Daily Tax Update - August 25, 2005

IRS and Treasury Issue Proposed Regulations relating to deductibility of dividends paid on employer securities held by an employee stock ownership plan:
On August 25th, the IRS and Treasury issued proposed regulations under sections 162(k) and 404(k) relating to deductibility of dividends on employer securities held by an ESOP

  • Section 404(k)(1) provides that, in the case of a C corporation, there is allowed as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation during the taxable year with respect to applicable employer securities held by an ESOP.
  • The proposed regulations address two issues. First, the regulations address which corporation is entitled to the deduction under section 404(k) for dividends paid when the applicable employer securities held in an ESOP are not securities of the corporation or corporations that maintain the plan.
  • The proposed regulations would provide that the payor of the dividend is entitled to the deduction under section 404(k), regardless of whether the payer is the employer maintaining the plan. 
  •   Second, the regulations address whether payments in redemption of stock held by an ESOP are deductible.
  • The proposed regulations would provide that payments to reacquire stock held by an ESOP, even if properly characterized as dividends, are not deductible.
  • The proposed regulations would be effective on the date of publication of the final regulations.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice.