot more paperwork.  If it's $2,500 I would tell the spouse to go back to the company, ask it to issue a 1099-MISC and zero out the 1099-R, and refund the withholding.  People shouldn't cash other people's checks just because they're dead and then expect other people to help them out of a tax situation.