Benefit Plan Blog

The Treasury Department and the IRS have issued proposed regulations regarding two deduction issues relating to dividends paid on company stock held by an employee stock ownership plan (ESOP).

• The regulations would provide that only the payor of the dividend is entitled to the deduction regardless of whether the payor is the employer maintaining the ESOP. IRS takes the position that foreign-owned companies are not entitled to deductions for dividends paid to U.S. employees who purchase shares of the parent company in a controlled-group situation. This may be unwelcome news to foreign parents that get no US tax benefit from the deduction.
• The IRS would also prohibit deductions for amounts paid by a company to redeem stock when ESOP participants terminate employment, despite an appeals court’s 2003 ruling to the contrary. In that case, a U.S. Court of Appeals ruled that Boise Cascade Corp. (now OfficeMax Inc.) could deduct the cost of ESOP share repurchases.

The regulations will take effect after a 90-day comment period. Written or electronic comments and requests for a public hearing must be received by the IRS by November 23, 2005.