John U. Fazi and Sylvia Fazi - Page 9

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            amount is not properly includable in 1986, the 6-year limitations                              
            period will not apply and the other adjustments set forth in the                               
            notice of deficiency will be barred since the sum of those other                               
            adjustments does not exceed 25 percent of petitioners' gross                                   
            income.  The Court, in Fazi I, did not purport to decide the                                   
            taxability of amounts in 1986; it could only determine tax                                     
            liability for 1987.  Sec. 6214(b).                                                             
            Taxability of the Merged Amount                                                                
                  In this case, respondent originally argued that the merged                               
            amount was taxable to petitioners in the year of merger, 1986.                                 
            She now concedes that the merged amount should have been taxed in                              
            1987, the year it was distributed to petitioners.6  Respondent                                 
            states on brief that:                                                                          
                  Upon reconsideration, however, respondent's interest in                                  
                  sound tax administration requires that she inform the                                    
                  Court that she has reached a different conclusion.  The                                  
                  correct result in Fazi I would have been to include the                                  
                  full amount of Plan 002 assets in petitioners' income                                    
                  for 1987.  In respondent's view, the merger of Plan                                      
                  002, a qualified plan, with Plan 001, a nonqualified                                     
                  plan, resulted in the immediate disqualification of                                      
                  Plan 002.  The 1986 merger did not represent a                                           
                  "contribution" to Plan 001, but rather a pooling of                                      
                  nonqualified assets all of which should have been taxed                                  
                  on distribution in 1987, consonant with the remainder                                    
                  of the Court's opinion in Fazi I and with I.R.C. sec.                                    
                  402(b)(2) and Treas. Reg. sec. 1.402(b)-1(c).                                            
            In Fazi I, we accepted respondent's concession that the merged                                 
            amount was not taxable in 1987.  Consequently, we are reluctant                                


            6  Respondent, in Fazi I, originally argued that the merged amount was taxable                 
            to petitioners in 1987, but later conceded that it was properly taxable in                     
            1986.  Hence, respondent's position on this issue has come full circle.                        



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