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account in plan 2). Mr. Fazi was 100 percent vested in his plan
2 account at the time of the plan merger.
Plan 3, when originally adopted by the corporation in 1979,
was qualified under section 401, and the accompanying trust was a
qualified, tax-exempt trust under section 501. Plan 3 and its
trust were disqualified by respondent, for the same reasons plan
1 was disqualified, for the plan years ending August 31, 1985,
August 31, 1986, and August 31, 1987.
The corporation contributed $10,300 to the plan 3 account of
Mr. Fazi for the year ending August 31, 1986. Mr. Fazi was 100
percent vested in his account during the 1985 and 1986 plan
years.
Petitioners received no distributions from plans 1, 2, or 3
in 1986. In 1987, petitioners' accounts in plan 1 were
distributed to them. This distribution included the $277,138
amount merged into plan 1 from plan 2, the merged amount.
All of the plans were operated in compliance with the
amendments required by TEFRA, DEFRA, and REA for all relevant
plan years.
Petitioners filed their 1986 Federal income tax return on
April 15, 1987. The amount of gross income stated in
petitioners' 1986 Federal income tax return and their share of
income from pass-through entities totals $395,108. Petitioners'
1986 Federal income return made no references to the plan merger
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