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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.
The IRS has released final regulations that disallow employer deductions of dividends used to pay for the redemption of employer securities held by an employee stock ownership plan (ESOP) or a related person. The regs address issues that have arisen under the application of stock reacquisition expenses under Code Sec. 162(k) and deductions for dividends paid on employer securities under Code Sec. 404(k). The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) amended Code Sec. 404(k)(5)(A) to provide that the Treasury Secretary may disallow a deduction under section 404(k) for any dividend the Secretary determines constitutes, in substance, an avoidance or evasion of taxation. In essence, the regulations seek to render impermissible a double deduction for the same dividend.
Payments made to reacquire stock held by an ESOP are not deductible under Code Sec. 404(k) because such payments would not constitute applicable dividends under Code Sec. 404(k)(2). Therefore, a deduction for such payments would constitute, in substance, an avoidance or evasion of taxation within the meaning of Code Sec. 404(k)(5) because it would allow a corporation to claim two deductions for the same economic cost.
Code Sec. 162(k), with certain exceptions, disallows any deduction for amounts paid or incurred by a corporation in connection with the reacquisition of its stock or the stock of any related person (as defined in Code Sec. 465(b)(3)(C)). The regulations clarify that amounts paid or incurred in connection with the reacquisition of stock include amounts paid by a corporation to reacquire its stock from an ESOP that are then distributed by the ESOP to its participants (or their beneficiaries) or otherwise used in a manner described in Code Sec. 404(k)(2)(A).
In Boise Cascade Corporation v. United States (CCH Pension Plan Guide ¶23,985E), the Ninth Circuit determined that payments made by a corporation to redeem stock held by its ESOP that were subsequently distributed to plan participants were deductible as dividends paid pursuant to Code Sec. 404(k). The court reasoned that the plan, not the plan participants, owned the stock when it was redeemed. This holding contradicts the IRS's position in Rev. Rul. 2001-6 (CCH Pension Plan Guide ¶19,944V), which barred such a deduction. The revenue ruling stated that the treatment of redemption proceeds as applicable dividends under Code Sec. 404(k) would produce such anomalous results that Code Sec. 404(k) could not reasonably be construed as encompassing such payments.
The IRS has stated that it would continue to assert that deductions for payments to reacquire employer securities held by an ESOP are disallowed under Code Sec. 162(k) and Code Sec. 404(k) in controversies outside the jurisdiction of Ninth Circuit. Rev. Rul. 2001-6 remains in effect for all periods, including periods before the effective date of the regulations. Concerning any matter in controversy within the Ninth Circuit, agents or district counsel attorneys are to consult the National Office.
These final regulations generally affect administrators of, employers maintaining, participants in, and beneficiaries of ESOPs, and apply to amounts paid or incurred on or after August 30, 2006, and with respect to payments to reacquire stock that are made on or after August 30, 2006.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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