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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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