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adopting such a retirement plan and the employees participating
in the plan receive favorable tax treatment. Income earned by a
qualified plan is not subject to taxation while the plan’s assets
are held in a trust which is tax exempt under section 501(a).
Sec. 401(a). Under section 404(a), the employer, subject to
certain limitations, receives an immediate tax deduction for
contributions to a qualified plan. Under section 402(a),
employees are not taxed on any employer contributions that are
made on their behalf until the benefits are actually distributed
to them from the plan. If the plan does not meet the
requirements set forth in section 401(a), however, the earnings
of the plan are subject to tax and employer deductions for
contributions may be deferred or eliminated. Moreover, if
contributions to an employees’ trust are made by an employer
during a taxble year for which the trust is not exempt from tax,
the employees are taxed on the value of such employer
contributions under section 83. Sec. 402(b).
Respondent determined that the lump-sum distributions
received by petitioners from their profit-sharing plan are
includable in petitioners’ gross income for taxable year 1988
because, at the time of the distributions, the Plan failed to
meet the requirements of a “qualified trust” under section
401(a). See Fazi v. Commissioner, 102 T.C. 695 (1994).
Petitioners assert, however, that they are entitled to relief
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Last modified: May 25, 2011