John U. Fazi and Sylvia Fazi - Page 8

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            contributions made during 1985 or 1986 because they would be                                   
            taxable to petitioners in the years contributions were made to an                              
            unqualified trust and not at the time of distribution."   Fazi I,                              
            supra at 713.                                                                                  
                  Respondent conceded in Fazi I that the merged amount would                               
            be taxable in 1986, rather than 1987.  Petitioners, in Fazi I,                                 
            argued for taxing the merged amounts prior to 1987, rather than                                
            in 1987, albeit on different theories.5  We accepted respondent's                              
            concession in Fazi I as to the timing of the taxability of the                                 
            merged amount without analysis of the underlying substantive                                   
            issues.                                                                                        
                                               Discussion                                                  
                  Whereas Fazi I dealt with the taxability to petitioners of                               
            distributions made in 1987 from a nonexempt trust, this case                                   
            deals with the taxability to petitioners of contributions to a                                 
            nonexempt trust by the corporation in 1986 and whether the merged                              
            amount should be taxed in the same manner as a contribution.  We                               
            must first decide if petitioners should be taxed on the merged                                 
            amount in 1986.  Only if the merged amount is properly includable                              
            in petitioners' gross income in 1986 is the 6-year limitations                                 
            period applicable and the year open to adjustment.  If the merged                              


            5  Petitioners argued that secs. 83 and 402(b) combined to make incremental                    
            increases in their interests in the nonexempt trusts taxable, though not                       
            because they were "contributions" in the traditional usage of the word.                        
            Petitioners also argued that the merged amount would be taxable in years prior                 
            to 1987 because, under secs. 402(b)(1) and 72, their interests in the                          
            nonexempt trust were "made available" to them in such prior years.                             



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