Herman E. and Sheri L. Villarroel - Page 5

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          Under section 72(e), the amount included in gross income equals             
          the amount distributed to the distributee less the amount of any            
          investment (i.e., contributions) made by the distributee.  Since            
          petitioner made no contributions to her account, the amount                 
          includable under section 72, in the absence of any exceptions,              
          would be equal to the total amount of the distribution.                     
               However, section 402(e)(4) provides:                                   
               (4) Net Unrealized Appreciation.--                                     
                    (A) Amounts attributable to employee                              
               contributions.-- * * *                                                 
                    (B) Amounts attributable to employer                              
               contributions.--For purposes of * * * [section 402(a)]                 
               and section 72, in the case of any lump sum                            
               distribution, which includes securities of the employer                
               corporation, there shall be excluded from gross income                 
               the net unrealized appreciation attributable to that                   
               part of the distribution which consists of securities                  
               of the employer corporation. * * *                                     
                    (C) Determination of amounts and adjustments.--For                
               purposes of * * * [section 402(e)(4)(A) and (B)], net                  
               unrealized appreciation and the resulting adjustments                  
               to basis shall be determined in accordance with                        
               regulations prescribed by the Secretary.                               
                    (D) Lump sum distribution.--For purposes of * * *                 
               [section 402(e)(4)], the term "lump sum distribution"                  
               has the meaning given such term by * * * [section                      
               402(d)(4)(A)] (without regard to * * * [section                        
               402(d)(4)(F)]).                                                        
               The phrase "securities of the employer corporation" includes           
          shares of stock of a parent or subsidiary corporation of the                
          employer corporation.  Sec. 402(e)(4)(E).  The net unrealized               
          appreciation (NUA) in the securities is the excess of the fair              
          market value of such securities at the time of distribution over            




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