5500 Preparer's Manual for 2012 Plan Years
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Witnesses at a January 18, 2006 IRS hearing on employee stock ownership plans (ESOPs) urged the IRS to withdraw proposed regulations (CCH Pension Plan Guide ¶20,261R ) that would deny a deduction to a U.S. subsidiary of a foreign parent for dividend payments made by the parent.
Under Code Sec. 404(k), a corporation maintaining an ESOP can deduct "applicable dividends" paid on employer stock held by the ESOP. If a subsidiary corporation is holding stock of a parent, stock dividends are paid by the parent. The proposed regulations would deny the deduction to the subsidiary, even though it was the employer maintaining the plan.
Joseph Marx, testifying on behalf of the American Benefits Council, said that, by denying a tax deduction to American employers with a foreign parent, the proposed regulations would "strongly discourage" these companies from establishing or maintaining an ESOP.
"Not only would this harm American employees," said Marx, "it contradicts the expressed intent of Congress: to encourage employers to establish ESOPs." The Council urged the IRS to adopt rules directing that the employer, not the parent company, is entitled to the ESOP dividend deduction. "This treatment," he said, "would be consistent with fundamental principles of tax law and other interpretations of the Internal Revenue Code that treat the employer as the party entitled to a deduction for payments made by a related third party."
This view was echoed by Todd Malan, president of the Organization for International Investment, and Paul Wolff of Daimler Chrysler Corporation. Malan said that the proposed regulation would reduce U.S. competitiveness and hurt employee recruitment. Malan noted that the legislative history of ESOP provisions enacted in 1984, 1989 and 2001 make it clear that deductions relating to ESOP dividends flow to the employer of the plan participants. In his testimony, Wolff cited the position taken by the IRS in Letter Ruling 200237026, in which the IRS ruled that Code Sec. 404(k) permits a subsidiary employer to deduct dividends paid by the employer's parent corporation. Treasury and IRS officials, however, pointed out that a private letter ruling is not binding precedent on the IRS and that the ESOP legislative history does not address consolidated groups.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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