Academic journal article Journal of Accountancy

ESOP Redemptions Not Deductible as Dividends

Academic journal article Journal of Accountancy

ESOP Redemptions Not Deductible as Dividends

Article excerpt

The Third Circuit Court of Appeals joined the Eighth Circuit in ruling that even if cash payments to redeem employee stock ownership plan (ESOP) accounts are otherwise deductible dividends within the meaning of IRC [section] 404(k), an employer is barred by section 162(k)(1) from deducting the payments if they are made in connection with the reacquisition of its stock.

The decision involved an ESOP established by Conopco Inc. The company, with roots in mayonnaise brands Best Foods and Hellmann's, is a wholly owned subsidiary of food and personal care product conglomerate Unilever USA. The facts and result closely mirrored a decision earlier this year by the Eighth Circuit in the case of another food giant, General Mills Inc. v. U.S. (554 F.3d 727 (2009); see "Tax Matters: Deduction Denied for ESOP Stock Redemption," JofA, May 09, page 65), which the Third Circuit cited prominently

Conopco established a trust to implement an ESOP in 1989 with 2.2 million shares of its voting convertible preferred stock. When participants who ended their employment with Conopco elected to receive the value of their ESOP account balances as cash payments, Conopco would redeem the preferred stock that had been allocated to those participants' accounts by paying the trust to buy back the shares. Conopco deducted the cost of the stock redemption as a dividend paid to the ESOP. …

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