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In view of the foregoing, we hold that petitioner was
disabled, within the meaning of section 72(m)(7), immediately
before receiving the Transfer Refund. Accordingly, the Transfer
Refund qualifies as a partial distribution and is eligible for
tax-free rollover treatment under section 402(a)(5)(D).
Petitioners are therefore not required to include in their gross
income for 1989 the $150,000 that was not previously included
therein.
II. The IRA Distribution Issue
On or about August 8, 1990, petitioner withdrew $157,174
from his IRA with First National. Petitioners reported $150,000
of this distribution in their gross income for 1990.
Respondent contends that for 1990, petitioners failed to
include in their gross income $7,174 of petitioner's IRA
distribution from First National. We do not understand
petitioners to argue that the amount of the IRA distribution in
excess of $150,000; i.e., $7,174, is not includable in their
gross income for 1990. In any event, based on the record as a
whole, we are satisfied that the $7,174 represents taxable
earnings from petitioner's IRA and that such amount is properly
includable in petitioners' gross income for 1990. Sec.
408(d)(1).
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