John U. Fazi and Sylvia Fazi - Page 10

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            to accept her concession in this case that the merged amount is                                
            taxable in 1987 without substantive review.                                                    
                  Plan 1 became unqualified and its accompanying trust became                              
            nonexempt starting with its plan year ending August 31, 1985.                                  
            Plan 2 was merged into plan 1 in May of 1986.  The single plan                                 
            and trust remaining after the merger was plan 1, the survivor of                               
            the merger.  Section 402(b) governs the tax treatment of a                                     
            beneficiary of a nonexempt trust:                                                              
                         (b)  TAXABILITY OF BENEFICIARY OF NONEXEMPT                                       
                  TRUST.--Contributions to an employees' trust made by an                                  
                  employer during a taxable year of the employer which                                     
                  ends within or with a taxable year of the trust for                                      
                  which the trust is not exempt from tax under section                                     
                  501(a) shall be included in the gross income of the                                      
                  employee in accordance with section 83 (relating to                                      
                  property transferred in connection with performance of                                   
                  services), except that the value of the employee's                                       
                  interest in the trust shall be substituted for the fair                                  
                  market value of the property for purposes of applying                                    
                  such section.  * * *                                                                     
            Pursuant to the general rules of section 83, the merged amount                                 
            would be taxable to petitioners in 1986 only if it was a                                       
            contribution by the employer.  If a defined contribution plan,                                 
            such as a money purchase plan or a profit sharing plan is not                                  
            qualified, the participant is taxed on the amount contributed and                              
            allocated to the participant's account during the nonqualified                                 
            years to the extent substantially vested.  Sec. 1.402(b)-1(a)(1),                              
            Income Tax Regs.  Mr. Fazi was fully vested in both plans 1 and                                
            2.  There were no distributions from any plan in 1986.  The                                    
            survivor of the merger was a nonqualified plan, plan 1.                                        




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