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Giani and Fred, alternatively hand, may face tax of exceeding $1 million, without having any cash to pay it. The rules of section 877A require recognizing all deferred compensation, including that in qualified plans, during the deemed sale. Giani and Fred will need to recognize $3 million of ordinary sales revenue. Their Federal tax will actually cover 35% for this. Further, if they are now living in a point out that imposes tax based on Federal taxable income, they will face state income taxing.
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