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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
A corporation was not entitled to a deduction under Code Sec. 404(k)(1) for the proceeds from a stock redemption that were used to provide for cash distributions made by an ESOP trust to terminated employees, the U.S. Court of Appeals at St. Louis (CA-8) has ruled in General Mills, Inc. & Subsidiaries v. United States.
The corporation maintained three employee retirement plans which included employee stock ownership plan (ESOP) components. Upon the termination of an employee, the ESOP trust was required to distribute the value of the employee’s vested ESOP account. The employee could elect to receive either shares of the corporation’s common stock or their cash equivalent. The trust could satisfy its cash distribution obligations by using the proceeds of redemptions of shares of common stock, or in several other ways. The corporation chose to redeem shares of its common stock held by the trust (“redemptive dividends”), and the trust then used some of the proceeds from the redemptive dividends to satisfy portions of its cash distribution obligations (“cash distribution redemptive dividends”).
The corporation sought to deduct the cash distribution redemptive dividends under Code Sec. 404(k)(1), which allows a deduction for the amount of any “applicable dividend” paid in cash by the corporation during the taxable year “with respect to applicable employer securities.” The district court held for the corporation.
Appellate court declines to follow holding in Boise Cascade
The Court of Appeals reversed, holding that Code Sec. 162(k)(1) barred the corporation’s deduction. That section (during the years at issue) disallowed deductions “for any amount paid or incurred by a corporation in connection with the redemption of its stock.” Code Sec. 404(k)(2)(A)(ii) defines an applicable dividend as two connected steps: the redemptive dividend (step 1) and the cash distribution redemptive dividend (step 2).
The appellate court explicitly declined to follow the Ninth Circuit’s holding in Boise Cascade v. United States. In that case, the court viewed the redemptive dividend and the cash distribution redemptive dividend as entirely separate transactions. The appellate court here disagreed, saying that it “cannot rule that one step is ‘in connection with’ the stock redemption, while the other step is not.” Accordingly, the district court’s holding was reversed and the case remanded.
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